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China’s Response to U.S. Tariffs Shows Proportional Response

April 6, 2018

Trade issues have recently emerged between the United States and China. These tariffs have already impacted pork exports from Iowa and there is concern that an escalation of tariffs between the countries could affect soybean exports as well.

These potential concerns for Iowa farmers, as well as a detailed look at previous Chinese responses to U.S. tariffs, are contained in a new policy brief from Iowa State University’s Center for Agricultural and Rural Development. The article, titled “What Can We Learn about U.S.-China Trade Disputes from China’s Past Trade Retaliations?”, examines both the current economic situation and trends from past trade disputes.

Wendong Zhang.“Typically Chinese retaliation during disputes like this is to target products that have a proportional trade value,” said Wendong Zhang, assistant professor of economics and extension economist at Iowa State, and a co-author of the new paper. “Following that logic leads us to believe they will not first target soybean imports because of the overwhelming value of those imports, but rather treat soybean as a nuclear option.”

Chad Hart, associate professor of economics and extension economist at Iowa State, and Minghao Li, postdoctoral research associate with CARD, are co-authors of the publication.

The United States announced steel and aluminum tariffs on March 8, affecting about $2.8 billion worth of Chinese imports. China responded with retaliatory tariffs that targeted 128 U.S. products – including an additional 25 percent tariff on U.S. pork products – with about $3 billion in trade value.

The U.S. exports more than $24 billion worth of agricultural and ag-related products to China every year, creating a $13.6 billion trade surplus. Any escalation in tariffs could lead to China targeting these agricultural exports, especially pork and soybeans, which are consumed by Chinese markets at a high rate. Soybeans make up 66 percent of the total U.S. agricultural exports to China. The importance of these imports leads Zhang to believe they will be targeted for tariffs only as a last resort.

“China tries to target products that are easily substituted by purchasing it from another country or easily substituted by another product,” Zhang said. “China already buys 70 percent of Brazil’s soybean exports. And the production season in South America is opposite that of the United States, so a cut in U.S. exports would not be easily substituted. The bottom line is that China doesn’t want to cut their imports of soybean – that would be an option that would significantly hurt both sides.”

The article examines China’s previous agricultural trade retaliations in depth, including against chicken products in 2009 and sorghum in 2017. It also lays out three lessons that can be learned from those previous retaliations.

“Given that U.S. farm income is already trending down, this is definitely not good timing,” Zhang said. “Currently both sides are actively working on negotiations, so hopefully this doesn’t escalate to the point where additional tariffs are imposed, especially on high-volume exports like soybean.”

Source: Wendong Zhang, Iowa State University