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Farm-Sector Depression In Play If Full-Scale Trade War Breaks Out

William Knudson
June 12, 2018
The Hill

In response to the administration’s tariffs on selected products, especially steel and aluminum, China, Canada and Mexico have announced increased tariffs on a range of goods produced in the U.S. The European Union will also respond to increased U.S. tariffs.

Farm products and products processed from agricultural commodities, such as wine and whiskey, have been singled out. As things currently stand, with the exception of pork and sorghum, the impacts should be manageable.

However, if the situation deteriorates, and a full-scale trade war breaks out, the farm sector could fall into a full-blown depression. The farm sector has slowly been recovering from a period of low prices and incomes during the mid-2010s, and the current dispute and concerns about a widening trade war has added uncertainty in agricultural markets.

Exports are critical to agriculture and U.S. farmers face increasing competition for markets from a number of countries, such as Argentina, Ukraine and Russia.

For example, generally 15 percent of the U.S. corn crop, 50 to 70 percent of the sorghum crop, 20 percent of pork and 70 percent of almonds are exported. Overall, 20 percent of all farm commodities produced in the U.S. are exported.

Given the nature of the supply and demand for farm commodities, small changes in demand will lead to large changes in the price — especially in the short term.

Mexico, Canada and China are of particular importance, because they are the three largest markets for U.S. agricultural exports. In 2016, agricultural exports to Canada were $20.4 billion, exports to China were $19.2 billion and exports to Mexico were $17.6 billion.

These three countries accounted for more than 44 percent of U.S. agricultural exports. If the trade dispute spreads to the European Union, more than half of the total U.S. farm exports could be adversely affected.

Tariffs on farm products are popular with these countries because there are alternative suppliers, and many congressional districts and the vast majority of senators have farmers as constituents. The pain of tariffs on farm products are spread throughout the country.

William Knudson is an agricultural economist at Michigan State University.

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