A sorghum crop in El Campo.EXPAND
A sorghum crop in El Campo.
U.S. Department of Agriculture

Trump's Trade War Leaves Texas at Head of Dark Path

Late last week, President Donald Trump opened the latest front in his ever-expanding trade war, announcing 25-percent tariffs on a long list of Chinese imports. The Chinese government responded in kind, creating similar tariffs on a bevy of U.S. agricultural products. While neither the U.S. nor the Chinese economy has experienced much fallout from the new policies, the United States — and Texas specifically — are vulnerable because of the current tariffs and the path on which Trump has set his administration.

The immediate risk to the Texas economy, according to Steven Cobb, the director of the University of North Texas' Center of Economic Education, is the potential harm Trump's tariffs could wreak on the state's agricultural exports to China, the world's biggest market. 

"China seems to be cautious but specific in the way that they're reacting to the U.S. trade barriers," Cobb says. "They're picking particular industries for retaliation. In many cases, the targets have been agricultural. One of the targets has been soybeans. Sixty percent of U.S. soybeans are exported, and the biggest export market is China. [Soybean farmers] are a group that's going to be hit particularly hard by Chinese tariffs. That's not the biggest agricultural product we have in Texas; it's probably going to hit the Midwest a little harder, but it's still an export crop here in Texas."

In 2017, Texas farmers harvested almost 7 million bushels of soybeans, up nearly 2 million bushels over 2016, despite the effects of Hurricane Harvey. Farmers exported half of those bushels and China was their No. 1 market.

Texas is an even bigger player when it comes to other products targeted by the Chinese tariffs. Texas is the country's second-largest producer of sorghum, a crop often used to feed livestock both domestically and abroad.

In addition to the costs Trump's tariffs and Chinese retaliation are imposing on Texas farmers, another bigger problem looms on the horizon, Cobb says. In carrying out his plans against China, Trump has shown no signs that he might pull back from his promise to "renegotiate" the North American Free Trade Agreement despite repeated objections from Texas leaders, including Gov. Greg Abbott.

"Texans need to be a little nervous about [the threat to NAFTA] because Texas has been a pretty major benefactor in terms of NAFTA. As we've increased the amount of trade, particularly with Mexico, we've had not only the benefits of the products that we're able to get, but there's been lots of trans-shipment and transportation benefits, as well as warehousing and storage in the state of Texas," Cobb says. "If we were to reduce the amount of trade between the United States and Mexico, that would reduce all of those benefits for Texas."

Down the road, another outcome of a continuing trade war that could hit the United States and Texas hard, Cobb says. If the United States continues to fight with China, it could see a key market for American bonds evaporate. If that happens, interest rates could rise, posing a major threat to the continued growth of the U.S. economy.

"China has bought a lot of U.S. government securities. They've also invested a lot of money in the U.S. stock market and other places," Cobb says. "If, as a result of this trade war, the Chinese were to essentially say, 'We're not going to bother with putting tariffs on American products coming into China; that just makes prices higher for Chinese consumers that are already at a relatively low income level. What we're going to do is: Step one, we're going to stop buying any U.S. government securities, and if that's not enough to stop the trade war, step two is we're going to sell all the U.S. securities we own on the international market.'"

The U.S. needs to sell securities because of its ongoing budget deficit, so in that scenario, the federal government would be forced to raise interest rates in order to move those bonds.

"Raising interest rates is not something we're all looking at as something the U.S. economy needs right now," Cobb says. "We haven't had huge economic growth even during the time of relatively low interest rates. You bump the interest rates up much higher, and you would see a slowdown across the economy that none of us are prepared for."

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