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BOHANON & CUROTT: Tariffs will hurt, but pain will not be felt this year

July 13, 2018

Economic Analysis by Cecil Bohanon & Nick CurottIf President Trump’s import tariffs are as bad as economists say, why is the Trump economy so strong?

In May of this year, we were among the 1,100 economists who signed a petition urging the president and Congress not to impose new tariffs on foreign imports. Yet, at the stroke of midnight on July 6, U.S. tariffs went into effect on Chinese goods valued at $34 billion. True to script, China retaliated and placed higher tariffs on an equivalent value of U.S. goods entering China, including U.S. soybeans.

The next morning, the U.S. Bureau of Labor Statistics announced that more than 200,000 jobs had been added to the economy in June. Tariff defenders had an Alfred E. Neuman “What, me worry?” look on their faces: “Where’s the disaster the economists talk about?”

Just wait. (Or, better yet, let’s hope this all gets sorted out before the fallout occurs.) The economic impact of most policies isn’t immediate. An instructive example is in our own back yard: Indiana soybeans.

Increased tariffs on U.S. soybeans in China are unlikely to have an effect on Indiana this year. As Purdue economist Wally Tyner pointed out back in April: “[Indiana] farmers [have] more or less made their decision on what to plant … so nothing happens this year really—even if the tariff is put into place.”

China’s soybean imports are seasonal for a straightforward reason. During the northern hemisphere’s spring, China relies mainly on Brazilian soybeans; in the fall, it switches to American beans. Over time, China can substitute out American beans for other sources—despite the seasonal constraint. A 25 percent tariff on U.S. beans certainly gives them an incentive to do so, if the tariff is permanent.

Tyner and other Purdue colleagues have estimated, using a sophisticated economic model anchored in historical data from the world soybean market, what it might look like if China turns away from American soybeans. They report that, after “approximately five years of adjustment, [a 25 percent Chinese] tariff would result in U.S. soybean exports to China dropping 69 percent, U.S. global soybean exports dropping 29 percent, and U.S. soybean production dropping by 13 percent.”

In 2017, exports accounted for around 12 percent of all goods and services produced in the United States. Small reductions in selected exports for limited durations are unlikely to generate big effects. But if trade disputes remain unresolved or expand, the story is quite different.

Let’s hope these disputes are resolved quickly and tariffs are rescinded on all sides.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

 

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