Feeling the ripples: The Trade War and the Farmers

Agriculture has always been the poor cousin of global trade – only coming under the umbrella of WTO rules forty years after industrial goods, and even now still blighted by protectionism.  Its fate in the trade war is no exception, with disruption to global agriculture markets already in evidence.  So far, the ripples have not had a significant impact on Kiwi farmers, but the threat of collateral damage remains high.

The theatre of operations for the ever-mounting trade war has largely been focused on bilateral trade between the US and China, and has been mainly targeted at manufactured and high-tech products.  The US farm sector has not escaped the fallout, however, and given the heft of the US as one of the world’s largest agriculture exporters and consumers, other producers, including New Zealand, may also feel the impact.

Farmers around the world are certainly familiar with the vagaries of natural disasters and market volatility…. But an environment in which tariffs, subsidies and even markets can be turned off and on like a tap is another proposition entirely.

Collateral damage to agriculture

Farmers have been drawn into the conflict in several ways.  First, China’s retaliatory tariffs have hit important US agriculture exports including soybeans, corn, fruit, beef and other products – a total of $27 billion last year.  China has previously taken around half of US soy exports, or a quarter of the overall crop, but exports to China have dwindled to virtually zero.   In response to the most recent round of tariff increases, a senior Chinese agriculture figure threatened that if the additional tariffs are not lifted, the US-China soybean trade “will never go back to normal”.

Global market disruption is the order of the day.   Brazil has largely replaced US soy exports to China, and in turn US soy sales to the EU and others have increased (although soy futures are down to decade lows); in fact, in the short term, while US farmers are hurting, other exporters of agriculture, and other products, may enjoy windfall gains – and we might expect more disruption and trade pattern shifts if President Trump follows through on his threat to impose auto tariffs, and the EU and Japan retaliate with tariffs on US agriculture.

While an early end to the trade war is imperative for global growth and stability, a deal to resolve the conflict may not be cost-free: reportedly it has been proposed that as part of a negotiated solution, China would agree to purchase more US farm goods, potentially including products where New Zealand competes, such as beef – a discomforting thought given that China is one of our largest chilled beef markets.

“Food aid” to dispose of trade-war surpluses

President Trump has also threatened further intervention by declaring that the US would use the trade war tariff income to “buy agricultural products from our Great Farmers… and ship it to poor & starving countries in the form of humanitarian assistance”.  While the overseas “aid” has yet to materialise, similar practices were targeted in the WTO Doha Round, since they can effectively act as export subsidies (now prohibited) and harm local farmers in the recipient market as well as displacing commercial trade. 

Subsidies instead of markets

President Trump has also offered $16 billion in new farm subsidies – mainly for crops, but also including dairy – building on the $12 billion he provided last year.   These have been calculated to almost double US farmer subsidy incomes compared to previous years.  It is not yet clear what effect these will have on farmers’ production decisions, and hence markets.  Nor is it yet possible to say whether the design of these measures would fit the “distorting” category and push the US over its WTO limits: its most recent WTO domestic support notification dates back to 2015 (rather ironic for a member that is insisting on greater transparency by others), so how much headroom it has, and how it will notify the subsidies, remains to be seen.    

A “more fair and market-oriented” global agriculture market?

More worrying, however, is the underlying ethos.  To remediate a problem of his own creation, President Trump has identified a policy toolbox ranging from trade-distorting subsidies to potentially injurious “food aid” and government-directed purchasing.   Contrast this with the philosophy of the WTO Agriculture Agreement, a foundation of the global rules-based trading system of which the US was a lead architect, which aims at creating “a more fair and market-oriented agricultural trading system”.  New Zealand and others, including the US, tried to go even further in the Doha Round, by slashing tariff peaks and tightening spending limits.  Unfortunately, the Doha Round negotiations failed to reach a conclusion – but the trade war shows how important the goal is. 

Farmers around the world are certainly familiar with the vagaries of natural disasters and well-used to dealing with market volatility; risk comes with the territory.  But an environment in which tariffs, subsidies and even markets can be turned off and on like a tap is another proposition entirely.

This blog was prepared by Stephanie Honey, Associate Director of NZIBF (and former New Zealand agriculture negotiator in the Doha Round)