One of the reasons I started On Pasture was to help graziers be more profitable. So, when I see something that might affect you, I like to provide information that you might use to mitigate potential threats to your livelihoods.
As participants in a Democracy, it’s also important for us to understand these things so we can be an informed electorate and encourage our elected officials to work on our behalf.
There’s a lot of talk of tariffs and trade wars in the news lately as a new administration gets set to take over in Washington D.C. There also seems to be a lot of confusion about the purpose of tariffs and who covers the cost for them. Because trade wars tend to impact farmers and ranchers significantly, today we’re going to take a closer look at what happened during the last trade war with China and the potential impact of threatened tariffs on China, Canada, and Mexico.
What’s a tariff?
Countries use tariffs to regulate trade, support and encourage industrial development in their own industries, and sometimes to punish trading partners. For example, the United States might put a 25% tariff on televisions coming from China because they think China is keeping prices on TVs artificially low, ensuring that their TVs outcompete those produced in the U.S. The U.S. would like to keep the TV factory and its jobs in the U.S., so making it more expensive to buy a Chinese TV is helpful to meeting that goal. The key here is that China does not pay the tariff. The company importing the television pays the tariff. Then they pass that cost on to the person who ends up buying the television. If the tariff is working, the Chinese TV becomes more expensive for the consumer and people buy American-made instead.
What does a trade war look like?
When one country implements a tariff, the other is sure to respond with its own. Just like in physical warfare, each country targets its rival’s perceived weaknesses. Most often agricultural products are targeted because they’re both economically significant and politically sensitive. Thus, farmers and ranchers bear the brunt of these disputes, as tariffs make their products less competitive, leading to lost markets and lower prices. In addition, while bombs and guns might destroy land and buildings, tariffs and sanctions wreak havoc on supply chains and livelihoods, harming citizens on both sides. And just as wars leave scars, trade wars erode trust and relationships in global markets. Once lost, export markets and supply lines can take years—if not decades—to rebuild.
The 2018-2019 trade war initiated by the Trump administration is a perfect illustration of how trade wars impact agriculture and the country as a whole. In response to U.S. tariffs on Chinese goods, China retaliated by imposing hefty tariffs on American agricultural exports, including soybeans, pork, and dairy. Before the trade war, China was the largest export market for U.S. soybeans, purchasing roughly $12 billion worth annually. By 2019, that figure plummeted to about $3 billion as China turned to other suppliers like Brazil.
The sudden loss of a major market left farmers with unsold crops, pork, dairy, and beef, driving down prices and shrinking profit margins. Many farmers were already struggling with low crop prices and high debt, making them more vulnerable. The trade war was the final straw for some. In 2019, farm bankruptcies (Chapter 12 filings) rose by 20%, the highest level since 2011. These bankruptcies were concentrated in states heavily reliant on agriculture, such as Wisconsin, Georgia, and Kansas.
The MFP payments to farmers was more than the U.S. spends on many other programs. Here are some examples:
Nuclear weapons maintenance and delivery systems: $21.8B
Federal Children’s Health Insurance – $17.3B
State Department – $26.8B
NASA – $19.8B
Commerce Department – $8.6B
Agricultural Research Service – $1.1BSource: Forbes Magazine
The Administration was not blind to the impacts on farmers and implemented the Market Facilitation Program (MFP), providing $28 billion in direct payments to farmers. The aid was deficit-financed, meaning it added to the overall federal deficit. While $28 billion represents a small fraction of the growth in deficit spending from $585 billion for fiscal year 2016 to nearly $1 trillion annually by fiscal year 2019, it was part of the broader trend of increased government spending during the Trump administration.
Trade war ripple effects
New Trade Relationships Formed, Old Relationships Abandoned
The relationship with China, which would become one of the U.S.’s largest agricultural trading partners, began to take shape after the normalization of diplomatic relations in 1979. Through the 1990s, as China’s economy grew and demand for protein-rich diets expanded, the U.S. increasingly supplied China with soybeans, corn, and meat products. The 2001 accession of China to the World Trade Organization (WTO) was a pivotal moment, leading to rapid growth in agricultural trade. Between 2000 and 2017, U.S. agricultural exports to China surged, reaching $24 billion annually by 2017.
But all that fell to the wayside when the trade war began. The tariffs on agricultural goods meant that either Chinese consumers had to spend more for soybeans, corn, pork, dairy, and beef, or they had to find other sources for these goods. They chose a two-pronged approach. First, they found other trading partners. Starting in 2018, China turned to Brazil, Argentina, Ukraine, and Australia to supply soybeans, corn, and other feed grains, and to the European Union and Canada for pork and canola oil. China also began ramping up local grain and livestock production, though this hasn’t been easy. China has only 7% of the world’s arable land which limits what and how much they can produce. In addition, intensive farming practices have led to soil degradation, water shortages, and pollution, posing risks to sustainable agricultural growth. This all means that they will need to continue to import food from other countries.
Though agreements were signed to end the trade war, it has been difficult to re-establish our past trade relationships with China. While China has agreed to begin buying U.S. agricultural products again, they have yet to get back to prior levels. They don’t really need to as their new trading partners continue to provide them with what they need. This kind of disintegration of trade relationships is a common outcome of a trade war.
Climate Impacts
China’s shift from U.S. to Brazilian and Argentine agricultural imports, especially soybeans and corn, has notable climate implications. Brazil’s soybean and corn exports are closely tied to deforestation in the Amazon and Cerrado regions. As Chinese demand grows, more forested land is cleared for agriculture, releasing carbon stored in trees and soil. Research indicates that deforestation for agriculture contributes substantially to Brazil’s greenhouse gas emissions, making it one of the largest global contributors to land-use emissions. The expansion of soybean and corn farming has also led to habitat destruction, soil degradation, and pollution.
What’s next in our tariff future?
President-elect Trump has already said that he plans to implement a 25% tariff on all goods coming into the U.S. from Canada and Mexico. He has likewise planned additional tariffs on China. You can read elsewhere about the potential impacts on consumers of these proposed tariffs. Here we’re focused on you.
Experts in trade, as well as history, tell us that these countries will likely impose their own tariffs and that agricultural products are the likely targets. While we don’t know how much those tariffs might be, we can make an educated guess that they will fall somewhere between 10 and 25%. Here’s what that looks like under a low-impact scenario (30% reduction in exports) and a high-impact scenario (50% reduction in exports).
Combined Estimated Annual Losses (Canada, Mexico, and China):
- High Impact Scenario:
- Canada: $3.6 billion.
- Mexico: $5.6 billion.
- China: $12.85 billion.
- Total: $22.05 billion.
- Low Impact Scenario:
- Canada: $2.16 billion.
- Mexico: $3.36 billion.
- China: $7.71 billion.
- Total: $13.23 billion.
Broader Economic Implications:
Price Declines in Domestic Markets:
Surpluses in soybeans, corn, and pork will lead to significant price drops, pressuring farm incomes.
Reduced Farm Investment:
Lower revenue will result in cutbacks on equipment, technology, and inputs, potentially impacting productivity.
Rural Economic Challenges:
Farming-dependent communities could face job losses, reduced tax revenues, and declining property values.
Global Trade Realignments:
Competitors like Brazil, Argentina, and the EU could permanently capture U.S. market share.
What can we do?
I usually like to finish On Pasture pieces with some kind of action you can take to make things better. That’s one of the reasons it’s taken me so long to get this piece out to you. I don’t know what to tell you. I have ideas about what I can do to at least encourage different approaches and maybe you do too. It’s my hope that this information is helpful to you and that you can use it to your benefit.
