Trading places

Crane cargo market and finance economic backgroundMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

One of the current hot topics involves the supposed breakout of trade wars. The most recent development was China’s announcement that imposed tariffs on a wide variety of U.S. agricultural exports to China. This action led to many news stories of how this will hurt U.S. agricultural exports, and also the assumption of big trouble for U.S. agricultural producers. While it never helps the U.S. producer when someone imposes a tax on importing product from the U.S., how much of a problem it creates really depends on the relationship. So, it pays to go to the numbers directly.

China imports very little of their pork consumption. A five-year average shows that they import 2.6% of their domestic consumption. As a policy decision, China has decided to import soybeans from around the world required to raise hogs domestically. Meanwhile, the U.S. exports about 22% of its domestic pork production. Combining China and Hong Kong, we saw about 17% of U.S. pork exports go to that market in 2017. While this represents a sizable share, it isn’t anywhere near critical. The rest of the world imports the other 80% of the global pork imports. Chinese buyers will be incented to purchase from other markets. Other buyers will shop the U.S. for deals. And, overall, the pork market will sort itself out quickly.

U.S. Pork and Pork Product Exports - Chart Table

A quick look at the numbers shows why China didn’t announce tariffs on U.S. soybeans. China imports 64% of the world’s exports of soybeans. Since soybeans exported by the U.S. comprise 37% of the world’s soybeans, even if China dedicated themselves to paying a premium and absorbing all of the seasonal and logistical problems to avoid U.S. soybeans, the rest of the world would only have the U.S. to source from for their soybean needs. Bottom line, China simply could not find enough soybean replacements.

It also pays to look at the relative yield differential between China and the U.S. The U.S. soybean yield of 3.3 metric tons per hectare is 84% higher than China’s yield. Rounding to a number we can remember, China would need to plant two hectares of precious crop ground to replace every one hectare of U.S. soybean production. And, they have way better uses for that crop ground than growing soybeans.

What about the other commodities and food products on which China imposed tariffs? This involves a question of substitutability and price/income elasticity. A good example is almonds. The U.S., with almonds entirely produced in California, is the only real game in town for almond sourcing, and the U.S. exports about 88% of the world’s almond exports. A tariff is really a consumer tax, and how the consumer responds reveals their real demand for almonds. Does the consumer think that pistachios, hazelnuts, walnuts, filberts, peanuts, etc. are substitutes for almonds? Or, when they want almonds, do they demand almonds? Additionally, we should consider that most consumers spend very little of their food dollars on tree and ground nuts, and almost zero of their total overall spending. If the price of almonds were to rise by 50% in China, would the average Chinese consumer really consume less almonds, especially, if they knew that there were not cheaper almond prices because of their government imposed tariff on almonds?

No product or service is perfectly inelastic in the long-term. This means that a Chinese almond tariff would have to reduce demand, but no one has a robust econometric estimate of the Chinese price and income elasticity for almond demand. Adding or removing a tariff is a great opportunity for estimating demand elasticities. Basically, we will find out what the Chinese consumer really thinks of U.S. products such as almonds.

Lastly, we need to remember that the Chinese exported approximately $11 billion of agricultural-based products to the U.S. last year, and they know that these exports could be put at risk with additional tariff disputes. Unlike with U.S. soybeans, most of their commodities and products could be resourced from the global market. Without a doubt, they will be weighing their risks and benefits very carefully. The U.S. is the world’s largest importer by dollar value of foods and commodities, so ultimately, losing access to the U.S. market is a bigger threat than the tariffs on U.S. exports. A trade war has many unintended negative consequences, however, it is always necessary to look at the data before jumping to conclusions.

Pork -- Source: USDA in 1000 MT CWE - Chart Table

USoybeans --  Source: USDA in 1000 MT - Chart Table