August 23, 2019
Determining who pays the retaliatory tariffs on U.S. agricultural exports is shaped by a number of factors that affect bargaining power between exporters and importers, depending on the agricultural good being traded. U.S. farms are bearing the brunt of retaliatory tariffs placed on their products, according to a Knowledge Exchange report released by CoBank, a cooperative bank serving agribusinesses, rural infrastructure providers and Farm Credit associations throughout the U.S.
Over the past two years, the U.S. has clashed with some of its most important trading partners. The tit-for-tat retaliatory tariffs have affected economies on both sides. Mexico, Canada, the European Union, China, South Korea and Japan have all been targets for trade negotiation and renegotiation by the U.S., and the flow of U.S. agricultural goods has felt the impact.
CoBank analyzed 11 commodities in the fourth quarter of 2018 and detailed who truly pays the cost for the ongoing trade disputes. Their findings? U.S. producers – not the importing country or its consumers – paid most of the cost of these tariffs in all but two cases.
The impact of retaliatory tariffs on U.S. farm products reflects the lopsided balance of power between U.S. producers and the importing customers. The commoditized nature of agricultural products, inventories with long shelf lives and ease of identifying and sourcing suitable substitutes are among the factors that give importing customers the upper hand. In some instances, the U.S. is able to take on less of a share in the cost of retaliatory tariffs due to geographic and supply chain advantages and/or dominance in particular markets.
Cheese exports to Mexico and almond exports to China were two of the commodities examined where the trade relationship was found to actually favor U.S. producers. Meanwhile, cooked beef shipments to Canada, ham and frozen fries to Mexico and whey, cotton, wine, pork, soybeans and sorghum to China all favored the importer.
Mexico is the largest market for U.S. pork exports by volume, accounting for nearly one-third of U.S. pork exports each year. Fresh ham is the primary pork product exported to Mexico. By some estimates, ham to Mexico accounts for 40% of total annual U.S. ham production, CoBank reported. “Despite having few options for fresh ham, Mexico significantly reduced its U.S. ham purchases. Instead, it increased domestic pork supplies and relied on other available animal proteins,” the report explained.
Thankfully for U.S. producers, U.S. ham exports should rebound through the summer, since Mexico dropped its tariff on U.S. pork in mid-May, CoBank said.
Meanwhile, the pork situation with China has a much grimmer outlook. The 50% incremental import tariff has resulted in the U.S. pork meat export value to China declining by 32% year over year in the fourth quarter of 2018. The ongoing African swine fever (ASF) outbreak in China "has drastically transformed its and the world’s pork supply and demand in the last year, yet the continued trade dispute between the U.S. and China will mean trade flows of U.S. pork to China will be driven more by politics than economics,” the report said.
Whey is another market that saw sharp declines after China instituted a 25% import tariff. U.S. whey exports experienced sharp declines of 42% year over year during the fourth quarter of 2018, as did the rest of the dairy complex, which saw a decrease of 47%.
China has long held the position of being the largest whey importer in the world due to its utilization of whey and lactose in hog feed. The ASF outbreak, which first gained ground in August 2018, raised concerns that this would further hamper dairy exports to China, since whey historically has comprised two-thirds of the total dairy export value. “However, whey’s share of Chinese dairy exports has continued to hold firm, suggesting that despite outbreak concerns, the larger factor in reducing demand was the 25% tariff rate,” CoBank said.
“Long term, it will be years until China is able to be self-sufficient in dairy production. When the tariffs are lifted, U.S. export value should rise again, despite China’s diversification of dairy importing countries,” the report stated.
Although the U.S. was once a major supplier of soybeans to China, CoBank fears that the U.S. is unlikely to gain back significant export sales in the coming years. The 25% tariffs resulted in a 98% year-over-year drop in value for soybeans. U.S. domestic purchases have significantly offset the loss of the Chinese market, but they’re not enough. The U.S. increased its export value to the rest of the world by more than 60%, especially to the EU, but total exported value still was down by nearly 50%.
With the prospect of declining bargaining power, U.S. producers of most agricultural commodities will face pressure to absorb more of the costs of retaliatory tariffs in the future, CoBank added.
While the U.S. has highly efficient farms with advantages in natural resources, along with other strengths that make many U.S. food and agricultural products the most competitive in the world, the more time competitors have to take away U.S. market share and cement trading relationships, the more it will negatively influence U.S. producers’ ability to recover.
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