Analysis shows tariff-induced trade war hurts farmers

CHESTERFIELD, Mo. — A new study revealed a tariff-induced trade war would have a serious impact on corn and soybean farmers via lost global market share.

The study was commissioned by the American Soybean Association and the National Corn Growers Association and conducted by the World Agricultural Economic and Environmental Services. Illinois Corn Marketing Board is an NCGA funding partner.

The study specifically investigated the impacts of another potential U.S. and China trade war in which China responds to U.S. punitive tariffs by imposing retaliatory tariffs on corn, soybeans and soybean meal and oil products, as would be expected given the 2018 trade war and overall historical precedent.

Exports of both corn and soybeans are important to U.S. farmers and critical to the bottom lines of Illinois farmers.

About half of Illinois’ corn crop is moved out of state on average, with the majority of those shipments destined for overseas markets via barge to the Gulf of Mexico or by rail to Mexico. Sixty percent of Illinois soybeans are exported.

“Corn and soybeans are prime targets for tariffs as the top two export commodities for the U.S. As the largest exporting state in the country, Illinois farmers can expect to pay an extremely heavy price,” said Jeff Scates, Shawneetown farmer and ICMB chairman.

Corn and soybeans account for about one-fourth of total U.S. agricultural export value. Farmers and rural economies will lose in a reinvigorated trade war with China during a time of extreme financial stress on farm families.

“The study highlights the dangers that come with broad tariffs on imports,” said NCGA Lead Economist Krista Swanson.

“While launching widespread tariffs may seem like an effective tool, they can boomerang and cause unintended consequences. Our first goal should be to avoid unnecessary harm.”

The study found that a new trade war would lead to a steep drop in soy and corn prices, resulting in a ripple impact across the United States, particularly in rural economies where farmers live, purchase inputs, use farm and personal services, and purchase household goods.

Other recent studies examining the effects of tariffs have arrived at similar conclusions.

Study Findings

If China cancels its waiver and reverts to tariffs already on the books, U.S. soybean exports to China fall between 14 million and 16 million metric tons annually, an average decline of 51.8% from baseline levels expected for those years.

U.S. corn exports to China fall about 2.2 million metric tons annually, an average decline of 84.3% from the baseline expectation.

Although the export quantity decline is much lower for corn than soybeans, reflecting the smaller quantity of corn exported to China, the relative change from the baseline quantity is significant for corn.

“The study highlights the dangers that come with broad tariffs on imports.”

—  Krista Swanson, lead economist, National Corn Growers Association

While it’s possible to divert exports to other nations, there is not enough demand from the rest of the world to offset the major loss of soybean exports to China. At the same time, Brazil and Argentina gain global market share with increased exports.

The United States loses a combined total of 2.3 million to 3.7 million metric tons of soybean plus corn exports annually, while Brazil gains an average of 4.6 million metric tons of soybean plus corn exports annually.

Chinese tariffs on soybeans and corn from the United States, but not Brazil, provide incentive for Brazilian farmers to expand production area even more rapidly than baseline growth.

The expansion is magnified because some land area in Brazil can be used to grow a soybean and corn crop in the same year. Land transitioned into production area in Brazil will remain in production.

The impact on U.S. soybean and corn farmers isn’t limited to a short-term price shock. This is a long-lasting ramification that changes the global supply structure.

A 60% retaliatory tariff level intensifies the shock, resulting in a loss of over 25 million metric tons of soybean exports to China and nearly 90% of corn exports to China.

In this situation, the United States loses a combined total of 2.9 million to 4.6 million metric tons of soybean plus corn exports annually, while Brazil gains an average of 8.9 million metric tons of annual soybean plus corn exports over the projection timeline.

Price Impacts

A removal of the waiver on existing tariff levels results in a U.S. soybean price that is 60 cents per bushel below the baseline, on average, over the forecast horizon.

The price rises for farmers in Brazil and Argentina, capturing more than 75 cents per bushel over the baseline price on average, according to the study.

In China, the price rises to $1.27 above baseline, on average. The price increases in China make imports more expensive for China, but are beneficial to its farmers.

The result is China buys less foreign soybeans and corn while alternatively expanding its domestic production area for both crops and retaining the added economic value of the higher price.

The U.S. corn price drops 8 cents per bushel below baseline, on average, while farmers in Argentina and Brazil capture a nearly equivalent increase in their corn price. In China, the price of corn rises 12 cents per bushel, on average.

Under a 60% tariff scenario, the price for U.S. soybeans falls nearly $1 per bushel on average, and the price for U.S. corn drops 13 cents per bushel, on average, from already low baseline price levels.

While U.S. soybean and corn farmers are hit harder, farmers in Argentina, Brazil and China see even greater increases in their prices for soybeans and corn.

Comparative prices in Argentina and Brazil rise while farmers in those nations benefit from a combination of higher prices and expanded export opportunity.

Alternatively, U.S. farmers face further price declines at a time when costs remain at record levels and commodity prices are already declining.

Current U.S. Department of Agriculture projections for 2023 and 2024 net cash income would result in the largest two-year decline since the 1970s, leaving U.S. farmers exceptionally vulnerable to the adverse impacts of trade war in 2025.

Depending on the scenario, U.S. soybean farmers lose an average of $3.6 billion to $5.9 billion in annual production value.

U.S. corn farmers lose an average of $900 million to $1.4 billion in annual production value, as the resulting decline in corn prices more than offsets the acreage change.

This burden is not limited to the U.S. soybean and corn farmers who lose market share and production value.

There is a ripple impact across the United States, particularly in rural economies where farmers live, purchase inputs, utilize farm and personal services, and purchase household goods.

Trade War Background

U.S. lawmakers from both parties are increasingly concerned with several Chinese trade practices. While addressing unfair trade practices is warranted, the use of import tariffs as a method to address trade concerns negatively impacts the U.S. farmer and has ramifications for the U.S. economy.

In the 2018 trade war, the United States extended tariffs on steel and aluminum to several major trading partners and separately imposed tariffs on an extensive range of imported products from China.

In response, China and other nations imposed retaliatory tariffs on numerous U.S. products, including many agricultural and food products. This led to significant reduction in U.S. agricultural exports to those nations.

As a result of retaliatory tariffs from the onset in summer 2018 through the end of 2019, U.S. agricultural export losses exceeded $27 billion, with China accounting for about 95% of the value lost, according to USDA data.

China and the United States signed a Phase 1 agreement in January 2020, which helped end the trade war. Part of the agreement stipulated China would purchase $80 billion of U.S. agricultural products over 2020 and 2021.

China dramatically increased its purchases of U.S. agriculture products during that time, though final volumes fell short of those obligations, with only $59.2 billion of U.S. agricultural products purchased by China.

Logistics issues stemming from the COVID-19 pandemic and resulting global supply chain crisis further limited China’s purchases, but the revival in trade — which included record volumes of soybeans and corn — helped repair goodwill between China and the United States.

U.S. farmers have worked more than 40 years to establish and nurture their strong trade relationships with China.

During those decades, many farmers visited China as part of trade teams, and Chinese buyers visited the United States.

The 2018 trade war created concerns about the reliability of U.S. supply creating an incentive for China to invest in alternative supply chains. These investments encouraged irreversible production area expansion in U.S. agricultural competitor nations.

While it took decades to fully develop trade with China, the trade war quickly reversed many years of efforts in ways that remain difficult to recover, the report said.