Close up photo of soy bean after harvest anasimin/iStock/GettyImagesPlus

Closer look: Trade war six months later: Who’s winning?

Tariffs hurt China’s economy more than the U.S., but that may not matter.

As mountains of grain pile up at elevators around the country, farm frustration grows over export demand slashed by a trade war between the U.S. and China.

Six months after the two countries slapped billions in tariffs on each other’s imports, whose winning? More important, are we any closer to a solution?

“Economically there is no doubt the Chinese will suffer more from the tariff wars,” says Wendong Zhang, an Iowa State ag economist. “But will it translate into political action? I am more and more pessimistic.”

In September the U.S. placed 10% tariffs on $200 billion worth of goods China imports to the states. That rate is set to increase to 25% Jan. 1, 2019. China retaliated with 5 to 25% tariffs on $60 billion of exports from the U.S. China’s retaliatory tariffs on imports like soybeans went into play in July.

President Trump applied tariffs in part because of China’s alleged theft of American intellectual property.

Economy in decline

Iowa State analysis reveals that this latest round of $200 billion in tariffs on China will cause the Chinese economy to decline close to or exceeding 1.5%. By comparison, analysts say the Chinese tariffs will only cause a drop of about half percent in the U.S. economy.

Further, analysts expect even more damage to the economy when U.S. tariff rates ratchet up to 25% in January. However, ISU analysis shows that the ag sectors were disproportionately impacted with Chinese tariffs: the trade disruptions so far could result in $1 to $2 billion to Iowa’s economy alone (off of a Gross State Product of $190 billion)

Last week China reported third quarter economic growth of 6.5%, missing its target of 6.7%. This is the country’s slowest economic growth since the financial recession. The U.S. reported growth of 4.2% in the second quarter and was expected to grow around 3.3% for the third quarter.

“Tariffs impact China more because we are targeting $200 billion of their products and the Chinese rely more on exports than we do,” says Zhang. China’s GDP is already mainly driven by consumption with only 20% from exports. China could also devalue its currency to make sure its exports are cheap enough, or more likely it may not intervene when the currency devalues on its own facing a strong dollar; that helps Chinese exports.

Political rhetoric in China has been toned down recently, although the country’s propaganda machine, China Daily, is attempting to influence Trump supporters through advertising inserts in the Des Moines Register. President Trump may meet President Xi at an upcoming G20 meeting in Argentina next month, but right now China shows no signs of interest in negotiation.

 

Photo by Christy Allen

Tariffs impact China more because we are targeting $200 billion of their products and the Chinese rely more on exports than we do,” says Iowa State economist Wendong Zhang.

Possible solutions

“China does not want to risk more export loss, so one possible solution to the tariff war is for them to agree to buy more of our stuff,” says Zhang. “The U.S. should see if there’s a possibility for more transparency on how China gives subsidies and expand market access for foreign companies, including the U.S.

“This could get tricky,” adds Zhang, a native of China. “The Chinese in general want to maintain an open market image, but if the trade war continues to escalate, they could block certain sectors for U.S companies exclusively. They could set up different standards for U.S. companies compared to those from other countries.

“That would be hard to implement, because a lot of companies are global in nature.”

Another solution may lie in turning the tables on the current dispute over intellectual property. China’s ambition to become world leader in multiple industries could work against itself. Chinese companies, especially those that work in internet e-commerce, are increasingly global and have become vocal about their own intellectual property protection. You don’t become a world leader without investing in the U.S., but how do you do that without rules that apply in both countries, not just one?

“That’s an opportunity for the U.S. government to push more for explicit rules that are fair, and timetables on how to make potential remedies happen,” says Zhang. “We should be agreeing on the overseeing agencies for dispute resolution. Those are meaningful discussions that need to take place.”

Minimizing damage

Meanwhile China is taking steps to minimize economic damage from reduced U.S. soybean imports. The country set a goal to reduce protein content in hog feed from 15-20%, to 12.5%. And this year it doubled subsidies to their own soybean farmers. Although U.S. pork imports have been hit by tariffs, China already produces about 97% of the pork they consume; the remainder is mainly supplied by Europe.

The Chinese government has shown willingness to shut down entire livestock sectors over political disputes. In 2010 President Obama placed a tariff on Chinese tires; China responded by slashing U.S. chicken paw imports, shrinking a $1 billion market to nearly zero, which is where it remains nearly 10 years later. (Other factors contributed to the loss, including reluctance by the U.S. to open its own market to Chinese chicken.)

“They can get chicken paws from other countries, but they also substituted other things like pigs ears,” says Zhang. “In either case, soybean meal is impacted since it’s a major source of livestock feed in China. These trade disputes have made Chinese diversification an implicit objective, rather than an explicit strategy.”

While China’s economic growth is down, and its stock market looks even worse, Chinese consumers may not see much trade war impact in everyday life. Food prices may increase, but tariffs will not lead to any shortages, even with an outbreak of African swine flu, says Zhang.  

“The impact of the trade war really won’t hit the food or food industries in China- it will be more about the slowdown in manufacturing and other industries that rely on exports” he says.

U.S. consumers may benefit from the trade war, at least when it comes to the grocery store. U.S. pork costs should be lower due to higher supply from reduced exports and cheaper livestock feed costs. But with continuing escalations, more consumer products are under target.

Long term impacts

Even if the disputes get resolved tomorrow, three things will likely come from the trade war:

  1. Low cost production is economic gravity. If China loses markets in the U.S. for low-cost production, that production may begin to appear in other countries that want to serve U.S. markets. That is, if those countries and their industries want to accept the risk that the U.S. won’t slap tariffs on them, too.
  2. Tariffs may seem simple, but they change global production, trade flow, related products, and more significant, they change expectations on where to get reliable supply in the future, both short-term and long-term.
  3. The trade war tainted the U.S. image as a reliable trade partner. Regardless of the resolution, the Chinese will be more actively and aggressively diversify away from trade with the U.S. and expand domestic production wherever possible. This will incentivize the country to invest more in other partners like the EU. Japan, Former Soviet Union countries, Brazil, and Africa. China and Japan just signed several important agreements facilitating monetary exchanges and coordinated global investments.
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