No U.S. sector has gained more from the opening of international trade than agriculture. None has more to lose from a trade war. Farm areas swung strongly for Donald Trump, but people fret about what he actually will do. So they query economists like me.
Questions center on how trade disputes affect specific ag products. One urbanite asked, “Who would a trade war with China hurt more, corn or soybean farmers?” A farmer asked about relative effects on crop versus livestock-product exports.
Both questions involve the same economic concepts. These are about “related goods.” For such products, 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 either in production or consumption.
An example: When the price of chicken rises, the quantity of beef sold goes up, as does its price. The two substitute for each other, if imperfectly. When chicken prices rise, people buy less chicken and more beef. These changes are incremental but real and predictable.
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These are substitutes in consumption. There are also substitutes in production. Corn and soybeans are a prime example. Both use the same land and machinery and similar other inputs.
So there really aren’t “corn farmers” and “soybean farmers.” There are just farmers, many of whom can grow both. Relative acreages of these “substitutes in production” vary with their relative prices. Any increase in the world price of corn pulls more acres into producing this now-more-profitable product. This reduces acres available for soy. Production falls and the price of soy thus rises.
Commodity markets are liquid and efficient. Adjustments are smooth. But for crops related in production, any factor affecting one, including trade restrictions, inevitably affects 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 than an identical percentage cut in corn exports would on that crop.
What about specific effects of U.S. trade disputes with China or Mexico? These are not as clear as one might think. China buys over 60 percent of our soybean exports. But if it stopped buying in retaliation for our restricting imports from them, that wouldn’t mean that our total exports would fall by the same number of tons.
Commodities like soy, corn and wheat are “fungible.” You can’t tell one unit from another. If China stopped buying U.S. beans or wheat but obtained identical amounts from Brazil or Argentina, our exports of these crops would flow to those countries’ ex-customers. The transport for the new pattern would cost more, so global economic efficiency would decline. Producers closer to the West Coast, like wheat producers in Idaho, would be hurt worse than those from North Dakota, who are closer to Atlantic ports. But as long as global purchases by importers don’t fall, effects on U.S. exports and farm profits would be small.
There always are “transaction costs.” Hundreds of millions of dollars that grain companies and railroads spent on facilities to ship to Asia would suddenly be excess, as would thousands of workers. But jobs would rise at Gulf Coast and Great Lakes ports.
Similarly, if a U.S. repudiation of NAFTA ended our corn exports to Mexico, that country could buy elsewhere. U.S. corn might flow to customers that had once sourced from Mexico’s new suppliers. But relative changes in shipping costs would be larger than for soy. Both the U.S. and Mexico would suffer proportionately greater economic damage.
Crop commodities approach pure fungibility. A bushel of No. 2 Yellow Corn is the same whether harvested in Iowa or Argentina. So does some meat. Standard boxed pork from Iowa differs little from the same cuts packed in Brazil.
However, the more one gets to specialized, branded goods, traded between specific companies in two nations, the less fungible the product is. The vulnerability of both sides to a trade war is greater. A specialty plant packing specific Chinese products will suffer more from a trade dispute than packers adding less value.
Hypothetically, if a trade dispute remains strictly bilateral, i.e. the United States with China, and if products are truly fungible, the effects on U.S. agriculture might be small. But in the real world, trade disputes between major world economies seldom are neat. Just as it did after the Smoot-Hawley Tariff at the beginning of the Great Depression, any confrontation initiated by the U.S. could quickly disintegrate into philosopher Thomas Hobbes’ vision of “a war of all against all.” That did happen in 1929-33. Global trade imploded and world economy with it.
This is the key problem. A decline in world trade does not mean that production returns home and the same quantities of goods remain available. Rather, total global output drops as trade is curtailed. History shows that it drops in every nation. There are no winners.
Our ag sector should be heartened by the appointment of former Iowa Gov. Terry Branstad as ambassador to China. He knows how important trade is to agriculture and has a decades-old relationship with Chinese President Xi Jinping.
But a single ambassador has limited power. There are antitrade ideologues with great voice in the new administration. Moderates hope that, when push comes to shove, sensible members of Congress will head off the most destructive initiatives. And many corporations that stand to lose from reduced trade will lobby accordingly.
Still, anything can happen. As my mother said, “Hope for the best and expect the worst.”
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.