The United States and China are in the midst of a major trade dispute, with the U.S. imposing tariffs on Chinese goods, and China responding with retaliatory tariffs on American goods. There has been some hope that current negotiations between the two countries could help to put an end to this tit-for-tat dispute, but to date, it remains very much alive.
This Backgrounder analyzes the dispute, with a specific focus on how it affects U.S. agriculture. Further, it identifies measures for eliminating the harm resulting from the trade dispute, while addressing any legitimate concerns over China’s trade practices.
The U.S.–China Trade Dispute
In 2018, the United States imposed major tariffs on imports through three different legal provisions:
1. Section 201 of the Trade Act of 1974. The U.S. imposed tariffs on washing machines and solar products on the grounds that imports were allegedly causing serious injury or threat of serious injury to domestic industries. These tariffs apply to a wide number of countries, including China. In justifying the Section 201 tariffs on solar products, the Office of the United States Trade Representative (USTR) focused on China’s actions. According to the USTR, China is a major player in the solar market, producing “60 percent of the world’s solar cells and 71 percent of solar modules.”
2. Section 232 of the Trade Expansion Act of 1962. Based on national security concerns, the U.S. imposed tariffs on aluminum (10 percent) and steel imports (25 percent). This was the first time the U.S. has imposed Section 232 tariffs in over 30 years. These tariffs apply to a wide number of countries, including China.
3. Section 301 of the Trade Act of 1974. Section 301 tariffs are justified, according to the USTR, due to “China’s unfair trade practices related to the forced transfer of U.S. technology and intellectual property.” Unlike the Section 201 and Section 232 tariffs, these Section 301 tariffs only target China. Throughout 2018, the Section 301 tariffs went into effect:
- July 6, 2018: The United States imposed Section 301 tariffs (25 percent tariffs) on about $34 billion worth of Chinese imports.
- August 23, 2018: The United States imposed Section 301 tariffs (25 percent tariffs) on about an additional $16 billion worth of Chinese imports.
- September 24, 2018: The United States imposed Section 301 tariffs (10 percent tariffs) on about an additional $200 billion worth of Chinese imports.
In 2018, the USTR looked specifically at whether the Section 301 tariffs imposed on China changed the country’s alleged unfair trade practices. However, according to the USTR, China “made clear—both in public statements and in government-to-government communications—that it would not change its policies in response to the initial Section 301 action [tariffs].”
The USTR also found that the tariffs were not effective in altering China’s “acts, policies, and practices related to technology transfer, intellectual property, and innovation.”
In response to the Section 232 tariffs and Section 301 tariffs, China instituted retaliatory tariffs on U.S. exports, including agricultural exports. The Congressional Research Service (CRS) has explained that China “has levied retaliatory tariffs on about 800 U.S. food and agricultural products that were worth about $20.6 billion in exports to that country in 2017.”
Current U.S.–China Discussions. The Section 301 tariffs that went into effect on September 24, 2018, were set at a rate of 10 percent. On January 1, 2019, this tariff rate was set to increase to 25 percent; however, after a meeting between Presidents Donald Trump and Xi Jinping at the G20 Summit in Argentina on December 1, 2018, both sides decided to enter into a new phase of trade negotiations and delay the tariff increase until March 2, 2019 (the deadline to reach a deal is March 1). On February 24, 2019, President Trump delayed this March 1 deadline.
Overview of U.S. Agricultural Trade with China
For many American farmers and ranchers, agricultural trade is a necessity, since they produce more than they can sell domestically. Free trade makes it possible for them to find customers outside the U.S. for their production and to expand into new markets. American consumers, for their part, benefit from agricultural trade by having access to a greater number of agricultural products throughout the year. Products that may have once been seasonal can be purchased throughout the year, and the increased supply can help to reduce consumer costs.
This trade dispute is an even greater concern because China is a key agricultural trading partner. China is both a leading agricultural export market for the United States, and a leading supplier of agricultural imports into the U.S.
U.S. Agricultural Exports to China. China was the second-largest market for U.S. agricultural exports in 2017, behind Canada, accounting for 14 percent of total U.S. agricultural exports. Just one year earlier, in 2016, China was the largest agricultural export market for the United States. (In recent years, China has been swapping the top spot with Canada.)
There has been major growth in U.S. agricultural exports to China. U.S. exports to China have gone from $376.2 million in 1993 ($579.3 million in 2017 dollars) to $19.5 billion in 2017.
For agricultural exports, China will continue to be an important market with great potential. As explained by the U.S. Department of Agriculture (USDA), “China offers our best opportunity for major export growth in the future.”
As shown in Table 1, China is a very important export destination for many U.S. agricultural products. China is especially important for soybeans; the United States exported 57 percent of its soybeans to China in 2017. Soybeans are the largest agricultural export to China, accounting for 63 percent of all U.S. agricultural exports to China and totaling over $12.3 billion in 2017.
Chinese Agricultural Imports to the U.S. China was the United States’ fourth-largest supplier of agricultural imports in 2017. Agricultural imports from China were $458.6 million ($706.1 million in 2017 dollars) in 1993. Twenty-five years later, in 2017, this number had grown to $4.3 billion.
The Trade Dispute’s Harmful Impact on Agriculture
The U.S. tariffs are a self-inflicted wound on the entire economy, including the agricultural sector. These tariffs serve as a tax on a wide range of imported goods; American businesses importing the Chinese goods pay the tariffs (not Chinese businesses), and then they likely pass the costs on to their customers. These tariffs also lead to retaliatory tariffs that reduce U.S. exports to China. This dispute risks losing important opportunities in the critical China market for American farmers and ranchers and, as the dispute continues, the costs will likely become more significant.
As noted, China has imposed retaliatory tariffs on about 800 food and agricultural products from the U.S. Like other countries, including the U.S., China is being strategic in how it applies its retaliatory tariffs, in part imposing tariffs that will inflict the most “pain.”
As shown in Table 2, China is imposing significant tariffs on important U.S. agricultural exports, such as soybeans (25 percent), pork products (50 percent), and sorghum (25 percent). These tariffs will make it more difficult for U.S. producers to sell these products in China.
One of the most telling statistics regarding this trade dispute is the USDA’s current forecast that China will drop from the second-largest to the fifth-largest agricultural export market for the United States in 2019.
The extent of the harm is still difficult to ascertain because the trade dispute is ongoing and the full harm from tariffs may not be immediate. However, there is already a significant amount of evidence showing harm across U.S. food and agricultural products. For example:
- The value of U.S. cheese exports to China between July 2018—the month the tariffs took effect—and October 2018 declined by 51 percent from the same period in 2017.
- According to CRS, “Total U.S. sorghum exports for FY2018 were valued at $759 million and are forecast to decline to $500 million in FY2019.” China has easily been the biggest market for U.S. sorghum exports, accounting for about 80 percent of sorghum exports in recent years.
- Informa Economics, in a study commissioned by the U.S. Dairy Export Council, found that China’s retaliatory tariffs on dairy products would reduce U.S. dairy exports to China by $3.1 billion through 2023.
Soybeans. Lost soybean sales to China will likely play the biggest role in reducing total U.S. agricultural exports to China. Soybeans are easily the largest U.S. agricultural export to China, accounting for 63 percent of all U.S. agricultural exports to China in 2017. (See Table 1.)
In December 2018, CRS noted that “U.S. soybean exports for January through October 2018 are 63% lower than during that time period in 2017.” CRS further noted: “After China hiked its tariff on U.S. soybeans in early July 2018, U.S. exports to China essentially halted, even as USDA was forecasting a record U.S. soybean crop.”
Farzad Taheripour and Wallace Tyner, two Purdue University agricultural economists, writing in Choices (a publication of the Agricultural & Applied Economics Association) analyzed the potential impact of a Chinese 25 percent tariff on U.S. soybeans and other agricultural commodities. They found that U.S. soybean exports to China would fall by 48 percent, and total U.S. soybean exports would fall by 24 percent.
Further, Taheripour and Tyner explain, “Exports to other countries make up about half of the loss in Chinese exports. Brazil and other exporters capture more of the Chinese market, and the United States takes some of the markets that other exporters give up.”
The USDA has also concluded that increased soybean exports to other countries would not make up for lost sales to China.
As the U.S. loses soybean sales to China, other countries, such as Argentina and Brazil, will likely fill the void to meet China’s demand for soybeans. There is a very real possibility that there could be long-term damage to U.S. soybean sales to China.
The American Soybean Association has asserted that when and if the U.S. rescinds the Section 301 tariffs on China, and China then lifts its 25 percent retaliatory tariffs, “the process of rebuilding the U.S. market in China could take years.”
There has been some promising news regarding soybeans. In January 2019, China agreed to buy 5 million tons of U.S. soybeans, in addition to the 5 million tons they agreed to buy in December 2018. There have also been reports in late February that China has agreed to buy an additional 10 million tons. These are still small numbers though when compared to the usual annual soybean sales to China of 30 million to 35 million tons. However, these purchases do help to mitigate the harm caused by the trade dispute.
There is a very simple overarching policy recommendation to eliminate the harm caused by the U.S.–China trade dispute: The United States should rescind the 201, 232, and 301 tariffs. This would not only help agricultural producers in connection with exports to China, but also in connection with exports to other nations that have imposed retaliatory tariffs. Such a move also helps to offset the harm imposed across the economy by these U.S. tariffs.
The United States should also:
Make More Frequent Use of the World Trade Organization’s (WTO) Dispute Settlement System. Admittedly, eliminating tariffs does not help the U.S. to address China’s alleged unfair trade practices. To address unfair practices, the United States should use the WTO dispute-settlement system instead of relying on tariffs. In fact, one of the most important benefits of the WTO is having a legal venue to challenge foreign trade barriers. As explained in the 2016 Heritage Foundation Farms and Free Enterprise:
Prior to the WTO, these foreign trade barriers [barriers to U.S. farm exports, including non-tariff barriers, discriminatory health and safety rules, and subsidies] were virtually impossible to challenge without self-defeating U.S. protectionism…. The WTO broke this painful cycle by providing a formal legal venue for enforcing other WTO members’ trade-liberalization commitments.
The United States has had major success utilizing the WTO dispute-settlement process. For example:
- In 2017, Cato Institute trade scholar Dan Ikenson explained that the United States has been the complaining party in 114 of 522 WTO disputes over 22 years and has succeeded in 91 percent of the adjudicated 114 cases.
- The United States has had significant success in the agricultural context as well. From 2016’s Farms and Free Enterprise:
The United States government has initiated 29 dispute settlement proceedings over other WTO members’ barriers to U.S. farm exports, including non-tariff barriers, discriminatory health and safety rules, and subsidies…. [T]he United States achieved a “victory”—an affirmative ruling and/or the elimination or modification of the measure at issue—in every single WTO case that moved beyond the first government-to-government “consultations” stage (and even in many of the consultations-only disputes). In only two cases did the offending WTO member refuse to comply with an adverse ruling, and only once did the United States need to resort to retaliation in order to convince one of these members to implement the WTO ruling at issue.
This is not to say that the WTO dispute-settlement system is without flaws. To the extent that there are concerns regarding the process, the United States should work toward improving the system. It is much better to have a venue to resolve disputes than to hurt Americans through tariffs.
Stop Compounding the Harm from Tariffs by Providing Special Aid to Farmers. On July 24, 2018, the USDA announced that it would authorize up to $12 billion in aid to help farmers. This aid, as the USDA explained in August 2018, was “in response to trade damage from unjustified retaliation by foreign nations.” Despite such assertions, this aid really exists because of the self-inflicted damage caused by the United States’ own tariffs, not the retaliatory tariffs that are the logical and expected response to the U.S. tariffs.
The federal government is certainly correct in recognizing the harm that it is causing farmers. However, providing aid to offset this harm is misguided. The federal government is trying to solve one harmful policy by creating another harmful policy. This “solution” could also lead to a terrible precedent: creating a justification for maintaining tariffs instead of opening up trade opportunities.
The federal government is also inappropriately picking winners and losers. Farmers are certainly not winners in these trade disputes, including the trade dispute with China. However, these trade disputes (including the one between the U.S. and China) are hurting far more people than farmers. For example:
- Consumers are going to be hurt through the tariffs (import taxes) on goods.
- Higher consumer prices, especially for products that meet basic needs, such as food items, are regressive in nature, therefore having a disproportionate impact on lower-income households.
- Taxpayers are paying out billions of dollars in aid.
- Many other industries (including small businesses within these industries) are feeling the harmful effects of the trade disputes, just like the agricultural sector.
While the USDA asserts that this $12 billion authorization is a one-time deal (issued in different rounds of payments), there is little reason to think that this will be the case as the trade disputes continue.
This entire aid package also seems to ignore the fact that it is duplicative in nature. Taxpayers already provide about $15 billion a year to agricultural producers, largely to inappropriately help insulate some producers from having to compete in the market. This includes triggering payments to producers when they do not meet revenue targets or when commodity prices decline.
Soybean farmers receive about $2 billion a year to address revenue and price issues from multiple programs, and receive the third-most farm-program support of all commodities. In addition, the recently enacted 2018 farm bill ignored subsidy reform and actually made existing overgenerous subsidies even more generous.
Promote Freedom to Trade. Trade is often discussed in connection with how it affects countries, but, as a general matter, trade is truly about the freedom of individuals and businesses to voluntarily exchange goods and services with customers.
As a general principle, American farmers and ranchers, just like other businesses, should be free to sell to customers all over the world. Further, consumers should be free to purchase goods and services that best meet their needs, regardless of national origin. Government-imposed barriers, such as tariffs, undermine these freedoms. As the U.S. works through trade challenges with China, this principle of freedom to trade should be front and center.
Near the end of his presidency, President Ronald Reagan delivered a radio address to the nation during Thanksgiving week of 1988 in which he espoused the benefits of free trade:
Here in America, as we reflect on the many things we have to be grateful for, we should take a moment to recognize that one of the key factors behind our nation’s great prosperity is the open trade policy that allows the American people to freely exchange goods and services with free people around the world…. Over the past 200 years, not only has the argument against tariffs and trade barriers won nearly universal agreement among economists but it has also proven itself in the real world, where we have seen free-trading nations prosper while protectionist countries fall behind.
His powerful words were true then and are still true today. Unfortunately, the current U.S.–China trade dispute runs counter to President Reagan’s crucial message. The U.S. should be fighting to free up trade by removing both domestic and foreign trade barriers, not creating more barriers. A commitment to free trade will help the United States prosper, and expand opportunities for the nation’s farmers and ranchers so they can sell even more of their products around the world.
—Daren Bakst is Senior Research Fellow in Agricultural Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom; Gabriella Beaumont-Smith is Policy Analyst in Macroeconomics in the Center for Data Analysis, of the Institute for Economic Freedom; and Riley Walters is Policy Analyst in the Asian Studies Center, of the Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy, at The Heritage Foundation.