Walking the tariff tightrope. There’s one question that isn’t being asked…

February 4, 2025

by Luke Hutson, New AG International Chief Analyst / Editor-in-Chief

The three countries facing tariffs from the new administration in Washington DC also happen to be the top three destinations for US agricultural exports. The EU is in fourth place.

Exports to Canada, China, Mexico and the EU totalled US$98 billion, forming 56% of the USA’s total agricultural exports of $174.17 billion in 2023.

So why would an administration want to threaten those sales by putting tariffs on agricultural imports (not to mention other commodities as well) from those countries?

The first line of opposition to tariffs is usually the headlines that such a move will generate – the inevitable retaliation and a possible trade war. The second line of opposition is usually an appeal to the consumer – that the cost of the import tariff will be passed on to them.

Tariffs are also an instrument of foreign policy as much as economic. The EU is currently looking to employ tariffs as an option in reducing its dependence on Russian fertilizer imports.

China, Canada and Mexico all run trade surpluses with the USA, when looking across all commodities. Taking the Census data from the US government, Canada ran a surplus of $64 billion in 2023; China’s was $279 billion while Mexico’s was $152 billion.

But when looking at the agricultural picture, there is one question that is worth coming back to – who has the trading advantage? Not to be confused with the comparative advantage of 18th century Scottish economist Adam Smith.

One could say the trading advantage is a way of describing the relationship between importer and exporter. In a business sense, it boils down to who has the most leverage.

If a country puts tariffs on certain imports, how easy is it for a trading partner to go elsewhere and find other sales? The answer to that question can be linked to another: how dependent is that trading partner on a product that can be supplied by that importer country?

If you think the exporter cannot easily replace those sales, and this exporter also has a heavy dependency on a product that you are exporting to them, then maybe those tariffs might not appear so reckless. The exporter can always reduce its margin so the tariff can be absorbed in the price – this is what fertilizer traders have been doing for years.

Starting with the big one – soybeans. This crop is the USA’s biggest agricultural export by value – at $27.72 billion in 2023, and soybeans form 15.9% of total US agricultural exports (USDA FAS). The top three customers in 2023 were (in order of size by dollars) China, EU and Mexico. The $15.06 billion from China forms more than half of the 2023 export value. China needs to import around 80% of its soybean consumption. And that’s the key. China may well put on a retaliatory 10% tariff and try to shift some buying to Brazilian soybeans, but let’s ask the question – how easily can China switch supplier(s)? Not easily. And those tonnes taken from other markets by Chinese buyers provide opportunities for US soybean sellers to backfill them.

The second largest commodity (by value) – corn. US exports were worth $13.11 billion in 2023 – with top buyer being Mexico at $5.39 billion. The Mexican government could decide to put a tariff on those corn imports in retaliation for tariffs on its exports, but where else will it be able to source that volume of corn? Mexico typically imports 50% of its corn consumption. Again, how easy for Mexico to switch supplier(s)?

Then to Canada, the second largest export market for agricultural products for the USA, with a total of $28.38 billion comprising various sectors between $1-$2 billion in size. Placing tariffs on imports from Canada will impact fertilizer prices in the USA, says the Fertilizer Institute, and it has argued that Canadian potash and other fertilizers should be exempted.

The Canadian government may well be minded to reciprocate with a 25% tariff on agricultural products. Taking just one example, Canada bought $1.97 billion of fresh vegetables from USA in 2023, amounting to 1.43 million tonnes. Given its geography and sheer size, how easy is it for Canada to find another supplier of fresh vegetables? Or even less likely, how easy to increase production? In the short-term it will probably continue buying lettuces and tomatoes from the USA and would probably prefer not to put a tariff on those items where it is more readily felt in the consumer wallet.

A counter argument runs along these lines: how easy would it be for the USA to find other suppliers of potash, without sourcing Russian or Belarusian tonnes. Maybe in the short-term US importers would have to absorb the tariff. But there are potash projects out there (one in the USA has recently been given the green light) and potash has one quality that other agricultural products do not – it can be stored long-term.

Having multiple buyers might be ideal from an exporter perspective, and dealing in a commodity certainly increases the options. However, there is also a dynamic in a trading relationship. A country might supply a trading partner with one good but be dependent on them for another. So, when considering the recent tariff announcements, it is worth looking at the question of trading advantage.

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