The U.S. might be the only loser in the soybean fight with China

China imposed 25% tariffs in the last week on U.S. soybeans as a retaliation to U.S. tariffs on Chinese products that worth 34 billion dollars. Theoretically, both consumers in China and producers in the U.S. would be hurt in this fight. It is an empirical question that which side would loss more in terms of welfare. And this is the probably the question that matters the most.

1. The economics
To see this, I draw a simple demand-supply diagram below (figure 1) that demonstrates the welfare distribution with the tariffs imposed. In figure 1a, ED denotes the excess demand curve (of China), and ES denotes the excess supply curve (of US). The interaction of the two curves defines the equilibrium. In figure 1a, the equilibrium price is p0. When tariff is imposed, the domestic price in China increases to p2, and the world price (or US price) declines to p1. The price gap between p2 and p1 is the tariff rate. At the new equilibrium, Chinese consumers loss the area of A in terms of consumer surplus; and the US producers loss the area of B in terms of producer surplus.

Which area is larger, A or B? Figure 1a shows a case that A is larger than B. However, it might not be the case. Shown in figure 1b, when the excess demand curve is more elastic, the A could be smaller than B. We can definitely calculate them once the excess demand and excess supply curves are estimated. Yet, we can still take a good guess before doing these. Notice that in figure 1a, the new world price p1 is closer to p0, the initial equilibrium price. This is the case that A is larger than B. In figure 1b, p1 is further away from p0; this is the case that A is smaller than B. Simply speaking, the US producer might loss relatively more if the world price drops significantly.

2. The data
The Global Information Early Warning System of FAO (link) records the US international soybean price at weekly basis. I find that on July 13th, the US soybean price at the Gulf has declined by around 15%, relative to the price (around 400 dollars per tonne) in May. What does it mean to China? China pays 400 dollars per tonne in May. After the tariff is imposed, China pays around 420 dollars per tonne (after accounting for the tariff). Hence, the price that China pays increase by 5% (=420/400-1) only after 25% of import tariff is imposed!

3. Conclusion
China is a big soybean importer. This means that China's demand has a large influence on the world price. The terms-of-trade effect could offset most of the price effect of the tariff shock. In this case, what is happening now is that US producers sell their soybean at lower prices, while consumers in China might not even feel any big difference.