Governors' Biofuels Coalition

Back in April, China notified the World Trade Organization it is suspending trade concessions to the U.S. on products including ethanol, in response to U.S. duties on aluminum and steel. China said it would increase tariffs by 15 percent on 128 U.S. products, intensifying a dispute between the world’s biggest economies. The previous duty was 30 percent.

Further escalating the trade war, at the beginning of August, the U.S. announced it would slap tariffs of 25 percent on another $16 billion of exports from China. This announcement rippled through the market almost immediately with the Shanghai Composite index falling 2 percent the next day.

The tariffs will neutralize cost savings of importing cheaper U.S. ethanol versus purchasing domestic supply. Chinese oil refineries will have to consider turning to domestic suppliers or elsewhere for ethanol. This is great for domestic producers, but analysts say China will probably need to resume imports to meet the government target of 10 percent ethanol content in all petrol nationwide by 2020.

What does that mean for international trade? Take pork for example—if China slaps a tariff on American pork, Canadian pork will replace American pork in the Chinese market, with American pork taking up the slack left over by Canada in the South Korean market. Commodity markets like pork work on the balloon principle—squeeze them somewhere and the supply just goes somewhere else.

In the short term, consumers will most likely see rising prices in the commodity market (fruits, vegetables, pork) and with end products (gas) until the countries can find alternative importers.

However, if those higher prices translate into lower sales, that will mean fewer jobs in the longer run. This is counterproductive for U.S. and Chinese ethanol producers. It is best to have free and fair trade for U.S., Chinese and international producers.

Generally, nobody wins when countries erect tariffs and anti-trade policies. Such barriers lead to fewer jobs and weaken the economy. Tariffs are regressive, leaving consumers, workers and businesses bearing the costs of higher prices. Acting as a tax on both consumers and businesses, trade wars raise the costs of trading, weighing on asset values, weakening consumers’ ability to spend and reduce incentives for businesses to invest by creating uncertainty. It is not a zero-sum game.

Closer to home, as trade war talks resume with the renegotiation of the North American Free Trade Agreement, the market takes a hit. The share prices of U.S. ethanol producers tumbled at the end of July after Canada announced a new wave of retaliatory import tariffs against American products. Biomass-based diesel producers also felt the drop, but ethanol producers were hit the hardest.

 

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