The prospect of a trade war has been prominent in the news this year. The 2018 threats began with the U.S. putting tariffs on solar panels and washing machines and soon moved to steel and aluminum. China retaliated with $3 billion of tariffs on U.S. exports to China including $1.1 billion of U.S. pork. A further $50 billion threat by the U.S. administration resulted in a similar sized threat by China that included $16.5 billion of U.S. agricultural exports to China including soybeans where U.S. sales to China were $12.4 billion in 2017.

While a number of U.S. agricultural exports to China have been named, the largest impacts will be on soybeans. In this article, we also discuss impacts on pork for both the U.S. and Indiana.

We have received many important questions from the media, agricultural organizations and policymakers on the proposed Chinese tariffs. Here we provide some background information and estimates of effects if the threatened tariffs on soybeans and pork should proceed.

Q. How important is China in the global soybean market?

• China is the largest user of soybeans in the world. The U.S. is the second largest user and has about one-half the domestic use of China.
• China only raised 13% of the soybeans they will consume in the current marketing year. This means they will import 87% of the total beans they consume.
• China currently buys about 65% of all the soy- beans that move in global trade.
• The U.S. will supply 29% of all the soybeans that China will use this marketing year.
• In calendar year 2017, the U.S. sold China 1.2 Billion bushels of soybeans valued at $12.4 Bil- lion. This was around 30% of U.S. production.

Q. How would a 25% Chinese tariff on U.S. soybeans work?

• If China puts an additional 25% tariff on U.S. origin soybeans this is essentially a tax to allow U.S. origin beans to enter China.
• An additional 25% Chinese tariff would largely make U.S. origin soybeans uncompetitively priced compared to other countries such as Brazil and Argentina.
• The Chinese tariff on U.S. origin beans means that soybean processors in China would buy beans first from our competitors because they were lower-priced.
• China would still need to buy some U.S. soybeans because we are such a large supplier. But, the U.S. would become the supplier of last resort, of- ten called the “residual supplier.” China would first buy from our competitors and purchase the minimum they can from the U.S.
• China would pay a higher price for both competitor beans and U.S. beans.

Q. What would be some impacts of a 25% Chinese soybean tariff?

• Purdue Ag Economists Tyner and Taheripour have completed a study of the impacts of a 25% Chinese tariff on soybeans. Given the many assumptions in their models, they find that after approximately 5 years of adjustment the tariff would result in:
  • U.S. soybean exports to China dropping 65%
  • U.S. global soybean exports dropping 37%
  • U.S. soybean production dropping by 15% (mostly from lower soybean acres)
  • Soybean prices dropping about 5%
  • U.S. and Chinese economic wellbeing falling $3 billion per year.

Q. How would the Indiana soybean industry be affected?

• Indiana farmers planted almost 6 million acres of beans in 2017. Soybeans were the largest acreage crop with corn second at 5.35 million acres.
• Indiana produced 321 million bushel of soybeans with an estimated farm value of $3.1 billion in 2017.
• Indiana ranked as the 5th largest soybean state by acres planted.
• The Chinese soybean tariff is estimated to drop revenues for Indiana soybeans by around $150 million annually assuming a 5% price reduction.
• The $150 million drop in revenue represents about a 10% decline in the $1.5 billion of annual Indiana farm income from the most recent official data for 2016.
• Overtime, lower soybean prices would lead to reduced soybean acres and more acres of corn, wheat and other crops. Prices and revenues for those crops would drop somewhat as well.

Q. Is China a big buyer of U.S. pork?

• China proposed a 25% tariff on U.S. pork exports on April 2, 2018.
• China is the world’s largest producer and consumer of pork. Their consumption is nearly 3 times the European Union (second largest) and almost 6 times the U.S. (third largest).
• China raises 97% of their own pork. Imports from the U.S. represent only 1% of their consumption.
• Unlike soybeans, China can easily replace the shortfall of U.S. pork from our pork competitors like the EU and Canada.
• Chinese tariffs on U.S. pork exports will have minor impacts on China.

Q. How might the Chinese pork tariff affect the U.S. and Indiana pork industries?

• U.S. pork exports to China represented 2% of U.S. production in 2017.
• Chinese tariffs will make U.S. pork largely uncompetitive in China and U.S. exports to China would drop to near zero.
• The loss of a market that represents 2% of our production will lower hog and pork prices in the U.S.
• There will be at least two positive compensations from these lower prices:
  • U.S. consumers will buy somewhat more pork at the lower prices.
  • The EU and Canada will ship more pork to China and less to some other destinations. The U.S. will pick-up some of this business.
• Purdue Ag Economist Chris Hurt has made some rough estimates of these impacts:
  • U.S. Hog prices drop about $3 per head
  • Nationally, this reduces revenues about $350 million annually
  • Indiana produces near 9 million head of hogs a year. So this is a revenue reduction of around $25 million.
  • The Indiana industry had farm receipts near $1.3 billion in 2017. So, the tariff impact would lower revenue about 2%.
  • The tariff would result in a small downsizing of the U.S. industry and provide an incentive to slightly expand production in competitive countries such as the EU and Canada.

Q: Can the current trade disputes be resolved?

• Neither the U.S. nor Chinese announced tariffs have been implemented yet.
• It is anticipated that trade teams from the U.S. and China will be meeting to better understand the concerns from each side.
• At this writing, there is the potential opportunity to find resolutions to these trade disputes, but that is not assured.

References

Taheripour, Farzad and Wallace E. Tyner. “Impacts of Possible Chinese Protection on U.S. Soybeans.” Purdue University Department of Agricultural Economics, February 2018.

USDA: Foreign Agricultural Service. PS&D and GATS databases