This morning the Trump administration announced that approximately $36 billion of tariffs on Chinese imports that were previously reported back in March would go into effect on July 6. The response was immediate, from seemingly all quarters. The stock market slumped in early trade, and the Chinese responded with a sharp rebuke of their own, promising their own tariffs on U.S. exports of “the same scale and the same strength.”
By the end of the trading day, some reports attempted to minimize the tariff’s impact, pointing out that they were designed to target high-tech imports rather than consumer goods. These reports reasoned that retailers that rely heavily on Chinese-made goods to stock their shelves, including Walmart Inc. (WMT), Target Corp. (TGT), and Nike Inc. (NKE), to name just a few, won’t see a direct impact on their business from the latest escalation of trade tensions between the U.S. and its largest trading partner.
I believe that it’s correct to say that the near-term effect may not be felt at the consumer level, in the sense that you’re not going to walk into your local store today, or next week, or even next month and start to see prices of many of the goods you’re used to buying at many of these businesses increase. It may even be correct to say these companies won’t reflect a sizable impact even in their next quarterly earnings report. That doesn’t mean, however, that retail businesses in the United States won’t begin to feel the pain of a trade war at some point.
President Trump released a list of approximately 1,300 Chinese imports that were slated for tariffs back in March, and almost 85% of those items were included in the $36 billion of imports that were announced today and will go into effect on July 6. Shortly after that first list was published, the Chinese government released its own list of duties it intended to impose on U.S. goods. That list included some of the largest U.S. imports to that country, including soybeans, pork, whiskey, and automobiles.
The soybean item is a big one. China is the largest buyer of soybeans in the world; in 2017 the U.S. exported about 33 million tons of soybeans to China, and they weren’t even the biggest seller. That distinction belongs to Brazil, who exported more than 50 million tons of soybeans to China last year. China uses soybeans to feed roughly 700 million pigs in the country and also to make cooking oil. U.S. soybean exports to China amounts to about $14 billion of business right now, and some experts predict that number could drop more than 65% if China follows through on its threat and imposes a 25% tax on U.S. soybean imports. That doesn’t seem like an unreasonable prediction, either; Reuters reported yesterday that the number of cargo vessels waiting to load up Brazilian soybeans for export has increased about 60% versus a year ago. Given that China buys two-thirds of the world’s soybean production, the implication for the U.S. seems simple: the Chinese can just start buying more from Brazil and leave the U.S. staring at a whole lot of soybeans, leaving U.S. farmers holding the bag.
That is a possible outcome of today’s tariff announcement that isn’t all that far from happening, and it is one that would have an ancillary impact on U.S. retailers nationwide, since a drop in U.S. farmer income would decrease their buying power for their own basic goods. It also isn’t inconceivable to point out a ripple effect that could bleed into other industries that provide additional goods or services to the farming industry. This is something that could take a few months to be seen, or felt on a national level, but could nonetheless have a real impact. It represents a risk that shouldn’t be ignored.
Another risk that any business or industry should be aware of is the fact that this may simply be the first of multiple rounds of tariffs back and forth. If a true trade war erupts, and China imposes the duties they are threatening as a response, Trump has promised to simply add more to his list. That means Trump might be making a point right now to shield the consumer, but it isn’t a given he will keep doing so. If it means winning his objective in the long run, don’t discount his willingness to take it as far as he needs to do. Everybody I listen to or read from seems to discount the likelihood a full-blown trade war will erupt, or that the U.S. is really that crazy. That could be a short-sighted view of a commander-in-chief that has neither the humility nor the disposition to worry about what most people think makes sense. He’s playing by his own drum, just as he always has.