Trade and tariffs are important to the beef industry for two reasons: trade affects the overall economy—including our customers—and it affects our prices directly. Trade didn’t used to be so critical to us, as it was 2-3% of our production. Now, it can account for 15% or more of production, so it is more important to us, approaching $500/carcass in added value. What we export is either high-value cuts that boost our carcass return, like ribeyes or loins, or variety meats of low value in our markets but prized in other countries.
Tariffs have gotten lots of attention in the general media because they are not well understood by either voters or some economists and because the Democrats have seen it as something to attack President-elect Donald Trump about. What many have not seemed to grasp is that free trade is different now. Some economists and government bureaucrats view tariffs—and taxes—as static events rather than dynamic events, especially given today’s quick response times.
It is not accurate to ignore what buyers’ responses will be to either taxes or tariffs. I’m used to politically left-leaning politicians not understanding incentives and disincentives, but the failure of well-known economists has surprised me.
For example, when corporate tax rates were lowered and equipment expensing was increased under the first Trump administration, companies responded by growing their business, hiring people and paying higher wages and buying equipment. The result, by the second year, was increased government revenue, a booming economy and a better standard of living for workers.
Tariffs—which used to be only regarded as taxes on the consumer buying the imports—are more dynamic than they used to be. Given today’s global marketing system, the consumer has much more information on pricing, on alternatives or substitutes, or on many items, the ability to skip or postpone the purchase. Today’s consumer is not automatically the price taker as they used to be.
So, accusations by politicians and Keynesian economists that any tariffs will be inflationary to American consumers are not necessarily true. Trump’s intention to use them as a tool to extract lower or eliminated tariffs or remove non-tariff trade barriers is powerful. We’re used to it, but other countries are more aware of the huge buying power of the American market. Many companies cannot afford to be shut out of our market, period. So, they respond by lowering their prices, putting price pressure on their suppliers or absorbing some portion of price increases. The result may be no increase to our consumers or minor increases, having little impact on the general economy.
You may have noticed that clothing, for example, that used to come from China may now have labels from Malaysia, Vietnam, Sri Lanka, India, Pakistan or several other countries, as companies find other suppliers. In fact, even before Trump’s tariffs, companies were finding other suppliers because China’s labor costs had increased enough to make other countries more competitive.
Of course, Trump has demonstrated the power of the threat of tariffs as a tool before he even took office. Canada and Mexico reacted immediately to his threats to levy tariffs on them. Beef is a good example here. We export lots of beef to Canada. But Canada is a beef-exporting nation. Most of their production is exported around the globe. Freight is cheaper to us, of course, but the size of our market is critical to them.
In most cases, the countries we are trading with would be hurt much more in losing our market than we would in losing theirs.
Are we being the bully in threatening tariffs on other countries? In most cases, we have small or no tariffs on most countries exporting into the U.S. Since WWII, when we were at the top of the world economic heap, we have let most countries export into our market without much restriction to help rebuild the world economy. But we need to change that, to make it a level playing field. Unless they are flouting trade rules, stealing our intellectual property and not allowing us into their market unless we give them intellectual property or force local partnerships. Like China. That is the biggest threat to our industry, as China has in a very short time become a major player in the global beef market but are the chief offender of trade rules for the general economy.
We noted that Trump’s Treasury nominee, Scott Bessent, regards Trump’s attitude on tariffs as “escalate to de-escalate,” on the way to no tariffs.
Overall, given our free trade agreements with key trading partners, the beef industry should be in good shape. I don’t expect any long-term fallout from our United States-Mexico-Canada Agreement partners. We should end up gaining access in places where it’s been restricted, like the European Union and the United Kingdom.
Since imports are a small share of our economy, some 15%, any trade storm should not be a big inflationary factor.
The biggest unknown is how mass deportations might affect the ag labor force. I don’t think the major beef packers have much to fear. — Steve Dittmer, WLJ columnist
(Steve Dittmer is the author of the Agribusiness Freedom Foundation newsletter. Views in the column do not necessarily represent the views or opinions of WLJ or its editorial staff.)
