President Donald Trump’s trade war with China would generate a negative impact on the U.S. economy—especially on economies that largely depend on agriculture—according to Duke scholars and local agricultural workers.
After the United States proposed a tariff on $50 billion worth of goods imported from China on April 3, China retaliated the next day by proposing a 25 percent tariff on $50 billion of U.S. imports. Although the United States targeted Chinese steel and aluminum exports with its tariffs, China focused primarily on U.S. agricultural products such as soybeans, tobacco and pork.
“When it comes to trade tariffs, we really need to focus on their real-life effects and not the political hysteria that we read in the news,” said Corinne Krupp, associate professor of practice in the Sanford School of Public Policy. “At this point, we hope both [the United States and China] can look back from the brink and make a compromise.”
According to data from the Department of Agriculture, China was the largest agricultural export market for the United States in 2016 and the second largest in 2017, with soybeans, pork and cotton as primary export products.
North Carolina farmers—who specialize primarily in growing tobacco, soybeans, corn and livestock—are among the potential victims of China’s retaliatory tariffs.
The tariffs will increase the prices of the U.S. agricultural products in China’s market, Krupp said. This will cause American farmers to lose access to the market if the heightened price exceeds what Chinese consumers could get locally or from other producers.
With the tariff, U.S. farmers have to either find another market big enough to absorb all the products or accept a lower price, Krupp added. Chinese consumers will also have to pay a lot more than what U.S. producers charge.
“It is not likely that a trade war will be good for anybody,” Krupp said.
A 2015 report by North Carolina State University showed that agriculture is the pillar of North Carolina’s economy. It accounts for roughly 16 percent of the state economy and provides 17 percent of all jobs in the state.
North Carolina soybean producers harvest from approximately 1.7 million acres, the highest acreage of row crop in the state, said John Fleming, president of North Carolina Soybean Producers Association.
North Carolina farmers are among the top producers of poultry, turkeys and hogs, for which soybeans serve as the primary feed, Fleming said. The vast majority of the soybeans produced in the state are consumed locally, and North Carolina even imports soybeans from other states and countries.
Even so, the soybean tariff that China—the biggest soybean consumer in the world—proposes will definitely harm U.S. soybean producers at large, Fleming noted.
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The tariff China imposed on American soybeans earlier this month has led to a significant drop in the price of U.S. soybeans and widened the basis—the difference between the local cash price and the future prices—Fleming said. Alternatively, the tariff drives up the demand for soybeans in South American countries such as Brazil, increasing the price.
But in the long run, U.S. soybeans will find new markets, Fleming explained. Traditionally, a country’s demand for soybeans is not influenced by its sources. As China shifts to Brazil for soybean imports, other regions that used to import from Brazil are likely to turn to the U.S. producers.
“The real impact [of the tariff in the long term] will not be on the demand [for U.S. soybeans] but on the distributions of sources,” Fleming said. “It will be a shift in terms of who is buying from where.”
None of the tariff proposals the United States and China raised will be in place anytime soon, Krupp said. And they may never be carried out if both parties can reach a negotiation.
Fleming noted that the tariff China proposed has limited impact on the soybean trade between the United States and China, especially during this time of a year.
China trades with the United States or countries in South America depending on the relative price of their soybeans, he added. January through mid-summer is traditionally the harvest season for South American soybeans.China is already purchasing primarily from Brazil.
“We are sensitive about the uncertainty in the market in terms of what we do for a living,” Fleming said. “Now we just have to step back, wait and see what what happens.”
A trade tariff is never beneficial from an economic perspective, but it is often used to achieve political goals, such as appeasing domestic constituents who feel they are disadvantaged by the free trade, Krupp said.
She explained that President Trump has assigned the Department of Agriculture to seek ways of using existing laws to compensate U.S. farmers if China’s retaliatory tariffs actually come in place, Krupp said. One existing program is the Commodity Credit Corporation, created in the aftermath of the Great Depression to support farmers.
“The [CCC] program is like an income support program,” she said. “It will be extremely expensive to carry out and not very likely to be politically attractive.”
Krupp added that at the same time, China hopes that by threatening to tariff U.S. agricultural products, it will drive U.S. farmers to lobby against President Trump’s tariff proposals.
Although President Trump’s tariff proposal will hurt domestic agricultural workers, it is unlikely to boost the U.S. economy as a whole, said Edward Tower, professor with tenure in economics.
He noted that low steel price will potentially benefit downstream industries in the United States that intensively use steel in their production.
“If the Chinese government is subsidizing its steel and exporting it at a low price, why shouldn’t we take advantage of it?” he asked.
The number of jobs in steel-using industries is much larger than the number of jobs directly involved in steel and aluminum industries, Krupp said.
“We should be cautious not to help a few at the expenses of many,” Krupp said. “Raising the prices of steel may make us less competitive in the [production of] appliances, cars and other manufacturing goods.”
A tariff on steel and aluminum imported from China may not benefit U.S. workers as much as President Trump claimed it would, Tower said. Unlike in China, steel and aluminum production in the United States is highly capital intensive. Protecting such industries benefit capital owners much more than workers, Tower noted.
Meanwhile, he added, the trade deficit that the United States maintains with China does not hurt the job market as conventional wisdom suggests.
“[Using tariffs to abate trade deficit] is really an idea from the old world,” Tower said.
He explained that when the gold standard—in which the value of currency is directly tied to gold—was still in place, a trade deficit would result in a net outflow of gold. This would be accompanied by a decline in the money supply and a downward pressure on prices and wages.
In contrast, the negative impact of trade deficit no longer holds in this era, where exchange rates become flexible, Tower noted.
Krupp said that the role of international institutions such as the World Trade Organization is limited regarding the disputes between the United States and China.
Trump claims China is not following the WTO rules by subsidizing domestic steel and aluminum production and artificially lowering the price, Krupp added. She mentioned that Trump is also alleging steel and aluminum industries are crucial national defense sectors for the United States.
“Yes, trade war is supposed to not be possible given everybody being a member of the WTO and following the rules,” Krupp said. “But [it does not hold] when politics is involved.”
She noted that at this point, the WTO can act as a neutral party, reiterating the rules and clarifying the responsibilities of both parties.
Although it is likely that the recent series of tariff confrontations between the United States and China will be resolved through a negotiation, it casts uncertainty on the global trade pattern in the future, she noted.
“[This trade confrontation] leads to concern about how global trade will go forward,” Krupp said. “Will it be rule-based or might makes right in that a country that is big and powerful always gets its way?”