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U.S. tariff war could spark dangerous consequences

The much-threatened tariff lists are being implemented and I fear we don’t know how wide the impacts will be.

American President Donald Trump’s hard, unreasonable line on trade has sparked retaliatory actions from Canada, China, Mexico and the European Union.

A study by Adam Slater, an Oxford University economist, says that if all the tariff threats are implemented, it would affect more than four percent of world imports.

The threat to world economic growth is significant.

“Our modelling suggests world GDP could be cut by up to 0.4 percentage points in 2019,” Slater wrote.

Economists with J.P. Morgan have a similar analysis in the case of tit-for-tat tariffs.

In agriculture, most of the analysis to date has looked at the impact of China imposing tariffs on United States soybeans, but I worry that we can’t foresee how the disruptions to supply chains will play out, especially if they last more than a few months.

Take the pork trade, for example. China and Mexico are including U.S. pork in their retaliation tariff packages.

You would think that the situation would give Canadian pork producers an opportunity to sell more to China and Mexico to backfill the hole left from barred American product.

But at the same time, there will be a build-up of surplus pork in the U.S. that would have gone to China and Mexico.

That cheap product could flood into Canada, disrupting our domestic market.

In another situation, China’s strong demand for Brazilian soybeans has raised the basis for Brazilian product well above the Chicago futures prices. This is raising the potential for Brazilian soybean users to import beans from America. Talk about coals to Newcastle.

This wears away at the foundations of capitalism, including the division of labour and free trade, as set out by economist and philosopher Adam Smith in his famed book The Wealth of Nations in the 1700s.

He theorized that when people, companies or nations specialize in what they do best and are allowed to sell the surplus of their labour to others, it creates a dynamic engine of economic progress. Costs fall and the saved money allows people to buy additional goods, pushing economies to grow further.

Tariff walls prevent this efficient system, pushing product into places where it normally would not go. It increases costs for all.

Beyond these inefficiencies, tariffs are a danger because they can spark an ever-widening round of barriers. Surpluses build as products are blocked from their natural markets and are then discounted to push into other countries, sparking complaints from producers there, leading governments to impose tariffs to protect their industries.

And so it goes until, potentially, you have the whole world tied up with trade restrictions, creating massive inefficiencies that drag on growth.

Another impact of these tariffs is that countries could decide that they can no longer rely on traditional suppliers and so must cultivate other sources or use incentives and subsidies to ensure adequate domestic supply.

China had been abandoning its old policy of self-sufficiency in grain. It was cutting subsidies and encouraging a shift to larger scale, more efficient farms to lower the environmental pressure on the land. It wanted to shrink its huge stockpiles of corn and wheat and was opening itself to more trade from a wider variety of suppliers instead of pouring money into domestic production.

Now, news reports say it is already backing away from plans to massively increase its ethanol production and consumption because it can’t be sure it will have enough corn. This spring, it raised supports for domestic soybean production.

It was already promoting agricultural production and trade with Russia, Ukraine, Africa and South America and will likely redouble those efforts to make it less reliant on imports from the U.S.

Trump’s trade war will ultimately harm the farmers and workers he says he wants to help.

It did not have to be this way. If the U.S. had stayed in the Trans-Pacific Partnership trade negotiations (now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) it would have gained better access to a host of countries, including Japan and Canada, sparked improved economic growth for all and would have put pressure on China to listen and act on America’s concerns about its business and trade practices or risk being isolated.

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