Trade War Heats Up and American Farmers are the First to Feel the Pain
President Trump has made good on his promise (or threat?) to impose stiff tariffs on imported Chinese goods. $34 billion dollars worth of trade to be exact. We heard Trump and Chinese President Xi go back and forth all Spring on how and when this would occur and we have appeared to have reached the point of no return.
Last midnight saw the first wave of tariffs take effect. China immediately responded with their own tariffs on $34 billion of American imports, primarily affecting US Auto and US Soy. Tesla (NASDAQ:TSLA), for instance, will see their Chinese duties raised from 10% to 40%. US whiskey will be taxed at 30%, up from a modest 5% before the new tariffs took effect.
The risks are great, as China one of the United States’ most important trade partners, with about $630 billion (-$130 deficit) in trade done in 2017, not far behind Canada ($670 billion, +$8 billion surplus) and just ahead of Mexico ($616 billion, -$64 billion deficit). All figures are official 2017 numbers per ustr.gov
The United States may be positioned advantageously in terms of a Chinese trade war as the US imports much more than it exports to China, there is simply much more China has to lose and much more that the US can slap with tariffs if they so choose.
Early signs show investors aren’t as concerned as once feared over the impending trade war escalations
Major stock market indexes have remained unphased throughout most of the verbal battles between the United States and China and even as the tariffs went live investors weren’t phased. June jobs data, recently published, show no evidence of trade war anxieties hurting the US jobs market according to Council of Economic Advisers Chairman Kevin Hassett said in an interview with Bloomberg today.
He remarked, “There isn’t clear evidence in the data that the anxiety over trade is being harmful to the industries that we would most watch for harm in.”
Current prevailing thought that if the tariffs go no further at this point then there will be only limited damage to the US and world economies and that the markets can absorb what’s been done up to this point with minor corrections.
However, economists predict that if the US imposes 10% tariffs on its other trade partners (a very big IF), then US growth will lag by 0.8% by 2020 which would indeed be felt nation-wide, especially in the unemployment and wage growth metrics.
However, that doesn’t stop the pain from reaching individuals in the States.
Perhaps the most immediate effect to US citizens will be some of its farmers. Soy producers sell 2/3rd their product to China, who in turn uses a lot of the soy to feed its massive pork industry. China is raising US soybean tariffs to 28%, up from basically zero percent all the while offering other nations a completely duty-free soybean import tariff rate of 0%.
This is a very targeted approach as the US soy industry is both especially reliant on Chinese buyers given the majority ends up there, as well as key Trump supporters. Trump did very well with rural voters and the mid-west agriculture industry during his 2016 election run and the Chinese know this all too well.
The Federal Government’s response could be to use a depression-era bailout fund in the neighborhood of $30 billion dollars to deliver a cash infusion stimulus to soy farmers to help ride out the impending storm.
The Commodity Credit Corporation, an entity that helped farmers during the Great Depression, is allowed by law to borrow as much as $30 billion from the US Treasury to buy crops that would normally be unsold and disposed of as excess or waste product. Ag Secretary Sonny Perdue mentioned this last month in Chicago as a possible band-aid to the problem.
Many are voicing their opposition to this as it essentially is borrowing against the government to fix an economic problem that the feds created on their own. Borrowing money to pay for a problem caused by trying to.. save money?
The American Soybean Association even came out with a statement strongly opposed to the plan:
It’s a whole lot easier not to wreck the car in the first place than it is to think about what a repair might look like.
The message is loud and clear. The farmers want a healthy and sustainable industry rather than a one-time cash infusion; which makes complete sense. A large and obvious concern is that if the CCC borrows the maximum of $30 billion from the Treasury then this will be an only one-time infusion for the soy farmers.
Many of these farmers are fourth and fifth generation farmers that expect to hand their businesses and farms over to their children and long-term viability is very important to them. Even getting a full year’s worth of crops paid for won’t help them five years down the road if a trade battle has turned into a multi-year trade war.