Increasing tariffs with China, the possibility of the breaking up of NAFTA-- as you look around, it seems like trade competition may be turning into trade war. What would that mean? Well, we'll find out by looking at the sector of the economy that is on the front lines of that war, agriculture, on the next episode of The Market That Moves America. 


Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities. 

Today's podcast is about US trade policy, the threat of tariffs, and the potential impact of those on middle market farmers in the food business, the food they sell, the food they grow, and the food that ends up on your plate. I'm Tom Stewart, the executive director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research group studying mid-sized companies, which account for a third of private sector employment and GDP and the lion's share of economic growth. It is the market that moves America. 

The National Center for the Middle Market is a partnership between Ohio State, and SunTrust Banks, Grant Thornton, and Cisco Systems. With me today is a special guest, Professor Ian Sheldon, who is the Andersons Chair of Agricultural Marketing, Trade, and Policy at Ohio State. Ian, welcome to The Market That Moves America. 

Good morning. Glad to be here. 

Let me begin with just a couple of points and maybe a little data to set the stage. As most of our listeners know, when we talk about middle market companies in America, we're talking about businesses with sales between $10 million and $1 billion a year. That's about 200,000 businesses in all industries from health care to construction to banking to farming and agriculture and agribiz. 

But quite a number of them indeed are in the food industry. You can put a Nathan's hot dog on a bun made by New Horizons and slather it with yellow mustard, and you're having an all-American middle market cookout. But if you go back up the value chain and go to growers and producers of food, you find a lot of mid-sized companies. And Ian, just give us a little tour of the horizon of the industry of agriculture as you see it. 

Well, in our state here in Ohio, the food industry itself, if you just look at the food processing sector, it accounts for about $15 billion worth of value added in the state. And that's about 2.5% of gross state product. And that compares pretty favorably actually with the share that that sector takes of the US's gross domestic product. 

The industry here employs about 112,000 folks. That's about 1.6% of the Ohio total employment. And the sector here in Ohio accounts for about $1.6 billion worth of exports of food and processed food products. 

Do you know off the top of your head how much Ohio exports as a whole? 

Not off the top of my head. I have the data sitting in tables back in my office. But-- 

Because one of the things-- one of the sort of hidden truths about agriculture is it is an extraordinarily important component of global trade and of US trade in particular. 

Yeah. In fact, I was looking at the numbers this morning in preparation for coming to talk to you guys. And as you know, the US overall is running a trade deficit in goods. We run a trade surplus in services. But overall in trade and services, we run a deficit. 

But one of the few sectors that actually runs a small positive export surplus is actually the food and agricultural sector. And it's been pretty rock solid running that surplus over the past 20, 25 years compared to other sectors, which of course are running deficits. 

And what is it? Is it grain? Is it fruit? Is it meat? Is it the whole thing? 

It's predominantly the major commodities-- soybeans, corn, wheat to some extent, sorghum, and processed products. We don't-- the actual share of total trade taken by this sector is not huge. But that's because, of course, food is a relatively low proportion of income spent by most consumers, at least in developed countries. Of course, in countries like China, which have had obviously very fast expanding demand, incomes over the past 20, 25 years, we've seen a significant shift in their diets away from rice, fish, and vegetables towards a much more meat-based diet, which we can talk about a little bit later when we get on to talking about what the Chinese are doing with their trade policy vis-a-vis agriculture. 

One of the things that struck me over the years, though, is the degree to which agriculture-- the original industry, the first sector, the primary sector-- is so much the point of the spear of trade disputes. I'm old enough to remember when the big rival for US business was Japan. And there were huge battles over the exporting of apples from Washington state and of rice. 

And the US trade representative was complaining mightily about protection for apples and rice from Japan. And it's just always been this extraordinarily contentious part of trade policy. Why is that? 

Well, there's two things going on here. First of all, compared to the manufacturing sector, trade has actually not been liberalized that extensively in agriculture. So the first time that agriculture was brought under the rules of what was then the General Agreement on Tariffs and Trade, now the World Trade Organization, only really occurred in the last round of trade negotiations that were successful, the Uruguay Round. 

That's where we placed significant disciplines on the extent to which foreign policy could or couldn't distort international trade. And we still have quite high average tariffs in the agricultural sector, about 25% to 30% on average globally. And one of the reasons that the Doha Round of the WTO hasn't succeeded is agriculture is a significant sticking point. 

Why is it so hard? 

Well, a lot of it's to do with developed countries like Japan have extensively protected agriculture and have always not been particularly willing to reform agricultural policy. And in the US, for example, we're really good at exporting soybeans, corn, and wheat. But we're not so good at producing commodities such as cotton, sugar, or rice. 

And these are much more heavily subsidized commodities in terms of the proportion of farm income that comes out of the government's pocket. So we have this tradeoff in the farm bill between those commodities and the commodities that we're really good at producing here, particularly in the Midwest. But going back to the other point I was going to make, in the current disputes that have been developing between the US and China, I think the Chinese are very astute in realizing that by pinpointing trade in agricultural commodities, they are focusing on individuals and states that clearly helped President Trump be elected in 2016. 

So they're focusing on Jack Daniels, but not on Jim Beam or [INAUDIBLE] 

Well, they're focusing-- well, bourbon from Kentucky because Mitch McConnell is the leader of the Senate. They were talking about products coming out of Wisconsin because, of course, Paul Ryan is leader of the House. But more sort of generally, states in the Midwest and elsewhere that are significant ag producers, we know from the surveys that have been done and the way farmers are now lobbying within the Beltway that they are very concerned about US trade policy leading to responses by the Chinese, which is going to significantly impact their sector. 

It's interesting. This is a bit of a rabbit hole, but it's an interesting one. Years and years ago, during this Japanese stuff, I was comparing rice production in the United States-- I was at Fortune at the time. And I was comparing rice production to the United States, where there was a lot of subsidy, for example, in the Central Valley of California in the form of cheap water to grow rice in basically a semi-arid area. 

And so we were subsidizing rice by providing very cheap water. And they were protecting rice with land use rules and tariffs. And I ended up, sort of back-of-the-envelope calculation, discovering that the United States was complaining fiercely about Japanese protection and subsidy of rice farmers, while we were subsidizing our rice farmers about the same amount per acre of rice. 

Right. Well, this goes on all the time in the agricultural sector. And it's kind of a minefield of different policies affecting the sector in different countries. One thing I should point out about Japan, if under the original signing of the Trans-Pacific Partnership Japan would have opened up its agricultural sector, and the US ag sector would have been a significant beneficiary if we had actually ratified the Trans-Pacific Partnership. Japan has been a market that we've never been able to open up outside of the TPP. 


And the evidence suggests that we would have gained in the beef sector, dairy sector, rice, barley-- not so much in soybeans, I don't think, because they're not producing huge numbers of animals there in Japan. But to give you a good example of where I think we're going to hurt ourselves by not signing up for TPP, back in the mid 2000s, we had an outbreak of mad cow disease here in the US. And the Japanese started backing away from US beef imports. 

Australia jumped in, took a lot of our market share. And so did Canada and Mexico. And we've not got that market share back. Australia's now the number one supplier of beef to the Japanese. And it's very interesting that Australia has a free trade agreement with Japan. 

And the EU has just signed a free trade agreement with Japan. And I think by not signing the Trans-Pacific Partnership, we've sort of shot ourselves in the foot in terms of an important agricultural market not just in Japan, but elsewhere in the Asia-Pacific region. 

Across the whole Asia-Pacific. 


I mean just net net, would reduction in tariffs-- or, let's say net net, would free trade help US agriculture more than it hurt? 

I think unambiguously it would benefit those portions of our agricultural sector that are very competitive in international markets. If you talk to my colleagues at the Corn and Wheat Growers Association, the Soybean Association here in Columbus who work in connection with the Ohio Farm Bureau, they'll tell you that US farmers rely on export markets now. And they're very concerned about losing markets and if the North American Free Trade Agreement breaks down. 

They didn't get access to those Asia-Pacific markets with the Trans-Pacific partnership not being signed. And of course, what China's threatening to do right now will take away significant market share from a particularly important part of the US ag sector, especially at the time when we're having to compete particularly with Brazil in exporting notably to China. But Brazil stands to potentially gain market share particularly in corn in Mexico if the North American Free Trade Agreement breaks down. 

So let's put a face on this. When we talk about US farmers, I think stereotypically there are two thoughts that come into people's heads. One is the endangered small farmer with the family farm that is disappearing and that sort of romantic view. And the other is the big, giant agribusiness combine that is a multi-billion dollar corporation. Is that barbell view of the agricultural sector right? Or in the middle, do you find-- when you think about-- thinking as the National Center for the Middle Market, what's that mid-sized agricultural piece look like? 

In this state, we still have a number of small farmers. But I think we're pushing more and more to-- we're not like Kansas, where you have these huge farms or further out in the plains. But we have farmers here in the state who farm anything from 1,000 acres up to 5,000 or 10,000 acres. 

And they're making how much a year overall, just a--? 

That's not really my-- well, I can tell you broadly that farm incomes in the US are actually under pressure right now. Because we've seen-- we had this big-- 

No. I'm asking about revenues, not [INAUDIBLE] profits. [INAUDIBLE] 

Well, but that feeds back into farming. 

Of course. It better. 

And margins are pretty slim right now because we had this spike in commodity prices in the late part of the first decade of the millennium, partly driven by this sort of global combination of effects-- weather, Chinese demands. Biofuels was taking corn in particular out of the human food consumption chain. So we had this spike in prices. 

But prices have been falling in the past four or five years. And that's putting pressure on farm incomes. And there's quite a bit of concern out there in the agricultural sector about farm incomes. And so that's why if we do start a trade war with the Chinese-- if a trade war starts with the Chinese, that's going to put significant pressure on farm prices, particularly soybeans and corn, I think. And if NAFTA were to break down-- of our exports of corn from the US, 25% goes into Mexico. 

Wow. Wow. So as we look at this right now between these, the threat of-- so the administration proposed slapping $60 billion in tariffs on the Chinese. And they countered with sort of, we'll see you and raise you. 

So here's the timeline. The US initially implemented tariffs on imports of aluminum and steel. And that would have accounted for about $3 billion worth-- will account for about $3 billion worth of trade, even though the target, China, only accounts for a relatively small proportion of our steel and aluminum imports. Most of them come from Canada and the EU, actually, especially steel. 

And China responded with tariffs on processed pork products, apples out of the West Coast, and also wine. And pork's an important commodity in Chinese consumption now. That feeds back into producers, particularly in states like Iowa. Think about Senator Grassley, a very important senator in general in the Republican Party, but also influential in setting agricultural policy. 

And the Chinese also had responded at least with the threat of an anti-dumping investigation. The US implemented tariffs on imports of solar panels. That was actually one of the first biggies. And they implemented, as I said, an investigation into sorghum exports to China. So sorghum is a corn substitute that gets used to feed poultry in China. 

Doesn't really affect Ohio but affects some of the Southern states. And also Illinois actually produces quite a bit of sorghum, apparently. I didn't know that until I read some stuff recently that was coming out of-- 

So we get solar panels versus sorghum and steel and aluminum versus pork. 

And they've just announced 179% tariff on US sorghum imports as of last Wednesday. Then, the administration implemented a $50 billion worth-- the tariffs would affect $50 billion worth of imports from China. And the Chinese threatened to retaliate with tariffs that would affect $50 billion worth of trade. And the important commodity that they included there was imports of soybeans, where they were going to implement a 25% tariff on US imports of soybeans. 

The US exports about $14 billion worth of soybeans to China. We're the number one exporter to China. They're the biggest importer of soybeans in the world. And my colleagues out of Purdue University suggest that would lead to a 65% reduction in imports of soybeans from the US by China. 

That's a big drop. 

About 2/3. And that would lead to a drop in prices. And my colleagues out at Illinois are already suggesting that there would be reductions in soybean prices and potentially corn prices as well. So China's such a large importer that if you-- if about $8 billion worth of exports can't get into the Chinese market, it's going to be sloshing around on the world market. It's going to drive down farm prices. 

And of course the farming community back here in the US is really bent out of shape about this. And the Secretary of Agriculture and the administration have talked about back-channeling money into the Department of Agriculture so that they can support soybean prices. But this looks like farm subsidies. 

And the risk I think the administration runs there is that Brazil right now would probably have a tough time arguing that Chinese import tariffs directly affect them. But if the US responds with subsidies to farmers which then puts further pressure on farm prices, then Brazil maybe could take us to the WTO. And they won a case about 10 years ago for our cotton subsidies, which were driving down global cotton prices. 

And so in effect, you could have a spat that would turn into a global trade war in agriculture that could disrupt a lot of businesses, a lot of food processes, and also then lead to a whole lot of sort of international legal arguments. 

Yeah, that's right. And that's on top of the fact we haven't reached an agreement in the WTO on how to liberalize trade. And we've backed away from the TPP. And I think-- personally, I think breaking up NAFTA is very significant for the US ag sector. We have this highly integrated market here in North America-- $1 trillion worth of trade a year, 25%-- 

$1 trillion-- wait. [INAUDIBLE] 

Not in ag, in total. 

Not just in ag. Yeah. OK, OK. $1 trillion altogether, yes, which is still a lot. 

25% of global GDP. And even though most of the focus has been on the value chains in the automobile sector-- 

So why don't we give a good example of [INAUDIBLE] 

So a really good example of an integrated production system here in North America in agriculture is the pork industry. And so about four million hogs get raised from birth to when they're weaned from the sows up in Canada. They're exported down to the US to the Midwestern states to be fed on soy meal and corn. 

And they're then slaughtered, processed here in the US. I think it's about 10,000 jobs actually in the pork processing sector alone. And most of that is exported either to Mexico-- Mexico is now the number one processed pork market for the US. Some goes back to Canada. The rest goes out to China and Japan. 

So it's a Canadian nursery, an American adolescence and slaughtering and processing, and then exports. 


Exports to the rest of NAFTA and around the world. 

So if we don't export corn and soybeans to Mexico to feed up animals down there, we're exporting animals that embody corn and soybeans. So whichever way you look at it, messing up that pork processing chain kicks back into the US pork production sector and the animal feed sector that relies on that. I drove up Route 98 towards Bucyrus back in January. And there's a huge unit up there producing hogs. 

I wouldn't be surprised if they're up there pretty much integrated into this pork production system. And that's just one of the points about NAFTA is that NAFTA has led to this highly integrated, efficient system here in the US-- well, North America-- which makes us competitive globally. And remember, the Chinese can't consume enough pork and poultry. 

And so they're an important export market. And I've already mentioned Japan for beef. And there is a beef production system here in the US as well. The Canadians raise calves. They often get fed out in Mexico. Then they get-- 

So do the Hawaiians. There's a lot of production in the-- I've forgotten the name of the big ranch in Hawaii where a lot of calves are raised. And then they come stateside for again-- 

One of the reasons the whole country of origin labeling issue blew up in the meat sector here in North America is that you'd go to Giant