Trade, tariffs, soybeans and China

A conversation with…

Ian Sheldon, Ohio State University professor and Andersons Chair of Agricultural Marketing, Trade and Policy

OCJ: Could you provide us an update of the tariff situation with regard to U.S. soybeans?

Ian: Well as you know, in response to the first round of trade barriers, the administration implemented a couple months back one of the major pieces of retaliation from an agriculture standpoint by the Chinese by implementing a 25% import tariff on U.S. soybeans — not Brazilian soybeans. It’s a discriminatory tariff. This has driven down the export price for U.S. soybeans coming out of the Gulf. We have actually suspended exports out of the west coast of the U.S. and we’re seeing a pretty large margin developing between the price Brazilians are getting out of the major port in Paranaguá as compared to the U.S. The gap between those prices is not yet large enough that the Chinese would still be able to import into China, even with the tariff in place, but I think it’s heading in that direction. It’s going to be interesting to see the extent to which the Chinese authorities try to prevent that from happening. So at a time when we’ve got high yields in soybeans to putting down the pressure on prices, that’s really going to have a significant impact on farm income both here in Ohio and elsewhere in the Midwest depending on how important China is as an export market for any given state. Out of Ohio we export maybe $1.6 or $1.8 billion dollars’ worth of soybeans. About a third of that goes to China. There’s a loss of market share, lower prices, and it’s going to feed back into farming income. Farmers then have to make choices about whether to push more into corn. But, of course, corn is faced with an export tariff and an import tariff by China as well. Corn prices are down as well, so then there are these substitution effects on the production side that could potentially hurt farmers in coming growing seasons.

OCJ: These pricing dynamics can also have an impact on global crop production. How is this going to impact farmers in Ohio moving forward?

Ian: I think one of the problems they face in the short run is how costly is it going to be to store this. A large crop is expected this year. We would have had this problem anyway I think, but it’s being exasperated by what’s happening with China. The price Brazil is getting is probably what would have been the world price for soybeans in the absence of the tariff. So China is just shifting its demand in that direction. I think the long run concern is not just the uncertainty this is creating with farm income. But how hard it is going to be to grab back that market share from Brazil? Much of this depends on how substitutable their soybeans are for U.S. soybeans, but I think they’re much more substitutable than maybe we thought with similar protein characteristics, etc. So, it’s potentially quite difficult to see how we might grab back that market share. Now, whether the Brazilians are going to be able to continue to supply all that in the long run is a question. They’re already the largest exporter and they could become the largest producer as a result of this if these tariffs remain in place.

In the U.S., we export about $15 billion worth of soybeans to China and agriculture actually has a net trade surplus for the U.S. compared to other sectors. This is one of the top three export industries from the U.S. Many farms have invested a lot in the way they grow soybeans, the type of soybeans they grow, and the technology they’re using. It’s going to be difficult for them to adjust in the short run easily to these price changes. So, it’s kind of doom and gloom. I think the tariffs simply made worse what would have been a difficult year price wise anyway. I think what’s concerning is how long this is going to go into the future, which is why the backfill subsidy from the U.S. government is pretty much just a band aid and won’t pick up all of the slack.

OCJ: This all got started over intellectual property rights between the U.S. and China. What better ways are there to handle this disagreement over intellectual property rights and trade?

Ian: Well I think from a multilateral standpoint, we should be perusing this through the World Trade Organization and getting our European colleagues and other countries like Canada to join with us to push much harder on the Chinese over those. Through the WTO they agreed to abide by the terms of what’s called the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement and that’s WTO agreement protecting intellectual property. But also, the Trans-Pacific Partnership was going to push very hard on protection of intellectual property and I think the point of Trans-Pacific Partnership was the U.S. in alliance with countries like Canada and Mexico, Australia, New Zealand, and Japan were going to write a set of rules on protection of intellectual property and investment agreements that would have eventually put pressure on China to join a broader Asia-Pacific trade agreement that would have gone way beyond the WTO. And the U.S. has been trying to negotiate a bilateral investment agreement with China for some time. Just because those multilateral trade agreements are difficult doesn’t mean to say you should walk away from them. I think the tariffs do more damage. They have so many unintended consequences that it outweighs any pressure they may or may not be putting on the Chinese.