The Effect of the Trade Deal on American Farmers

American President Donald Trump and Chinese Premier Xi Jinping are both now slated to meet each other and reach an agreement by the end of May 2019. Earlier, the expected date was March 2019. However, this new agreement is very important for millions of people in both countries. Ever since Donald Trump shot off the first few bullets in the trade war, both countries have been caught in an eternal battle. Each country is levying tariffs on the other. The problem is that America and China are the first and second largest economy in the world. Hence, their battle is having a huge impact on the world economy in general and their own citizens in particular.

All groups of people in both countries have been negatively affected by these adverse announcements. However, the American farmers, in particular, have suffered a lot. Prior to the trade war, American farmers used to export $24 billion worth produce to China every year. During the trade war, this number almost halved and was stuck at $13 billion. In this article, we will list down the economic woes suffered by the American farmer.

Falling Prices: The majority of the produce cultivated by American farmers was meant for foreign markets. China and the European Union were two of the major markets where American farmers have consistently sold their produce over the years. However, due to government regulation and the resultant tariff wars, it became economically unviable for Chinese and European buyers to buy American produce. Hence, they started buying farm produce from other countries, and American farmers were left holding large quantities of farm produce. Since the Americans had no buyers, they were forced to warehouse their produce.

Whenever supply exceeds demand, the prices fall. This is precisely what has happened to farmers in America. Prices of corn, wheat, and soy are down by at least 15% in most parts of America. The American farmer has faced a double whammy of high warehousing costs and lower market prices. The problem became so adverse that the government had to interfere by providing a $12 billion bailout to the American farmer. However, if experts are to be believed $12 billion is nothing more than pennies on the dollar. The reality is that this trade war has led to losses to the tune of $4 billion per month! The typical American farmer has seen their income plummet. Their incomes are 35% lower than they used to be in 2012!

Debt: The problem with the American farmer is that they have found themselves in the middle of a perfect storm. First, high warehousing costs and lower sales prices were squeezing their margins. Then to top it up, the Federal Reserve started raising the interest rates. The rise in interest rates led to a wave of bankruptcies in the American Mid-West. More than 100 firm companies filed for bankruptcies in 2018. Also, if the bankruptcies filed by individuals and small companies are considered, the overall rate shows an increase of 56% over the past years. The typical American farm household has seen their interest expense rise by $1500 over the past year. Rising interest rates were a problem for American farmers who had become accustomed to lower interest rates and lower land values. The sudden change has created economic turmoil which has led to an increase in farmer suicides.

American Approach To The Trade Deal: Even though the American farmers have suffered devastating losses in the trade deal, the Americans are still approaching the negotiations with an aura of high-handedness. Donald Trump wants China to blink first and remove their tariffs. However, Xi Jinping is unlikely to do so unless he is assured that America will also follow suit.

Secondly, the Americans want the Chinese to significantly ramp out their purchases of agricultural produce from American farmers. Donald Trump wants the purchases to be doubled or trebled in the first year so that all the products that American farmers have stored in warehouses can be offloaded quickly. The farmers form the core of Donald Trump’s voter base. Hence, he is expected to negotiate hard to ensure that they don’t lose any more money.

Lessons from the Trade War

There are two major lessons that Americans have learned from the trade war.

  • Firstly, it is not good to have one customer purchase so much of your produce. Now since American farmers have seen the negative effects of over-reliance on one customer, they are likely to diversify so that China cannot hold them hostage in the future
  • Secondly, no one wins a trade war. It is unlikely that the terms of the deals between America and China will change too much. Hence, instead of taking the government route and imposing tariffs, the market route should have been taken. America needs to reduce its reliance on Chinese products and Chinese companies if it is wary of their increasing influence in the region.

The bottom line is that the trade tariffs have accomplished very little on both sides. In this article, their devastating effect on the American farmers has been described. However, businesses on the Chinese side have also faced a major impact.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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