In US-China trade spat, soybeans symbolize two economies intertwined

A trade dispute escalated this week, as China pledged to respond in kind to proposed US tariffs. One target, soybeans, would hit US farmers particularly hard. But it also hurts Chinese consumers. Both sides have incentives to cut a deal.

Dan Koeck/Reuters
A technician checks the processing of soybeans on a gravity sorter at Peterson Farms Seed facility in Fargo, N.D. Soybeans are a major export for the US, and much of their crop each year goes to China. Threatened tariffs by Beijing would cut into those shipments, hurting American farmers and also Chinese consumers.

The seeds are purchased. Farmers are spraying fertilizer and herbicide on their fields. Across the Midwest and Plains, they’re waiting for the soil to dry out and warm up so they can plant their crops.

But this year the biggest unknown on their horizon is not the chancy April weather, it’s the threat that China will stop buying their soybeans.

It’s not just the drop in prices that worries farmers, who are already operating on razor-thin margins, but also the risk that other countries could displace American producers in the Chinese marketplace.

“My fear is that once we’re replaced, it’s going to be awfully hard to regain our foothold in those markets,” says Glenn Brunkow, a fifth-generation farmer who grows soybeans in Wamego, Kan., on land his forefathers homesteaded in the 1860s.

In the rising drumbeat of trade war threats, China has already raised tariffs on a bevy of US farm exports: pork, wine, fresh fruits, dried fruit, and nuts in retaliation for US tariffs on steel, aluminum, and washing machines. But by threatening to impose a 25 percent tariff on US soybeans, Beijing is taking the conflict to an entirely new level. If it follows through, the conflict will amount to a trade war for US agriculture that will hit both American farmers and Chinese consumers at levels that are hard to predict.

This rising uncertainty worldwide over commerce – an echo of the trade battles in the 1920s and ’30s – is the result of President Trump’s preference for tense staredowns with nations over exports and imports instead of the dispute-settlement mechanisms of the world trading system. At the same time, it’s important not to get caught up in the theatrics, trade experts say.

“You can't play successful brinkmanship unless you're really serious about it,” says Edward Alden, a trade expert at the Council on Foreign Relations. “If you don't signal clearly that you're prepared to carry out your threat, then your threat is not credible. Clearly both sides are signaling, as loudly as they can, that they are prepared to act.”

And that signaling, curiously enough, may be the sign that both sides are eager for a deal, he adds. “I think [it] increases the possibility that there's some sort of positive resolution here.”

Interconnected economies 

The US and China trading relationship is deep and broad, running from raw materials to Apple iPhones and other consumer electronics. But few products illustrate the codependence quite like the soybean.

Just under half of all US soybeans are exported. And China by itself purchases more than 60 percent of those exports. For every four rows of soybeans that American farmers plant, one is destined to feed Chinese consumers. No other farm good the US sells to China comes close to the $12 billion that soybeans earns for US farmers.

That is why the prospect of tariffs sends such a chill through farm country. A Purdue University study published before the Chinese threat suggested that a 30 percent tariff would cut US soybean exports to China by 71 percent and overall US exports by 40 percent – a blow that seems almost unfathomable in farm country, especially at a time when net farm income was already forecast to fall to 12-year low.

“I can’t imagine us losing 70 percent of our exports to China,” says Todd Hubbs, a University of Illinois agricultural economist. Just the threat of a 25 percent tariff by Beijing Wednesday (on aircraft, cars, beef, and chemicals as well as soybeans) sent soybean futures prices down 4 percent before recovering somewhat.

Soybean tariffs have political implications, too. By choosing to target the crop, Beijing is putting economic pressure on rural agricultural areas that strongly supported Donald Trump in his 2016 presidential campaign. Even farm-state Republicans are speaking out against the president’s strategy. “It’s my hope that the Trump administration will reconsider these tariffs and pursue policies that enhance our competitiveness, rather than reduce our access to foreign markets,” Sen. Joni Ernst (R) of Iowa said in a statement Wednesday.

Brazilian soybeans won't fill gap

But Beijing’s move also threatens its own consumers. Although it’s the world’s fourth-largest soybean producer, it still has to import nearly 90 percent of its soybeans – a huge void that no other soybean-export nation but the US can fill. “The Chinese market is so large that even if Brazil and Argentina dedicated almost their entire export soybeans to China, it would not be sufficient to fill the Chinese market,” says Patrick Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri.

Even with the tariffs, China will be forced to buy US soybeans, causing its own consumers to pay higher prices for food. (Soybeans are crushed, yielding soybean oil, which is used in a slew of products from margarine to frozen foods, and also yielding soybean meal, which is fed to livestock.) It’s the livestock feed that will be difficult to replace in the short term, so Chinese consumers could see significant rises in meat prices, says Wendong Zhang, an economics professor at Iowa State University in Ames. By taking actions that will hurt its own consumers, China is signaling its willingness to fight US trade tariffs, he adds. For Beijing, “soybeans are a nuclear option.”

Nevertheless, many observers view these moves as negotiation tactics rather than a desire for a trade war. The US has instituted a 60-day comment period before it imposes its tariffs aimed at $50 billion in Chinese goods to compensate for what it calls improper appropriation of US intellectual property. And Beijing has said it won’t act with its tariffs (also on $50 billion in goods) unless the US acts first.

That’s enough time to reach a deal, trade experts say. And even if the tariffs were implemented, $50 billion in sanctions does not amount to a trade war. Compared with the $500 billion a year the US imports from China, “it’s a relatively small amount," says Mary Lovely, an economics professor at Syracuse University.

Still, even a trade-war “lite,” involving US agriculture and Chinese industrial products, would push Washington and Beijing into “a new unstable equilibrium with the tariffs in place in both sides,” says Mr. Alden of the Council on Foreign Relations.

“This is the whole reason that the [World Trade Organization] was created, because solving trade disputes like this creates enormous uncertainty,” he says. “And there's the ever-present danger of things escalating out of control and doing real economic harm.”

Late on Thursday Trump threatened sanctions on an additional $100 billion of Chinese goods. This doesn't sweep aside the theory that confrontation could lead to a deal, but it highlights the risks of soured relations if the two sides can't cut a bargain. [Editor's note:  This paragraph was added April 6 to update the story.]

Staff writers Christa Case Bryant in Wamego, Kan., and Boston; and Mark Trumbull in Washington contributed to this article.

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