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Dr. Ken Rietz “Tariffs” seem to be the word of the day for the past several months. We had tariffs promised, tariffs imposed, and tariffs postponed, in a dizzying cycle that is not slowing down, rather is getting bigger. The markets can always try to operate by incorporating as much information as they can, but the free-flowing tariffs make that nearly impossible, driving the uncertainty that markets cannot tolerate. So, the markets contract, like a turtle pulling its had into its shell when in danger. In this commentary, we will look at tariffs and their likely consequences and a measured estimate of where they are going to go. But first, here is a map of the world, colored by the average tariff each country charges. |
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Source: World Bank Group, most recent year, usually 20r21 For those who want a more refined view, Wikipedia gives a table of tariff rates by country, and generating average tariffs with different methods and different sources. Next, we want to look at the results of the recent tariff policies. Going into detail on all aspects of tariffs would take a fairly large book. Instead, we will look at specific instances of three agricultural items (corn, soybeans, wheat; the three most exported crops) and three energy items (crude oil, natural gas, electricity), one at a time. Other things show up in the course of the discussion, but only briefly. We begin with corn. A Bloomberg article details 12 million tons of agricultural products have been booked, but not shipped, and therefor are threatened by tariffs. Almost half of that amount is corn sold to Mexico, the biggest importer of US corn. Given the common border, US corn is often cheaper than from other countries. The tariffs were contingent; if Mexico helped enough with the US-Mexican border situation, then the tariffs can be canceled. Little specific information is public about what “helped enough” is. Currently, the tariffs are postponed, but how long that will last is unclear. Given the on-and-off Mexican tariffs, a significant chance exists that the sale of that corn could be executed during a time tariffs are not in effect. The New York Times published an article with two additional issues that must be considered. Tariffs classically imply a trade war and imposing them is a declaration of such. China has already responded in kind. Losing a substantial fraction of US trade to China, Mexico, and Canada would seriously affect US agriculture, especially since the administration has frozen federal aid to farmers. This is especially true for corn farmers, since they produce the largest crop affected by tariffs. Next, on to soybeans. The same Bloomberg article talks of the sale of 1.6 million tons of soybeans to China. However, that puts the Chinese Communist Party (CCP) in a hard place. Increasing populace discontent must be considered; food shortages could become a serious problem. We have seen in the Middle East how food riots have worked to overthrow governments. The CCP may be particularly nervous now about that happening there. On the other hand, the CCP would not want to look like it is allowing the US to dictate trade terms that much. China’s policy is to buy soybeans from the US only as a last resort. This means that the 1.6 million tons of soybeans is actually needed in China, and the US is the only country left which can supply that many soybeans. This is indeed a conundrum for the CCP. It should also be noted that China has set tariffs of 20% on imports from Canada and Mexico. Now onto wheat. The USDA has published a paper discussing many aspects of tariffs, with illustrations about the wheat market. It also includes a special box with the title Why Countries Use Tariffs, since there are many subtleties. But one item from the boxed text does stand out, reinforcing an article from Bloomberg: Tariffs will not make American agriculture great again. But what about the current situation on wheat and tariffs? Generally, wheat futures are dropping slightly. This seems counter-intuitive, but as the USDA boxed explanation shows, tariffs decrease exports and so increase local supply, causing prices to slide downward. This hurts farmers. There are limited alternatives, such as storing the wheat to sell it next year, but that can’t be done forever. We now move to the energy commodities, starting with crude oil. Crude oil is the most obvious victim of tariffs. Energy in general, and crude oil in particular, from Canada was tariffed at 10%, rather than the 25% tariff on everything else. And another Bloomberg article shows that the tariffs, at least for Mexico, are political and not economic weapons. Similarly, a Reuters article makes again the point: the demand for crude oil is dropping because of tariffs, and the decline in the USD. Both of those are blunting the effects of tariffs, but not eliminating them, just as with wheat. The effects of tariffs on natural gas will not be very great, in part because the tariff on Canadian natural gas (the largest importer) is only 10% and partly because the US produces so much natural gas internally. Finally, we come to electricity. The US has not imposed any tariff on electricity, but Canada has imposed one on the US. This was done in retaliation for the 25% tariffs on Canadian goods. This is the classic trade war in full array. The US immediately added another 25% to Canadian aluminum and steel. This sparked the Canadians to revoke their tariff on electricity, and the US rapidly revoked the extra tariffs. Again, the markets were set spinning. What can we expect in the future regarding tariffs? Predictions, especially during the high-speed maneuvers of this administration, are exceptionally tentative. But there is some guidance, since Trump also used tariffs in his first administration. According to the narrative in The Hightower Report, markets are reacting now very much the same as they did under Trump 45, providing some support for extrapolating from then to now. This is not surprising, since Trump’s policy goals in 2017 are mostly the same as in the beginning of 2025. And, despite the turbulence in the market, the price of gold has remained fairly steady lately, and the USD has plunged in value, taking away some of the sting of the tariffs, both for other countries and for the US. All this points to the possibility of Trump implementing his promise/threat of equalized tariffs and then leaving them all alone. After that, he could decide on what, if anything, to do. |