The inauguration of Donald J. Trump as the 45th president of the United States is likely to usher in a world of economic changes, especially for agriculture where his trade policies could have an impact on farmers’ bottom lines.
Economists say they are already seeing evidence of the results from what some are calling the “Trump effect” that may help determine the direction for agricultural exports to major U.S. markets in countries such as China.
“After the election in November, money began exiting China,” said Darren Hudson, director of the International Center for Agricultural Competitiveness. “There was already a downturn, but since the election the volume of international reserves – U.S. dollars and Euros – held inside of China has been dropping even faster.
“That’s telling us some things; one of them being that international finance doesn’t have a lot of confidence in China – they’re pulling their money out of China and putting it elsewhere. What does that mean? If China’s economy turns south, they’re less of a big source of demand for U.S. agricultural products.”
Dr. Hudson, who is based at Texas Tech University in Lubbock, spoke on “Trends in competitiveness of U.S. and global agriculture and impacts on Mississippi Delta agriculture” at the Delta Ag Expo in Cleveland, Miss.
Downturn in cotton imports
China’s economic policies have already caused downturns in the fortunes of U.S. crops such as cotton where Chinese imports have fallen from 11 to 12 million bales annually to its tariff rate quota minimum level of less than 5 million bales in the current marketing year (runs from Aug. 1 to July 31).
“Some of that cotton is getting diverted to other places like Bangladesh, Taiwan and Thailand and manufacturing occurs,” he said. “But if that’s an indication of future weakness in Chinese growth, it also means a weakness in Chinese demand for other products and a lot of those are ag products.”
Prices of most U.S. agricultural commodities remain low relative to the highs of three or four years ago. Most forecasts show little chance for improvement, in part, due to the strength of the U.S. dollar. Since it takes more pesos or yen or yuan to buy more dollars, U.S. commodities and products are more expensive than those from competing countries with weaker currencies.
Trying to predict what a Trump administration might do can be difficult, Dr. Hudson said, primarily because of the president-elect’s tendency to issue early morning tweets that may not always agree with what he said the day before.
“But he’s been fairly consistent about creating jobs and renegotiating the North American Free Trade Agreement and other long-running trade policies,” said Hudson, who served as an agricultural economist at Mississippi State University before joining Texas Tech.
Hedging their bets
“Some of this stuff that you’re seeing in the international markets right now is a reaction by people trying to hedge against the impact of that happening (the renegotiation of the NAFTA agreement.”
During the 2016 election campaign, candidate Trump talked about putting a 5 percent tariff on Chinese goods entering the U.S. and taking steps to counteract the effects of China devaluing its currency and making its good cheaper and more competitive.
(Those comments led to a recent discussion by two China experts entitled “Can China survive a Trump-led trade attack?” in which the authors indicated they hoped Trump’s comments were just talk. To read the commentary, visit http://bloom.bg/2jyj6g6.)
“There are a couple of things we need to be clear about,” said Dr. Hudson. “NAFTA has been good for ag. It may not have been good for everything else, but it has been good for U.S. agriculture. And, if we try to renegotiate that, don’t think the Mexicans and the Canadians aren’t going to come to the table with demands for changes in things that are important to them.
“The reality is that what’s most important for Mexico, for sure, are ag issues. They have a lot of ag production that they feel like they got slighted on in the NAFTA negotiations. The Canadians aren’t real happy about a lot of ag issues, either. So going back to the NAFTA table is likely to have an impact on U.S. agriculture and probably not for the good.”
President-elect Trump also promised to scrap the Trans-Pacific Partnership, an agreement reducing tariffs and streamlining trade between the U.S. and 11 other Pacific Rim countries that did not include China.
“It wasn’t a huge benefit to U.S. ag, but there were going to be some doors opened, especially in light of where textile processing is shifting to southeast Asia. We would have solidified a more open trade relationship with those countries. Believe it or not, wage rates have risen in China to the point where it is no longer competitive to spin a lot of cotton in China relative to other places in southeast Asia.”
Dr. Hudson believes that many of the policies President Trump is likely to pursue will be “pro-strong-dollar policies, which are going to be detrimental – other things being equal – to U.S. ag exports. That doesn’t mean it will be detrimental to U.S. agriculture in total, but in some export markets we’re going to see a lot of pressure.
“It’s something to be watching because those developments will impact prices this year and next year as these markets are moving around and trying to figure out where that new equilibrium is likely to be.”
In an interview following his presentation, Dr. Hudson said President Trump’s renegotiation of the trade agreements and bringing jobs back to the U.S. are both developments that are likely to put pressure on the dollar “in terms of raising its value. That affects agriculture the most because we’re very export oriented.
“I think that side of his policy is one that could impact commodity prices by at least keeping pressure on them,” he said. “It doesn’t necessarily mean they’ll drop, but it means they may not rise as much as they would have with similar supply/demand conditions.”
Another question is what are the new president’s policies likely to do to other countries in terms of their economic growth potential.
“The U.S. exports a lot of goods so economic growth around the world has something to do with food demand,” he said. “Those things really come into play. We’ve looked at China and the way their incomes have grown over time, and they’ve shifted their preferences to cotton-based products. If that moderates that puts a halt on potential growth for demand for U.S. cotton exports.”