Despite some apparent de-escalation of Donald Trump’s trade war with China this week, it really hasn’t got started. Tariffs on $34bn (£26bn) of Chinese goods will come into force on July 6 and China will retaliate – with Trump-supporting farmers firmly in its firing line. US agricultural products that face trade barriers from China include orange juice, fruit, nuts, wine and farmed salmon – but China’s main target is soya beans.
China buys roughly half of all exports from the US – or one out of every three rows of soya beans that American farmers grow. The value of these exports is around $14bn out of total agricultural exports to China of around $20bn.
This week’s good news for China came on Wednesday with President Trump deciding to go with a less harsh method to curb Chinese funding in US tech companies than his previous rhetoric had suggested. Instead of a broad-based crackdown, he will instead work with Congress on a more modest measure that involves letting the committee on foreign investment in the US deal with concerns about foreign purchase of sensitive domestic technologies.
Despite trade barriers not officially being erected until next month, US farmers have already started feeling the initial brunt of China’s retaliation. Soya bean prices have plunged to a nine-year low as China plans to weaponise the crop against the Trump heartlands. Chinese authorities have promised to slap a 25pc tariff on US soya beans should the US administration put up trade barriers against its exports. Processed soya beans are the world’s largest source of animal protein feed and the second largest source of vegetable oil. The crop is particularly important in China, as it is the largest pig producer in the world and pork remains a staple food across the country.
Of the top 10 soya bean producing states in 2017, eight produced a majority for Donald Trump in the 2016 presidential election. Only Illinois and Minnesota chose Hillary Clinton over the controversial Republican. Iowa, Nebraska, Indiana, Missouri, Ohio, South Dakota, North Dakota and Kansas all plumped for Trump. Farmers in the region are already being impacted as shipments have stopped even before tariffs have been introduced. The US is also expecting a bumper crop this year, which is a further negative for prices.
Trump-supporting soya bean farmers in Minnesota have been talking about the value of their farms losing in the order of $200,000 apiece. “When a tariff even gets talked about, it makes both the buyers and the sellers jumpy,” soya bean farmer Dale Stevermer told CNN. “It’s going to impact my bottom line, it’s going to impact my business livelihood, and, to an extent, it becomes a mental outlook.”
Citigroup has calculated that a 25pc import tax on US soya beans would completely price Midwestern farmers out of the China export market based on recent prices. Crops in Argentina are currently being hit by a drought, so the country is unable to capitalise on the extra demand from China as it switches the source of its supplies, so the biggest beneficiary looks likely to be Brazil. There are also other suppliers in Asia that can help fill the shortfall.
On Tuesday, Beijing decided to remove tariffs on soya beans imported from India, South Korea, Bangladesh, Laos and Sri Lanka that were previously set at 3pc. Soya bean meal, which had been subject to 5pc tariffs, will also be exempted. These cuts were agreed before the current trade escalation and are part of the Asia-Pacific Trade Agreement signed by its members in 2016, but the timing of their introduction is likely to be tied in with current machinations.
However, it is important to note these countries have not been exporting soya beans to China at all for the last year so how much of the shortfall they can make up remains moot. There is likely to be some upward pressure on Chinese food prices, which won’t play well domestically, but authorities appear comfortable with the impact. China’s national development and reform commission, its former state planning commission, said last week that consumer prices were likely to be stable in the second half of the year, with grain and edible oil stocks relatively high.
It’s not just farmers in the Midwest that look set to be collateral damage in the trade war – there will be a slowdown in the whole logistic supply chain. Louisiana, a state that was solidly behind Trump in the 2016 election, will also be hit. The Port of South Louisiana handles the most tonnage of any US port – and fewer exports of soya beans and lower imports of products such as steel and aluminium will hit trade here.
A full trade war will cut economic output by a minimum of 7pc over five years, the largest impact on any state, according to the Federal Reserve Bank of Dallas. It also noted that one in six jobs in the state were linked to international commerce, so a protracted spat could send the US unemployment rate in the wrong direction.
But, hopefully, it won’t come to this. With the midterm elections due to be held in November, Trump really needs to declare some sort of “win” by mid-September. Any escalation will probably lead to a broad-based market sell off and this is not the ideal backdrop to go into an election, and could be seen as a vote on the popularity of the incumbent of the Oval Office.
~Garry White is the chief investment commentator at wealth manager Charles Stanley