Since the beginning of 2018, we’ve been hearing escalating trade war rhetoric between the United States and China. Some of the first actions were taken in January 2018 as the U.S. imposed safeguard tariffs on washing machines and solar cells, followed by China starting a one-year anti-subsidy investigation into sorghum (a grain traditionally used for livestock feed) imported from the United States. About one month later, President Trump signed tariff orders on imported steel and aluminum, and subsequently filed a complaint with the World Trade Organization about Chinese protection of intellectual property.
The rhetoric and actions continued to accelerate, which resulted in tariffs being implemented on more than $250 billion of goods from China to the U.S., and on $110 billion of goods from the U.S. to China. There are additional threats by the U.S. to increase some of the tariffs to 25%, as well as the overall extent of tariffs to cover $500 billion in goods from China (essentially all of their exports to the U.S.). Currently, however, leaders of both nations are discussing ways to end the trade war and help get their economies and markets back on track.
As seen in the Chart of the Week, total agricultural exports from the U.S. to China started to decline in the second half of 2018 and really collapsed in the fourth quarter, with exports down 78%. Taking a closer look, China placed a 25% tariff on U.S. soybeans on July 6, 2018, and in November, exports of U.S. soybeans to China dwindled to zero. Soybeans exported from the U.S. to China were down a staggering 98% in 4Q18 compared to 4Q17. To put the magnitude of this decline in perspective, soybeans exported to China in 2017 were worth over $12 billion, accounting for roughly half of the more than $24 billion in total agricultural exports for the year. Moreover, the $6.5 billion decline in soybean exports in 4Q18 from the U.S. to China accounted for more than 86% of the total agricultural export decline. It’s possible that the U.S. shipments were only displaced to other countries around the world, but the U.S. exports of soybeans were still down nearly 50% in 4Q18 vs. 4Q17.
Perhaps China’s dramatic slowdown in the purchase of U.S. goods has led President Trump to rethink his trade war strategy, making him more amenable to a deal. Perhaps China’s lack of key imports like soybeans is making its leaders more willing to come to the table to resolve the issues. The dramatic decline in both the equity and credit markets in 4Q18 may have also sparked some fear in the leaders of the two countries. From my perspective in early 2019, it seems like both countries are worse off as a result of the trade war. If they can come to a resolution in the relatively near future, I would expect prices and volumes to return to pre-trade war levels. However, a drawn-out trade war could lead the global economy toward a recession. I will continue to watch the trade data and headlines to monitor economic reality.
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