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China announced yesterday they will be placing tariffs on 128 American goods for a total of $3 billion dollars in response to the Trump administration tariffs of 25 % on steel and 10 % on aluminum. The situation is posed to escalate as the President is expected to announce $60 billion of new tariffs on Chinese imports this week.
The US agriculture industry is reeling from increased competition from overseas countries like Brazil and now the administration is throwing a trade war into the mix. Farmers are perplexed as to how to navigate these new trade waters.
Source: US Department of Agriculture, The Wall Street Journal – 4/2/18
The US agriculture industry is one of the bright spots in US exports accounting for $140.5 billion in exports for 2017 according to the US Department of Agriculture. China receives about $22 billion of US exports last year in pork, and meat products. While the $3 billion in tariffs is not large it maybe just an opening round in the economic shots being fired by the US and China.
While some industry analysts look at just the dollar amounts involved we see a very disturbing trend in the tenor of the conduct of this trade conflict. This administration has distinguished itself by being bullying, intimidating, impulsive, vengeful and unpredictable – not good traits for a positive trade negotiation outcome.
Next Steps:
First, we need to understand how corporations, suppliers and customers respond to political uncertainty. Corporations either buyer or seller are seeking certainty around first of all selling their products and second at the highest price. Second, when our government starts picking winners and losers in the US economy and linking unconnected segments like sacrificing US agriculture for intellectual property theft by China from US high technology companies – then any economic shot is fair game. Just the threat of tariffs on certain goods is enough to cause customers, in this case Chinese buyers of US agriculture goods to find other lower cost suppliers. Once these buyers discover new suppliers with lower prices and similar quality they are likely not to switch back to US suppliers. Sales for US agriculture companies are likely to drop as a result.
We have said in our Insight Byte of March 6th that starting a trade war linking disconnected parts of the economy, not using international bodies like the World Trade Organization will just lead to lose – lose economics for global corporations and consumers. Lost jobs will result, economic recession or depression will spiral downward and it will take years to recover. Sound, research based trade policies based on win-win partnerships are the only way to turn this situation around. This administration has opened an economic Pandora’s box that it will not be able to close.