Trade tensions between the United States and China escalated last Friday as negotiations stalled, causing the United States to raise tariffs an additional 15% on $200 billion in Chinese goods.  These tensions have created more uncertainty in the U.S. dairy industry, because China will likely impose another round of retaliatory tariffs on U.S. goods, including dairy products, by June 1 unless an agreement can be reached.

Background

The United States imposed $250 billion worth of tariffs last July on Chinese imports based on the Office of the U.S. Trade Representative’s findings that China’s acts, policies and practices related to technology transfer, intellectual property and innovation were “unreasonable or discriminatory and burden or restrict U.S. commerce.”

China retaliated by adding new tariffs on $110 billion worth of U.S. goods, including dairy products. As a result, milk, cream, yogurt, whey, butter and cheese from American processors exporting to China face a 25% tariff, while lactose and infant formulas face up to a 10% tariff.

On Friday, the United States raised the tariffs on Chinese imports, saying China had backtracked on its trade commitments. China responded by releasing a new list of retaliatory tariffs with an expected implementation date of June 1. The proposed Chinese tariffs combined with current tariffs would reach 37% for U.S. ice cream products, 30% for infant formula and 35% for casein.

Dairy Sales Drop

“The U.S. dairy industry supports the administration’s efforts to negotiate a fair and equitable agreement with China, but tariffs on U.S. dairy exports will most certainly increase if a deal isn’t struck soon,” said Michael Dykes, D.V.M, president and CEO of IDFA. “Tariffs will further damage market share that U.S. exporters spent a decade or more cultivating. It will be difficult, if not impossible, to regain that market share once Chinese buyers have established business relationships with dairy suppliers in other countries. It is imperative that we move toward a market-principled approach on trade, as current tariff escalation is causing uncertainty in the market.”

China was the U.S. dairy industry’s third-largest export market in 2018, representing $500 million in sales compared to just $154 million in 2007. Since the initial tariffs went into effect last July, sales of U.S. whey to China have dropped by 43%. For the first quarter of 2019, the value of U.S. cheese exports to China fell 43%, compounding the 42% loss U.S. cheese manufacturers experienced in the second half of 2018.

Cheese Sales China

Source: U.S. Department of Agriculture

Added Pressure

In addition to the pressure of retaliatory tariffs, African swine fever is decimating China’s hog herd, the world’s largest, and decreasing sales of U.S. whey, permeate and lactose to the country for livestock feed. Rabobank expects the Chinese hog population to be reduced 25% to 35%, lowering potential returns to cheese and whey manufacturers as a result.

To alleviate the strain on American farmers and companies, the administration is planning more trade mitigation purchases of agricultural products. “We have already been in contact with the U.S. Department of Agriculture to ensure that any subsequent support includes dairy purchases,” said Dykes.

For more information, contact Beth Hughes, IDFA senior director of international affairs, at bhughes@idfa.org.