Impacts of Chinese Tariffs on Soybeans and other Ag Commodities and the Renegotiated NAFTA Agreement Wallace Tyner Purdue University In collaboration with Farzad Taheripour, Dominique van der Mensbrugghe, and Maksym Chepeliev January 11, 2019
What do economists think? Comparative advantage 18 th & 19 th Centuries Adam Smith, David Ricardo Most economists would argue that the net gains from free international trade are positive. However, when there is a change in trade policy, there generally are gainers and losers. Often those who gain are more dispersed, and those who lose are more concentrated. 2
US tariffs have never been lower 3
And tariffs are low in most parts of the world 4
Global trade has outpaced global output 20000 World merchandise export, constant $2010 18 World merchandise export vs GDP (1960=1) 18000 16000 14000 billion $2010 12000 10000 8000 6000 4000 2000 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 1960=1 16 14 12 10 8 6 4 2 0 World merchandise GDP 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Source: World Trade Organization, World Bank Source: World Trade Organization, World Bank 5
Large rise in agricultural trade, particularly post-2000 2000 1800 1600 1400 billion $2010 1200 1000 800 600 400 200 0 World agricultural export, constant $2010 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: World Trade Organization, World Bank billion $2010 250 200 150 100 50 0 US agricultural trade, constant $2010 US agricultural export 1980 1983 1986 1989 US agricultural import 1992 1995 1998 2001 2004 2007 Source: World Trade Organization, World Bank 2010 2013 2016 6
Assessing benefits/costs from free trade +1-2% of GDP from efficiency gains Ignores dynamic effects (productivity, innovation, pro-competitive, increased varieties) There are nonetheless winners and losers Those negatively impacted are typically easy to identify, the benefits are more diffuse Gains should be sufficient to help displaced workers Re-training, re-localization But implementation has typically been deficient 7
Trade vs. technology Still an open question Consensus is that productivity improvements account for up to 80% of job losses in manufacturing In other words, a good bit of the job losses that have been blamed on trade are due to capital substitution for labor, not imports for domestic goods. 8
Negotiated multilaterally Implies countries see mutual benefit (not necessarily always purely economic) Most tariffs are too low to matter, currency movements and trade impediments (e.g. ports, logistics, procedures, standards) are likely to be a bigger hindrance to trade Countries do not always play by the rules, but there are remedies Is the trading system fair? 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Exchange rate vis-à-vis US dollar 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 AUS CHN KOR CAN ME X JPN DEU 9
China Tariff Study Objectives Our aim was to estimate the medium term impacts of Chinese imposition of a 25% tariff on US soybeans, corn, wheat, sorghum, and beef. The study was funded by the US Soybean Export Council
China is World s Largest Soybean Market China imported 93.5 MMT in 2016, about 65% of global soybean imports. These imports mainly come from US (42%), Brazil (44%), and Argentina (9%). In 2016, total US exports were 59.2 MMT and for Brazil 63.1 MMT.
US Soybean Exports Major Destinations
US and Brazilian Soybean Production Increase, 2000-16
Analytical Approach We used the GTAP model developed and housed at Purdue for this analysis It is a global computable general equilibrium model covering 140 countries/regions and 57 commodities For this analysis, we aggregated to 6 regions: US, EU, Brazil, China, South America, Rest of World
Data The latest public version of the GTAP data base is 2011. Lots has happened in the agricultural commodity production/trade world since then, so we updated the data base to 2016. We updated all important variables including GDP, population, capital formation, crop area and production, and trade
Shares of export in US production and shares of China in US export for targeted crops (figures are in quantity %) Commodities Share of export in US production Share of China in US export Wheat 45.6 3.8 Sorghum 50.1 78.8 Corn 14.4 0.5 Soybeans 50.6 62.3
Summary of Impacts Variable Tariff on soybeans (cases 1 and 2) Tariff on all targeted Commodities (Cases 3 and 4) Change in quantity of China s soybean imports from US -69-69 (%) Change in quantity of total US soybean exports (%) -29-29 Change in quantity of US soybean production (%) -13-13 Change in US soybean producer price (%) -4-4 Change in US economic welfare ($ billion) -2.3-2.6 Change in China economic welfare ($ billion) -2.4-2.6 Change in Brazil economic welfare ($ billion) +2.2 +2.2 The tariffs are a lose-lose proposition both the US and China lose about the same amount. Brazil is the winner. These are medium term impacts not short term.
USMCA/NAFTA Analysis USMCA consolidates gains of NAFTA- 1.0 with modest improvements in market access Nonetheless, farmers are facing strong headwinds as U.S. trading partners react to rising U.S. tariffs Dissolution of NAFTA could be costly for U.S. agricultural interests
Canada and Mexico have doubled their share in U.S. agricultural exports 36.8% Top 10 importers (1995) Japan 4.1% 4.7% 5.6% 24.0% 6.6% 8.6% Canada Korea Mexico China Taiwan Netherlands Hong Kong Egypt Germany ROW Source: GTAP 9 bilateral merchadise trade data Top 10 importers (2017) 17.1% 32.1% 13.7% 12.7% 4.9% 8.5% Source: UN COMTRADE Canada China Mexico Japan Korea Hong Kong Taiwan Netherlands Indonesia Philippines ROW
Mexican exports have gained market share, but Canada less so 41.6% Top 10 sources (1995) 17.9% 4.1% 3.6% 3.4% 11.7% 5.9% Canada Mexico Thailand Indonesia France Colombia Brazil Italy Netherlands Ecuador ROW Source: GTAP 9 bilateral merchadise trade data 38.3% Top 10 sources (2017) 3.4% Source: UN COMTRADE 18.1% 3.8% 3.5% 4.9% 16.7% Mexico Canada China France Chile Italy India
What s in the agreement? Consolidates NAFTA 1.0 Main market access changes Auto content for duty free access is raised to 75% from the existing 62.5% 45% of the auto content must be produced in factories where workers are paid at least $16/hour Expanded import quotas in Canada for dairy and poultry products A variety of other changes not directly linked to market access, for example: Extension of copyright protection from 50 to 70 years New measures for the digital economy: no duties on music and e-books, protection for internet companies Improved transparency in import and export licensing
New market access measures in agriculture, estimated changes in quotas, percent 120 100 105.59 80 60 40 20 0 11.5 2.69 0.04 Dairy products Live poultry and pigs, eggs Poultry and pork meat Other food products Source: authors estimates based on USTA (2018a; 2018b)
Modest increases in U.S. agricultural exports 6 5 4 3 2 1 0 Change in U.S. exports, % 300 250 200 150 100 50 0 Change in U.S. exports, $ million -1 Dairy products Meat products n.e.s. Food products n.e.s. Animal products n.e.s. Other agriculture Other food products -50 Dairy products Meat products n.e.s. Food products n.e.s. Animal products n.e.s. Other agriculture Other food products
What Happens if NAFTA is Eliminated with no Replacement? Reversion to most favored nation (MFN) tariff rates Uncertainty about special regimes such as dairy quotas Findings reflect work by Ciuriak et al. 2017 and Walmsley and Minor 2017
Concluding Remarks Results are subject to a number of assumptions, though likely to be robust Results reflect long-term impacts after adjustment Results ignore adjustment costs Results assume standard investment behavior, however: A different tariff environment in NAFTA could impact investment and changes to the deep supply chains A volatile tariff environment could dampen the appetite for investment USMCA consolidates the gains from NAFTA-1.0 and increases market access for some agricultural sectors However, recent actions by the U.S. could end up harming farming interests that are targeted by retaliatory actions Lower agricultural exports Job losses and a reduction in land values
In summary: current policies will lead to agricultural export losses, USMCA notwithstanding 2000 0-2000 -4000-6000 -8000-10000 Change in U.S. agricultural export revenues, $ million 454 USMCA -1767 USMCA+Ag retaliation by Canada and Mexico -7896 USMCA+full suite of measures and counter-measures -9373 NAFTA withdrawal
And will lead to read income losses 5,000 0-5,000-10,000 188 Change in U.S. real income, $ million -779-15,000-20,000-19,894-25,000-27,772-30,000 USMCA USMCA+Ag retaliation by Canada and Mexico USMCA+full suite of measures and counter-measures NAFTA withdrawal
It could be better USMCA is approved U.S. and trade partners agree to roll back trade war U.S. joins the TPP 28
TPP12 would be beneficial for U.S. exports 25 U.S. exports change, % 20 15 % 10 5 0-5 Dairy products Meat products n.e.s. Food products n.e.s. Animal products n.e.s. Oil seeds Other agriculture Other food products
An agricultural export gain of nearly $5bn 1400 U.S. exports change, mn USD 1200 1000 800 mn USD 600 400 200 0-200 -400 Dairy products Meat products n.e.s. Food products n.e.s. Animal products n.e.s. Oil seeds Other agriculture Other food products
In summary: current policies will lead to agricultural export losses, USMCA notwithstanding 10 Impact on U.S. agricultural exports, $bn 5 0-5 -10-15 -20-25 Worst Current Intermediate Best USMCA TPP11 Trade War TPP12 NAFTA dissolution
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