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November 07, 2019

Tariff Battle Could Have Local Impact, But Ag Safe For Now

April 12, 2018


With President Donald Trump and China trading tariff threats like bets at a World Series of Poker final table, it seems no sector of the American economy is safe from getting sucked in. Over the past month the chips in play went from Chinese steel and aluminum to American hogs and soybeans. Tariffs are taxes nations put on goods imported from other nations. Sellers of those goods typically pass that added cost on to buyers, so prices increase and as a result consumers may buy less of them.


After Trump threatened tariffs, China in the first week of April upped the ante by saying it would impose them on numerous U.S. imports. Imperial County residents and farmers could feel the pinch, though how much is largely a matter of speculation, observers said.


"You need to step back and look at the bigger picture. It's more of a strategy to negotiate these other trade agreements," said El Centro business consultant Thomas Topuzes, explaining Trump's threat to place tariffs on Chinese goods might be a tactic to win better trade deals in Asia. Trump is delivering on a campaign promise that addresses a long-standing economic issue, according to Michael Bracken, managing partner and chief economist of DMG Economics (Development Management Group, Inc.). 


"Yes, we appear to be in the beginnings of a trade war with China, and potentially others," Bracken stated in an e-mail. "The genesis of this is that for decades many countries have relied on open trade TO the United States for their products while having more protectionist limits and tariffs on goods coming FROM America." Bracken added, "President Trump campaigned on working to reduce barriers for American products (both in terms of limits and tariffs). He appears to be working to deliver on that campaign promise."


Imperial County's main exposures are with hay--or forage crops--its growers export to China and consumers possibly paying more for goods imported from China.


Even though forage crops were not among the more than 100 American-produced items on the tariff list recently released by the Chinese, many agricultural items are. As such, the entire farm sector and its related industries could feel the effects if China ends up buying less of those goods due to tariffs, Topuzes said. Local growers are watchful, said Brea Mohamed, executive director of the Imperial County Farm Bureau. "I think the biggest concern is the ag in general. We're all just paying attention," she said. "We haven't seen any forage crops on the list, so hopefully we won't."


Alfalfa, Sudan grass and Bermuda grass hay production in Imperial County totaled about $240 million in 2016, with a significant portion of that compressed and shipped to Asia, including China, according to the annual crop report released by the Imperial County Agricultural Commissioner. Cotton is on the Chinese tariff list, but it is not currently among the leading crops in Imperial County, totaling just 2000 acres and $2.8 million in value in 2016, the crop report states. Bracken added the situation will be of greater concern if it expands.


"Specific to the Imperial Valley, I would be most worried if hay crops are impacted as that is the crop that is most often exported," he explained. "That said, in the near term, China represents only about 7% of crop exports from the region. If Japan and Mexico were to enter into a trade war with the United States, the impact to the region would be greater."


The salvos started on March 1 with Trump threatening to slap a 25-percent charge on steel and 10-percent charge on aluminum imported from China. The response from China was the wide-ranging list of tariff targets, including pork products and soybeans, many of which are produced in Midwest farming areas that heavily voted for Trump in the 2016 election. Topuzes said such targeting is no accident.


"The Chinese are very smart. There's a lot of precision. It will impact a certain segment of the population," he said, adding the U.S. approach is no different: "Each side knows what they're doing." Asked about the outlook, Topuzes maintained it favors the U.S. and any impact likely will not be long term.


"China needs us more than we need China. They have a large market in the U.S.," he said of the myriad goods the Asian nation sells in America, including electronics, whose sales could decline if prices rise due to tariffs. "I'm pretty sure we are the largest customer they have.


When a business has a reduction in business with its largest customer, it has an adverse impact." Actual implementation of tariffs "could come into play, however, I don't think it's going to be long term because both sides will realize 'It's not the best thing for my economy.'"


One impact already seen is wild gyrations in the U.S. stock market. Bracken said that inflicts more immediate pain.


"If a trade war were to occur there will be winners and losers. In a broad sense, anyone with retirement investments (401k and similar) in the stock market will lose because markets want and need certainty. Atrade war compromises certainty," Bracken stated. The Dow Jones Industrial Average was down 572 points, or 2.34 percent of its value, on April 6.


The sell off came less than 24 hours after Trump tripled to $150 billion the value of Chinese imports on which he is threatening to impose tariffs. Shortly before that, China had said it would slap tariffs on more than 100 U.S. imports.

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