What do Reciprocal Tariffs Mean for Agriculture and the Markets?

On top of the tariffs on Mexico and Canada set to go into effect at the end of the month the Trump administration is also planning on invoking reciprocal tariffs on all countries.

This is in an effort to level the playing field for the U.S. in global trade but what does it mean for agriculture?

Dan Basse, president of Ag Resource Company, says these tariffs are different than those that were imposed during the first Trump administration or even recently with the 10% increase on China imports.

He says trade officials will go through with each trading partner and look at different commodities code line by code line to determine the imbalances in trade.

“You know, we’re talking like 300 ,000 additional code lines. This will take a long period of time, but I’m hopeful that countries are thinking about their trading position with the US. And in really commodities, particularly like ethanol or renewable diesel, biodiesel, or maybe LNG, these are commodities that every country needs. And this could be a real boon for the U.S.

Basse says Vietnam is a good example because the country has a trade surplus with the U.S. and needs to buy additional product.

“It imports around 8 million metric tons of corn. Let’s say half of that corn comes from the United States with a deal to cut that deficit. That would be something we haven’t had before and would be positive for U .S. agriculture. So when you think about reciprocal, we in the United States want to have a level playing field, the same tariff rate for, let’s say, Vietnam corn in U .S. corn, maybe it’s at 6 % or 7%, but also we need to get rid of the trading surpluses or deficits and kind of even it out with the U .S., that could mean additionality for U .S. imports.”

How will the agricultural and outside markets handle this kind of change in trade policy?

Basse says, “I think the markets are gonna struggle to best understand how that all comes forward. Normally tariffs have been bearish in agriculture, if you think about it, because we worry about it being a tax. Taxes, of course, hit prices and with prices rising people import less. But in reciprocal tariffs, it could be a lot different. We could have trade deals going forward that would assure the United States farmer a demand profile,” he explains.

He thinks U.S. agriculture could see an improvement in its export portfolio, but it will take time and so farmers need to let it play out.

Most of the world doesn’t want to compete with U.S. agriculture. In many developing countries, agriculture is still an essential employment sponge; the alternative is for the rural poor to flock to the shantytowns around the cities — which many do anyhow, because at least in the city, they see at least a hope of finding a job and beginning a scramble up. Even in most advanced countries, farmers have relatively small holdings and cannot compete with the big operators in the U.S., Brazil or Argentina, which are also ag export oriented.

Looking at tariffs is only the tip of the iceberg. Non-tariff trade barriers are where the real action is. This is where the Luddite anti-GMO stuff originated. I’ve made a small joke for years that Western Europe doesn’t really have an agricultural sector; it has a landscape gardening program that produces food on the side, with farmers being paid for providing “social benefits” like picturesque stone walls and hedgerows around picturesque small fields with plenty of critter and insect habitat cutting into production.

U.S. farmers don’t get paid to grow weeds. Farmers in the EU do.

The U.S. drifted into our current position largely for post-WWII and Cold War reasons. We were the unquestioned economic behemoth — a temporary status, yes, that began to erode in the mid to late 60’s, but we were the balance wheel, the alliance leader, the extender of the Pax Britannica, and the great advocate of an open, pro-market international trading system. We made many concessions to bring others in line. We made many more to stitch together Cold War alliances. And we made concessions to bring third world countries into opening to world trade as the best way to spur development.

But over time, too many other countries got used to being free riders, and Uncle Sam morphed into Uncle Sucker. That’s what has to be recalibrated now. We can no longer afford to pick up the slack for freeriders and cheaters. Other developed countries need to pitch in, quit their cynical gamesmanship, and play by the rules. China has also become a huge issue; we turned a blind eye to a lot of Chinese cheating to wean them away from the Soviet Union and encourage them to open to global markets. As recently as ten years ago, China was doing a lot of things right and one could be guardedly optimistic. But China has taken a disastrous turn to the dark side as the hard liners prevailed in what was an intense internal struggle. Basically, the communists finally pulled the plug on reforms that threatened to undermine party dominance.

So here we are.

As to U.S. wheat, corn, and soybeans exports to developing countries ... the fact is, one of the first thing that people want as their economies begin to develop is a better diet. Almost everywhere, this translates into an immense demand for milk, eggs, other dairy products, and high quality animal proteins — i.e. meat. In much of the world, meat was a luxury item. People lived on vegetable or rice-fish diets. In my first trip to China over 25 years ago, I recall a relatively young woman who recounted that when she was growing up, her family had meat a couple of times a year , and it was a big birthday treat to get one egg all for herself.

The demand implications are huge when several billion common people start to eat one meat dish a week ... then two a week ... then daily. To produce poultry, pork, beef, lamb, etc. on this scale, they need feed grains, and a lot of places simply don’t have the acreage and water to grow enough. If they are going to improve their diets, they will have to import either finished meat products or feed grains — and most developing countries would prefer to import the feed grains and keep the higher value added meat finishing and packing industries domestic.

They HAVE to import because they can’t support the massive increases in demand through grazing, and they can’t grow enough feed grains to produce the animals themselves. Either they consign most of their people to continuing on a vegetable diet, or they will import feed grains. Grazing won’t do it; grazing couldn’t meet the demand in the U.S., and it certainly can’t in China or across most of the third world. That means they will import corn and soybeans from the U.S., Brazil and Argentina — that’s about it — and a somewhat wider network of suppliers for wheat. The bottom line is that they like meat and dairy products as much as we do, and they have to import to get them. Or they continue to live without much meat.

Even India, which remains predominantly vegetarian (with a lot of exceptions because India is a crazy quilt of everything you can imagine) has soaring demand for milk and eggs.

Rural displacement is hard. It was hard in the U.S., with the 1930’s being the emblematic decade. Every tractor displaced several tenant farmers who spent their days behind a team of mules. But we presumably don’t want a society in which half or more of the population spends their days farming behind mule teams and harvesting the crops by hand. Nor do China and India want hundreds of millions of people trapped in rice paddies or tending microplots with hand tools and living on the equivalent of a dollar a day. They have to scale up their own agricultural systems, and that will displace many traditional farmers while making the modern farmers far more prosperous than ever before. But that means that they have to find ways to absorb the displaced population. That’s their challenge. But it’s either that or remain poor.

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