No sector of the U.S. economy gained more from trade agreements over the past 40 years than agriculture. None has more to lose from a trade war. So while farm areas swung strongly for Donald Trump in November, there is some unease among producers about what policies his administration actually will pursue with regard to trade. And then there are a few bitter non-farm folk who openly wonder whether “farmers will get what they deserve.” Both are querying me about how agriculture would be affected by a trade war.
The questions tend to be about the effects of possible trade disputes on different specific ag products. One urbanite asked, “Who would a trade war with China hurt more, U.S. corn farmers or soybean farmers?” A farmer asked about the relative severity of effects on crop exports compared to livestock product exports. Both sets of questions are good ones and both involve the same set of economic concepts.
These are questions about “related goods.” Such products are those for which a change in the price or quantity of one will affect the market prices and quantities traded of the other. These products can be “substitutes” or “complements.” And these relationships can exist on either the production side of things or on the consumption side.
A quick example would be that when the price of chicken rises, the quantity of ground beef sold goes up as does its price. The two are both ingredients in everyday meals for many households. They thus substitute for each other, if imperfectly. When chicken becomes more expensive, some people will buy somewhat less chicken and somewhat more beef. These changes are incremental, but real and predictable.
This is a case of substitutes in consumption. But there are also substitutes in production. Corn and soybeans are a prime example. Both use the same land. Both use the same machinery for tillage, planting storage and transportation and there is only a small difference for harvesting. With the exception of soybeans not needing nitrogen, the chemicals used are similar and come through the same supply channels.
So there really aren’t “corn farmers” and “soybean farmers” as distinct groups. There are just farmers, many of who can grow both. The relative acreages of these “substitutes in production” vary with their relative prices. Any increase in the world market price of one, say corn, will pull more acres into producing that now-more-profitable product. But doing this reduces the acres available for soy. Production will fall and the price of soy will thus rise. Commodity markets like these are so liquid and so efficient in digesting new information that the adjustments are smooth and apparently simultaneous. But with two crops so directly related in production, any market factor affecting one, including international trade restrictions, inevitably will affect the other.
They won’t be affected equally, however. Nearly 45 percent of all U.S. soybeans are exported. Only 14 percent of all U.S. corn is. So any given percentage cut in soy exports would have a greater effect on the price of soy — and on “substitutes in production” like corn — than an identical percentage cut in corn exports.
Some readers query about the specific effects of U.S. trade disputes with China or Mexico. The answer to this is not as clear as one might think. Yes, China currently buys over 60 percent of our soybean exports. But if China stopped buying beans from us in retaliation for some trade restriction we imposed, that wouldn’t necessarily mean that our exports would fall by the same number of tons.
Commodities like soy, corn and wheat are “fungible.” That is, one cannot distinguish one unit from another for practical purposes. So if China would stop buying U.S. beans but get an identical amount from Brazil, most of our beans would flow to ex-Brazilian customers, who tend to be in Europe. The transport costs for both sides of the new pattern would be more expensive, so global economic efficiency would drop. But as long as total world purchases by importing countries did not fall, the effects on U.S. exports and farm profitability would be small.
There always are “transaction costs,” however, even if economists frequently ignore them for simplification purposes. So hundreds of millions of dollars that grain trading companies like Cargill and U.S. railroads like the BNSF have put into facilities specific to shipping crops to Asia in the last couple decades would suddenly be excess, as would the jobs of thousands of workers in this infrastructure. But there would be increased employment at Gulf Coast and Great Lakes ports. Duluth might be one of few winners in a trade war with China.
Similarly, if a dispute triggered by a U.S. repudiation of NAFTA ended U.S. corn exports to Mexico, that country could buy elsewhere, including from Argentina and its neighbors. U.S. corn might flow to global customers that had once sourced from this Southern Cone. But the relative changes in shipping costs would be much larger relative to the cost of the product than for soy and both the U.S. and Mexico would suffer proportionately greater economic damage. If it is any comfort to those who see trade as a brutal struggle for advantage, Mexico’s harm would be much greater relative to its economy than the U.S.
Note that there are product relationships on the consumption side as well as in production on the farm. Soybean oil competes with corn oil and with canola and sunflower oils. So disruptions in soy exports would affect these other crops as substitutes in oil production and consumption.
Crop commodities approach pure fungibility as much as does any product. But this is less true for many livestock products. A bushel of #2 Yellow Corn is the same whether harvested in Minnesota or the state of Entre Rios, Argentina. And yes, standard boxed pork cuts from Worthington, Minn., may not be all that different from the same cuts packed in Parana, Brazil.
However, as one gets to more and more specialized and branded goods, traded in bilateral relationships established at great effort between specific companies in two nations, the less fungible the product is. And thus vulnerability of both sides to damage from a trade war also grows. The smaller and more specialized pork plant in Pipestone might well suffer more from a sharp trade dispute with China than larger packers that add less value.
In a hypothetical case where a trade dispute remains strictly bi-lateral, i.e. the United States with China or with Mexico and in which the products are truly fungible, the effects on U.S. agriculture might be less than many imagine. But in the real world, trade disputes between major world economies seldom are so neat. As after the Smoot-Hawley Tariff at the beginning of the Great Depression, any truculent confrontation of trade partners by the U.S. could quickly disintegrate into a generalized conflict on the order of political philosopher Thomas Hobbes’ vision of “a war of all against all.” That did happen in 1929-1933 and global trade imploded. The world economy imploded with it.
This is the key problem. A decline in world trade does not just mean that production returns within domestic borders and the same quantities of goods and services are available to everyone as before. Total global output will drop as trade is curtailed and history shows that it drops in every nation. There are no winners in any trade war.
Farmers and people in related jobs should be heartened by the appointment of former Iowa Gov. Terry Branstad as ambassador to China. If anyone knows how important trade is to agriculture, it is Branstad, and he has a decades-old relationship with Chinese President Xi Jinping. But any single ambassador has limited power and there are anti-trade ideologues who will have a voice in the new administration. Many moderates, including me, hope that, when push comes to shove, sensible members of Congress will head off the most destructive initiatives. And many large corporations stand to lose much with sharply reduced trade and will exert their influence accordingly. Still, anything can happen. As my mother was wont to say, “hope for the best and expect the worst.”