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Commentary By Stephen Vukovits

Soybean Price Decline Illustrates Trade War Dangers

Economics Trade

The first round of the trade war between the United States and China officially began on Friday.  Citing unfair policies and disregard for intellectual property rights, the Trump administration imposed tariffs on $34 billion worth of Chinese goods.  Technology products and industrial parts were the most common of the 800 items targeted.

In retaliation, China implemented equivalent tariffs on American products, including a 25 percent duty on soybeans. This was designed to inflict major damage on American farmers, since soybeans make up 63 percent of U.S. agricultural exports to China.  A study by Professors Andrew Muhammed and S. Aaron Smith at the University of Tennessee estimated that a tariff of this magnitude would reduce American exports between $4.5 billion and $7.7 billion.

To make up for lost supply, China eased tariffs on its neighbors and increased subsidies to the soybean sector.  Specifically, the three percent tariff on soybean imports from India, South Korea, Bangladesh, Laos, and Sri Lanka was removed, and in China’s northeast Heilongjiang province, the government is shifting subsidies away from corn and towards soybeans.  While these measures will make up for some of the lost American supply, it will be nowhere near enough to maintain current import levels.

Brazil is poised to fill the remaining void.  Having already overtaken the United States as the world’s largest soybean exporter in 2013, the South American nation stands to grow as an even larger share of the market by filling in for America’s absence in the Chinese market.

The effect of this shift is illustrated in the dramatic shocks to soybean prices.  While American soybean futures have fallen to the lowest level in over a decade, the Brazilian soybean premium has tripled since May.  The gap between the bushels from the two countries is now $2.21, the largest margin recorded since the measure began in 2014.

Those most affected by the soybean tariffs are farmers in the Midwest.  Politically, these rural areas are conservative, and President Trump carried 95 percent of the counties that harvest soybeans in this region.  However, a major downturn to local farm revenues could turn many away from the President and Republicans.  With toss-up Senate races this fall in Indiana, Missouri, and North Dakota, rural voters will have a major influence on who controls Congress.

Because of the importance of this constituency to the outcome of the 2018 midterm elections and President Trump’s potential re-election efforts, it is no surprise that Secretary of Agriculture Sonny Perdue is exploring potential countermeasures to combat falling soybean prices.

One option under consideration is relying on the USDA’s Commodity Credit Corporation (CCC) to stabilize the soybean market by offering loans and buying unsold crops.  Established in 1933, the CCC can borrow up to $30 billion from the Treasury to fund any programs protecting farm revenue.  Rather than selling soybeans to traditional customers, the USDA would likely sell these crops directly to foreign governments and donate the leftovers to international charities.

However, this proposal is nothing more than a short-sighted bailout of the soybean industry that would have damaging long-term repercussions.  Government subsidies may balance farmers’ budgets this year, but buying excess soybeans does nothing to discourage additional tariffs.  The government cannot buy unsold crops forever.

Fortunately, legislators on both side of the aisle have warned against this kind of temporary intervention.  Representative Collin Peterson [D-MN-7], the ranking Democrat on the House Agriculture Committee, has argued that farmers do not want this kind of market intervention, and Senator Pat Roberts [R-KS], chairman of the Senate Agriculture Committee, has stated “we don’t need another subsidy program.”

The most effective solution would be to end the trade war and use other mechanisms to force China to comply with global intellectual property laws. Rather than tariffs, the U.S. government could further limit visas to Chinese students, close down U.S. college campuses in China, and prevent Chinese companies from listing on U.S. exchanges. These actions would limit China’s ability to gain access to valuable American technology.

Soybean farmers are just the first victim in what could be an economic disaster if retaliatory measures continue.  Other agricultural staples such as cotton and pork are already facing similar tariffs and the list of targeted products will only continue to grow if the trade war continues.  Other remedies should be tried.

Stephen Vukovits is a contributor to Economics 21.  Follow him on Twitter @svukovits.

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