April 13, 2018

How Tariffs Actually Work

 |  By: Anna-Lisa Laca

America’s farmers are well aware that there could be negative market impacts of the Chinese tariffs on agriculture products, but do you know how a tariff actually works? Chris Hurt, an ag economist at Purdue University broke it down for Chip Flory on Wednesday’s edition of AgriTalk After The Bell.

“Essentially a Chinese tariff on soybeans says if a vessel of soybeans is coming from the U.S., for that vessel to unload on Chinese soil it will have to pay a tax of 25% of the value [of the shipment],” he explained. “So for a crusher in China to buy U.S. origin beans, they are going to be 25% [more expensive] than Brazilian or Argentinian soybeans.”

How does that impact American markets? According to Hurt, it signals to the Chinese crusher that they need to buy all of the Brazilian, Argentinian and non-American soybeans they can find. Which means that countries who purchase Brazilian and Argentinian beans would end up buying American soybeans. It essentially shifts global purchasing habits while the tariffs are in place.

“The impact in China is not good,” he told Flory. “It raises the costs of U.S. beans sharply and because they’re more aggressively buying Brazilian and Argentinian beans [those prices go up] as well.”

According to Hurt, economists predict that although other countries would pick up some of the U.S. soybeans China would leave on the table, there would still be a decline in soybean demand and U.S. soybean production. He thinks American farmers would shift soybean acres to other grain crops like corn or wheat, which would then push downward pressure on the prices of those grains.

“It really would not be good for grain farmers of any kind,” he added.