A study by Texas A&M University shows that the impacts of trade tariffs and the potential loss of the Chinese and Mexican markets would be extremely costly to U.S. dairy producers.
The study was led by Luis Ribera, director of the Center for North American Studies at Texas A&M University and economist for Texas A&M AgriLife Extension Service, found that a 25% tariff on dairy products traded to China and Mexico cause a number of economic issues.
Both China and Mexico are important trade partners for U.S. dairy. Mexico is the top market accounting for $1.3 billion in dairy trade during 2017. China was the third largest market for the U.S. last year with $577 million in dairy products exported.
Tariffs on cheese exports to Mexico impacts $390 million. Whey, dry milk and cheese were the primary dairy exports to China that were impacted by tariffs, affecting a $408 million worth of products.
China and Mexico have imposed retaliatory tariffs on dairy products from the U.S. after the Trump administration imposed tariffs on steel and aluminum. Following the 25% tariff enacted by China on U.S. dairy products it resulted in a 42% drop in exports to the country during July and August compared to the same time period in 2017, according to Ribera.
“That’s not just economics, but also politics at play here. That makes sense in China since it’s a centralized decision. The interesting part of this is a combination of economics and politics,” Ribera says.
China already imposes a value added tax (VAT) of 16% added on top of the tariff resulting in price increases ranging from 21.7% on liquid milk to 24.5% on whey.
The Texas A&M study looked at three trade scenarios with respect to China and Mexico, including:
- Scenario 1: Impacts of these retaliatory tariffs involves applying elasticities for the impacted dairy product exports to determine loss of exports and additional impacts
- Scenario 2: Impacts of the retaliatory tariffs assumes all U.S. dairy exports to China and cheese exports to Mexico are lost with competitors absorbing many of these sales
- Scenario 3: Impacts of the retaliatory tariffs assumes 42% of U.S. dairy exports to China and cheese exports to Mexico are lost if post-implementation losses were to continue
In Scenario 1 it is estimated a total of $129.7 million in U.S. dairy exports would be lost per year. This would result in an annual loss to dairy farmers of $414.9 million because of both lower milk prices and exports. The milk price would drop by approximately $0.172/cwt. The entire economy would lose a total of $990.6 million per year and 4,840 jobs would no longer be needed.
If trade were to entirely cease between the U.S. with China and Mexico because of tariffs as in Scenario 2 the impacts would be much worse. An estimated $798.5 million per year in U.S. dairy export losses would result in an annual loss of $2.77 billion to U.S. dairy. Milk prices would fall by an additional $1.154/cwt. There would be 32,233 jobs eliminated and the entire economy would lose a total of $6.58 billion per year.
The 42% reduction in trade from Scenario 3 shows losses from U.S. dairy exports to total $335.5 million per year. Total losses to U.S. dairy farms would come to $1.17 billion, while milk prices would fall $0.485/cwt. The economy would take a $2.77 billion per year hit with 13,358 jobs lost.
Depending on the scenario, five-year losses could range from $2.07 billion to $13.87 billion for U.S. dairy farmers.
“That’s a big hit with regards to money turning over in our own national economy, so the implications of these potential scenarios could carry some big weight,” Ribera says of the potential trade impacts.
Ribera expects the U.S. midterm elections on how the scenarios play out. But regardless of politics or economics “we won’t be sending as much product overseas, not selling as much, (and) still losing that important market.”