Trade War Repercussions
The accumulating effects and costs of trade wars.
Evolving market dynamics make it easy to underestimate how the effects and costs of trade issues will continue to grow in 2019. Many agricultural markets have been affected thus far, and the damage will grow and spread unless resolutions are forthcoming promptly. Trade issues will have accumulating effects in a variety of ways as more time passes.
The U.S. macroeconomy has been strong thus far, but that doesn’t mean that there were no trade impacts. More importantly, it doesn’t mean that the economy can continue to absorb trade-related blows without more obvious damage.
The most obvious effects of trade wars are the direct effects of tariffs and disruptions in trade flows in specific markets. This includes numerous agricultural markets, in particular, soybeans and pork as a result of reciprocal tariffs with China; and pork and dairy markets as a result of the retaliatory tariffs from U.S.-imposed tariffs on steel and aluminum. The new North American Free Trade Agreement (NAFTA) — the United States-Mexico-Canada Agreement (USMCA) — is not yet ratified and implemented but, in any event, much of the benefit is negated by these other tariffs.
Economic effects of tariffs may be initially limited mostly to changes in margins if the disruptions are perceived to be short-lived. Later the effects will evolve from the initial market shock to larger and more permanent adjustments. With more time and ongoing uncertainty about trade issues, more and more of the cost of tariffs are passed on to buyers, alternative product flows develop, and lost market shares become much more difficult to undo. The direct costs of tariffs are difficult to measure but certainly grow over time.
Even more difficult to measure are the lost opportunities associated with trade issues. It’s difficult to know how much you lost from something you never had. For example, the United States withdrew from the Trans-Pacific Partnership (TPP) two years ago. The remaining 11 countries continued and launched the revised TPP (CPTPP) in January 2019. The United States now doesn’t have the benefit of tariff adjustments and increased market access with TPP, and going forward the United States will be increasingly less competitive and likely lose ground relative to TPP participants.
The stated U.S. intention to negotiate bilateral trade deals with Japan and others has so far not resulted in new agreements or even serious discussions. Any agreements that may result are many months if not years away. In China, the U.S. beef industry had barely begun to build on the market access achieved in 2017 before tariffs hit in 2018. What was expected to be a lengthy process to grow market share for U.S. beef is now at a standstill. While the tariffs didn’t result in significant direct effect since little U.S. beef was exported to China, it certainly is restricting any chance for U.S. beef to participate in the growing Chinese market for beef.
Finally, the uncertainty of global trade turmoil takes a significant, but largely unmeasurable, toll on the economy. It is nearly impossible to know how much trade and investment has been postponed or abandoned as a result of trade uncertainty the past two years. The combined direct effects, lost trade opportunities and ongoing uncertainty are reducing growth potential for U.S. and global economies. Those effects are likely to grow in 2019 barring improvement in trade issues. The U.S. macroeconomy has been strong thus far, but that doesn’t mean that there were no trade effects. More importantly, it doesn’t mean that the economy can continue to absorb trade-related blows without more obvious damage.
The beef industry enjoyed strong demand and supportive trade in 2018, but who knows what it might have been without trade effects. More importantly, growing trade effects on domestic and international markets could mean that (obvious) negative effects will be apparent in 2019, while lost opportunities that are less obvious will no doubt continue and grow.
Editor’s note: Derrell Peel is a livestock marketing specialist for Oklahoma State University Extension. This article is reprinted with permission from the Jan. 7, 2018, edition of the Oklahoma Cooperative Extension newsletter Cow-Calf Corner.
