Will Proposed US Tariffs Hurt US Farmers?

By Ian Sheldon (sheldon.1@osu.edu)

In a previous post (Ian Sheldon, “Do US Buyers Bear the Cost of Import Tariffs?”), it was shown that based on analysis of the 2018-19 trade war with China, US buyers bore the cost of US tariffs, and the expectation is that if a further round of tariffs is implemented, the costs will increase fivefold. However, this ignores the impact of China and other countries retaliating with their own tariffs against US agricultural exports during the trade war, and the likelihood that they will respond to any future increase in US tariffs.

The key results of a peer-reviewed study published by agricultural economists at Virginia Tech. and USDA are that, due to tariff retaliation, the US agricultural sector suffered annualized trade losses of $13.5 to $18.7 billion over 2018-19, China accounting for the majority and severity of the retaliation.  In addition, losses were larger for bulk commodities compared to differentiated products, damage to soybean exports being estimated at $10.7 billion. (Jason H. Grant et al., 2021. “Agricultural Exports and Retaliatory Trade Actions: An Empirical Assessment of the 2018/2019 Trade Conflict.” Applied Economic Perspectives and Policy 43(2): 619-640).

Drawing on the latter study, agricultural economists at the Economic Research Service (ERS) of USDA also examined the distribution of agricultural export losses by both state and commodity groups over the period 2018-19 (Stephen Morgan et al., 2022.  “The Economic Impacts of Retaliatory Tariffs on U.S. Agriculture.” Economic Research Report Number 304. Washington, DC: USDA/ERS).  At the national level, losses due to retaliatory tariffs over the period totaled $27 billion, with China accounting for 95 percent of the losses, annualized losses being $13.2 billion.

At the commodity level, export losses were dominated by soybeans at $9.4 billion, 71 percent of the annualized losses, while at the state level, export losses were concentrated in the Midwest, notably in Iowa, Illinois, and Kansas.  In the case of Ohio, its annualized trade losses were $616.09 million, accounting for 4.7 percent of the US total, with the bulk of its export losses being in soybeans at $567.12 million.

Although resumption of the trade war has not yet happened, an incoming administration could follow up on public commitments to raise tariffs against China and all other US trading partners (Thomas B. Edsall, New York Times, August 28, 2024). Necessarily any evaluation of the effects is before the fact, but given the extent and breadth of the proposed tariff increases, and what is already known about the impact of the previous tariff increases on US agricultural exports, it is important to get some sense of what to expect.

In this context, agricultural economists at North Dakota State University have recently released their analysis of various tariff scenarios for US agricultural exports (Sandro Steinbach et al., September 11, 2024, “Trade Policy Shifts and Their Potential Implications for U.S. Agricultural Exports.” farmdocdaily (14): 165, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign).  The key scenario reported assumes the United States implements 60 and 10 percent tariffs respectively on imports from China and the rest of the world, the latter both retaliating with tit-for-tat tariff increases.

Based on export projections by the World Agricultural Outlook Board (WOAB) (WOAB, 2024, “USDA Agricultural Projections to 2033.” Office of the USDA Chief Economist), and the estimated tariff elasticities reported by Grant et al. (2021), the results of the analysis indicate that US exports of soybeans and corn will decrease by $15.8 and $4.4 billion respectively, i.e., losses of 67 and 39 percent compared to the projected value of exports for 2025, with only modest increases forecast out to 2033 if all tariffs remain in place.  At the state level, Ohio is forecast to lose $1,014 and $173 million in export value respectively for corn and soybeans in 2025.

As the authors of the study point out, these projected trade losses would intensify the challenges already faced by US farmers, likely putting further downward pressure on commodity prices and profit margins, which would require a significantly larger government transfer to the sector compared to that under the Market Facilitation Program (MFP) implemented in 2018-19.  Bottom line: if all the proposed new US tariffs are put in place, China and the rest of the world retaliating in kind, farmers in the United States can be expected to take a significant financial hit.