Tariffs are now a regular topic of conversation in the news, especially over the last year.

What are Tariffs?

Tariffs are a special tax applied on a good imported from another country. The home country that imports the good applies the tariff. The idea is that if imported goods are more expensive, consumers in the home country would be more inclined to purchase items produced domestically. Tariffs can bring both positive or negative economic welfare.

How do tariffs affect farmers?

"We produce significantly more than we can consume here in the United States, & farmers across the United States in all sectors of agriculture rely on exports to maintain price levels,” says David Swenson, an economist at Iowa State University.

History

The US has, since its inception, grappled with the issue of tariffs & what role they should play in our economy. The Founding Fathers, having just secured independence from England, generally loathed any form of new tariffs. Eventually, they agreed on a 5% import tariff levied against foreign goods entering the US. Over the next 25 years, the US economy began to grow & become more industrialized, & states began to impose their own tariffs on each other’s goods & services. During the Andrew Jackson administration, tensions over state tariffs rose to such a level that the federal government had to intervene & force a compromise.

On an international level, the US often uses tariffs to help with economic growth at home & to reduce the need for imports. While never very aggressive, the tariffs resulted in a steady flow of revenue for the federal government without harming international trade on goods & services with our allies. These policies fluctuate with different Presidential administrations, but stayed largely intact until the Great Depression of 1929. As the US economy spiraled downward, President Herbert Hoover decided to impose heavier tariffs on foreign goods, in hopes that they would spur the US economy at home. Instead, the policy backfired & sent the US into a deeper depression. The economy didn’t fully recover until after World War II.

Post WWII, the US partnered with other capitalist countries & formed the General Agreement on Tariffs & Trade (GATT). GATT was instrumental in reducing tariffs & promoting free trade amongst its members. Over the years, GATT was revisited & more countries were recognized as participants. Eventually, GATT morphed into the World Trade Organization (WTO) that exists today. While critics of the WTO have long argued that reduced tariffs & free trade deals have been unfair to certain members, overall the results have allowed more goods & services to flow between different countries than ever before. The challenge for the US has been to re-negotiate its own trade deals, as international competition for goods & services has increased.

China, admitted to the WTO in 2001, is the biggest buyer of many U.S. agricultural products (ISU). There have been many clashes with the US over unfair tariff practices, including theft of intellectual property by the Chinese. Additionally, China has been accused of manipulating or devaluing its currency, another unfair trade practice. After years of pressure from the US & its allies, in an effort to secure better trade terms for United States business exports, President Donald Trump engaged China in a full-on trade war. As a means to combat China’s trade practices, the US has imposed heavy tariffs on Chinese goods coming into the country. As a countermeasure, the Chinese have done the same to US goods.

tariffs: present day

Currently, terms of a new trade deal are being negotiated. While the net impact on your pocketbook is largely unknown, we know that the tariffs will have an impact. Below we have highlighted a few major events related to tariffs over the last year.

April 2018

Trump imposes technology tariffs of up to $50 billion as a “penalty” for stealing US trade secrets. In response, China officially announces $50 billion worth of tariffs on US exports like soybeans, planes, & cars.

Trans-Pacific Partnership

The Trans-Pacific Partnership (TPP) is a defunct proposed trade agreement between the United States & Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, & Vietnam that was signed on 4 February 2016. Trump tells advisors the US should consider rejoining the partnership based on escalating tension between the US & China. Joining would ideally give the US more leverage in trade. Trump meets with lawmakers from farming states who want in on the deal because it will help farmers sell more abroad. The idea is that by eliminating taxes & other trade barriers that put American products at an “unfair advantage.”

July 2018

Trump administration hits China with $34 billion in tariffs. China matches with $34 billion in tariffs of their own. The US then imposed another $200 billion in tariffs against China. The US Senate votes on a measure that would require it to sign off on tariffs related to national security.

The International Monetary Fund organization estimates that trade wars could cost the global economy $430 billion, & refers to the US as “especially vulnerable.”

The US prepares to give farmers $12 billion in aid in the form of payments, buying up unsold grain, or by teaming up with businesses to create new markets.

Trump strikes an agreement with the EU to lower tariffs & hold off on additional impositions, which he thinks will cause the EU to buy “a lot of soybeans.”

May 2019

Trump raises $200 billion worth of tariffs on Chinese imports in addition to the previous $200 billion. China retaliates by raising tariffs on $60 billion worth of US goods. White House chief economic advisor Larry Kudlow indicates that Americans will have to bear the brunt of these new tariffs, saying “both sides will pay.”

Farmers that support the tariffs say “Trade war is worth it, let’s hope Trump stays firm.”

Farmers that oppose say “Our livelihoods are being used as a negotiation tactic.”

John Deere stock price falls 10% because China is not buying as many soybeans,. Caterpillar dropped 4% because China is the biggest construction nation in the world. Tesla drops 10%, as China is its second biggest market.

Trump writes another check to farmers worth $16 billion. China used to buy half of all US soybean exports. Last year, the amount China spent dropped by 75%. Many are wondering if China is purposely waiting this out until after the 2020 election.

Conclusion

So far, farmers by & large are still supporting President Trump. A November 12th article by FarmProgress mentioned a survey conducted by Iowa State University which found that the vast majority of 693 farmers found President Trump’s assistance to be useful. 56% of those surveyed supported the tariffs & 30% opposed them. Many also see this as “short-term pain for long-term gain.” More than half of the farmers surveyed believe something good will come out of the trade talks. In Ag Lender Survey results, they found that 57% of farmers were profitable this year, up 6% from last year.

On the opposing side, the International Monetary Fund announced that 2019 will have the weakest global economic growth since the 2008 financial crisis, with tensions between the US & China to blame. In many cases, companies eventually pass on their higher cost of goods to customers, meaning that we all may pay more. On the flip side of the Ag Lender Survey, 82% of farms indicated declines of farm profitability from all regions. Producers in the survey indicated liquidity, income & leverage as their top concerns, with trade, tariffs, & weather also being high on the list. Only 9% of producers in the survey expect increases in farm profitability in the next 9 months.