The mercantilists contend that President Donald Trump’s tariffs on imports are to shrink the trade deficit, protect American businesses, and boost exports to the rest of the world. But the latest developments in international commerce show this is not going to plan. Instead, the president’s levies are triggering unintended consequences for several key industries, particularly agriculture and energy. Previously sitting on the throne of global markets, these U.S. sectors are being more harmed by the tariffs than they are being helped, proving that former President Ronald Reagan was right: “The most terrifying words in the English language are: I’m from the government and I’m here to help.”
Needless to Soy
Since the U.S.-China conflict started, American soybean farmers have been decimated. Because Beijing was their biggest market for their crops, the Plains have nowhere to sell their supplies. As a result, inventories rotted, storage costs surged, farms went bust, and farmers started to transition into other crops, such as cotton, wheat, and alfalfa. The federal government attempted to rescue the agriculture industry by offering subsidies, giving bailouts, and employing the Depression-era measures of purchasing stockpiles.
With no end in sight to the U.S.-led trade spats, some of the globe’s top consumers of soybean are turning to other foreign markets to satisfy their demand. This, of course, has resulted in dissipating global market share for the U.S., which reigned supreme in this arena for years.
In addition to Brazil surpassing the United States as top dog in soybean output, other countries are attempting to take a bite out of global market share. Soybean prices are beginning to rebound from 12-year lows, so it might be a worthwhile endeavor for these states.
In 2018, China launched a five-year plan to increase domestic production of soybean. Entering into its second year, the world’s second-largest economy anticipates output levels to soar to their best in 14 years. With soy demand sliding amid the African swine fever outbreak, its volumes may be enough to no longer depend on outsiders – at least in the short-term.
India has started to plant more land to grow soybeans. In the 2019 crop year, Indian farmers have begun to shift from a diverse array of commodities, primarily cotton, and into soybeans. In the last year, output has climbed about 7%.
Thanks to favorable weather conditions, Argentina will see a 48% jump year on year, up 2% from the previous projection in April. Argentina is the world’s third-largest grower.
Even Europe, which has promised to purchase more soy from the U.S., is anticipated to expand production by more than 14% this year.
A Real Steel
China has produced half of the world’s steel for several years. After more than a year of tariffs on its steel, analysts say that they are having “no effect” on the world’s second-largest economy. Why? There is robust domestic demand and the nation is enjoying worldwide tariff exemptions.
While the Trump administration has imposed levies on Chinese steel, the economic powerhouse is enjoying a lot more tariff exemptions from Canada, South Korea, Spain, and the United Kingdom. The Asian juggernaut even increased its total steel production last year, from 831.7 million metric tonnes to 928.3 million.
Exports have tumbled 8%, but these have been offset by rising national sales.
Paul Bartholomew, senior managing editor at S&P Global, told the South China Morning Post:
“Last year when the tariffs first came in, the steel market reacted negatively in China. It’s very sentiment driven, tends to be reactionary to policy announcements.
But it returned to fundamentals within a few days. For the first three quarters, the market was very strong and robust, demand was very robust.
Steel tariffs, the so-called trade war, wasn’t a huge factor. It was playing out in sentiment, but domestic demand was strong enough to save the steel industry.”
Overall, U.S. imports of Chinese steel have slipped from 5% to 2% in the last year.
Fuming Over Natural Gas
America’s rise from energy dependent to energy independent has been a remarkable tale. No longer does the U.S. need to bow to the demands of OPEC. Not only is the U.S. keeping its own lights on, but it is also fueling the rest of the world. The natural gas revolution is expected to go on for another decade – perhaps beyond – but it might lose business should the trade war linger.
While the United States is set to surpass Russia as natural gas king in the next couple of years, Washington and Moscow are vying for two key markets: China and Europe.
When Beijing said it would impose retaliatory tariffs on more than 5,000 products, it included U.S. liquefied natural gas (LNG) imports on that list. As of June 1, LNG products will face a 25% levy. This is not good for American energy firms, especially with the trend suggesting diminishing imports. According to Reuters, just 27 LNG vessels ventured from the U.S. to China in 2018, down from 30 in the prior year. And, more than half of those that left U.S. ports did so before the trade war commenced.
Meanwhile, trade negotiations between the U.S. and the European Union seem to have paid off for American natural gas firms. Since 2016, U.S. LNG exports to the E.U. have skyrocketed 272%, with the biggest imports taking place between October 2018 and March 2019.
But Russia was still the biggest supplier of natural gas to the E.U. last year, followed by Norway. It should be noted that Algeria and Qatar are gradually boosting their energy exports to the eurozone. E.U. Commission data show that 11 member states, including Austria, Finland, and Hungary, imported more than 75% of their natural gas needs from Moscow, mainly because of their proximity to the nation.
Moving forward, there are two main factors that could help Russia.
The first is that E.U.-U.S. trade relations could sour, which may be happening right now. U.S. trade representatives have accused the E.U. of not keeping up their part of the temporary arrangement, insisting that the region buying more agriculture be a part of the deal.
E.U. Trade Commissioner Cecilia Malmström told Foreign Policy:
“But it’s true, we have a long list of issues in the trade area where we have disagreements with the U.S. administration. So we are not negotiating with a gun to our head. We have very clear red lines, very clear conditions, but we are also determined to say that the EU and U.S. are natural friends and allies—we should have a common agenda.”
The second gamechanger are pipelines. Russia has an advantage over the U.S. with cheaper transportation costs and established infrastructure. In addition to an abundance of major pipelines, Russia is in the middle of constructing several important ones, including the Nord Stream 2 that links Russia to Europe through the Baltic Sea. It could explain why the Congress is targeting the project with sanctions.
No Trump Card for US Industry
Proponents of the Trump tariffs contend that the rest of the world has been ripping off the United States for far too long. The import levies are an attempt, they say, at reducing the trade deficit, leveling the playing field, and bringing back American jobs. Is the trade war proving to be successful? The trade deficit has increased since President Trump took office, consumer prices are rising, tariffs are having little effect on the roaring labor market, and American industries are losing their competitiveness on the world stage. If this is winning a trade war, then one can only imagine what losing would look like.
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