America’s Trade War:
Essentially, this is a story of pre-WWII protectionist trade policies conflicting with the 21st Century global economy. Few major manufacturers today get their raw materials, and the parts they assemble, locally. There are long-established international supply chains that contribute to finished products in the US and around the world. Airplanes and vehicles labeled as American, German and Italian draw components from other countries and are often assembled outside their home bases.
The US Government decided on March 1, 2018 to impose tariffs (taxes) on imports of steel (25%) and aluminum (10%) to protect these two domestic industries. For years, US steel and aluminum had faced stiff competition from cheaper imports produced in Canada, Mexico and Japan.
Impact on US Farmers:
The importance of steel to American agriculture can be seen in one statistic; in 2017, 95,000 tons of steel was shipped to the agriculture sector compared to 14,000 to the auto industry. Thus, while US steel and aluminum producers are happy today, many others, including the American agricultural community, are not. They have seen prices for farm equipment, from tractors to grain storage bins, rise substantially in the past five months. And many buyers have cancelled or delayed purchases.
Similarly, long-standing patterns of imports and exports have provided market stability and predictability for private sector planning. These were especially important for long-lead-time farmers. Few economic sectors are as sensitive to disruptions as agriculture. China and European Union countries have been major buyers of American agricultural products for years. China, for instance, bought 61% of US pork exports in 2017.
However, reacting to America’s imposition of tariffs on foreign steel and aluminum, foreign governments retaliated with counter tariffs, primarily on US agricultural exports. China chose pork, corn and soybeans. The EU focused on Harley-Davidson motorcycles and bourbon. Suddenly, traditional foreign buyers of American farm products are looking elsewhere for cheaper imports. Brazil has become an active alternative source for soybeans and Mexico is turning to Brazil for corn it usually imported from the US.
US Agriculture Weakened Before Tariffs:
Prior to the administration’s March 1 public announcement of the steel and aluminum tariffs, farm income had dropped more than 50% since 2013. Huge harvests had saturated markets and drove down prices for staples such as corn and soybeans. Moreover, competitors like Brazil, Argentina and Russia increased grain production for export, nibbling away at US export markets.
Conclusion:
The Department of Agriculture predicts US net farm income will drop by 8.3% over 2017. Similarly, Caterpillar and John Deere must now pay a $2.5 million tax on a $10 million foreign steel purchase, increasing their operating costs. And both firms’ shares are taking a beating on US and international stock and equity markets. Unless Washington’s trade war (aimed at disciplining China) ends, or the US negotiates bilateral deals with these countries, thus easing these burdens, serious effects on the economy, particularly agriculture and related industries, will be increasingly felt. However, the White House is threatening tariffs on more Chinese exports and Beijing counters with threats of its own. It’s time for more common sense.
Title image: Pond at Pickering Creek Audubon Center, Talbot Co. Photo: Jan Plotczyk