Food service professionals throughout the country have been wondering what tariffs could mean for business in 2019 and beyond. While the U.S. has historically sought to lower tariffs in support of free international commerce, the growing conflict between us and several of our major trade partners threatens to disrupt prices in several major product categories.
How would tariffs — both those proposed and already enacted — affect the cost of major food imports? It all comes down to a mixture of three things:
- Supply and demand
- Who bears the cost of the import fee
- Whether other countries retaliate with their own tariffs
For example, in May of 2019, Trump increased Tariffs on $250 billion of Chinese imports from 10% to 25%, affecting a massive list of imported items such as rice, soybean oil, and many distilled spirits. It’s up to U.S. purchasing companies to decide how much of the tariff fees they eat themselves and how much they pass to the consumer by raising prices in stores.
In other cases, tariffs imposed by other countries (whether retaliatory or not) could raise the supply of some items as U.S. companies choose to sell them at home rather than pay more to sell them abroad. For instance, if a trade partner were to levy a tariff on pork imported from the U.S., pork providers here may opt to simply sell more of their product domestically, which could lower pork prices for U.S. consumers (at least initially).
Below, we’re going to examine how upcoming tariffs could affect the food service industry by analyzing potential price changes on five specific food items. But first, let’s dive into the basics of how tariffs work.
What is a tariff?
Tariffs are a tax that a government places on specific, imported goods, usually to bolster the competitiveness of domestic producers of those goods. By making it more expensive to get those goods from foreign countries, the government hopes to encourage vendors to purchase them here, often in an effort to preserve jobs in a specific industry or region. Tariffs can also be used as political leverage against the country being taxed.
Proponents of free trade — from manufacturing organizations to large businesses — have expressed concern over who bears the cost of these tariffs. Though they are intended to improve the domestic economy, heightened costs have forced companies to shrink their workforce in the past, such as with the 2002 steel tariff. Organizations like National Retail Federation stand against tariffs for another reason. They claim that tariffs end up affecting consumers most of all, as businesses simply factor the tariff into the price customers will pay.
On the other hand, steel and aluminum union leaders currently support the increased tariffs, claiming that countries like China have unfair advantages that harm U.S. production. There are politicians on both sides of the aisle who feel that tariffs could jump-start the economy.
How do tariffs affect the food industry?
The effects of tariffs can be hard to initially detect since changes are not always immediately reflected in consumer prices. Companies may initially absorb the cost of tariffs before raising the prices down the line. The long-term effects, however, can be significant. In addition to the extra costs of the tariffs themselves, countries whose exporters are impacted by them may retaliate with their own tariffs on other goods.
For example, China recently halted all agricultural purchases from the U.S.. Prices on some food items therefore may drop if the goods no longer being exported to China result in a domestic surplus. This comes after a growing trade war between the U.S. and China, and directly relates to Trump’s recent announcement of an additional 10% tax on $300 billion worth of Chinese imports. Though the president has ensured federal aid to help the agricultural industry through these turbulent times, farmers are struggling with declining sales just 18 months after the initial tariffs.
So, the question remains: Which food items are most likely to be affected by these ongoing trade wars? And what direction should we expect prices to go? Our analysis is below.
U.S. farmers depend on exporting meat, grain, and vegetables to foreign partners. Since China recently halted all imports of U.S. agricultural goods, American farmers have far fewer places to send their pork products. This was a particularly crucial time for U.S. farmers to capitalize on the export of pork, as China is dealing with an epidemic of African Swine Fever that threatens their own pork supply. It is estimated that U.S. pig farmers lost $1 billion in exports due to the trade war.
Though the economic impact of the China-U.S. trade could change the very nature of our agricultural industry, the current surplus of pork in the U.S. has prices currently at their lowest in a decade.
2. Dairy and cheese
The U.S. imports dairy and cheese products from all over the world, while also maintaining a strong industry at home. In 2018, the U.S. was the second-largest producer of cow milk in the world. However, growing tariffs are quickly changing the landscape of domestic dairy industry. Small and mid-sized Wisconsin dairy farmers, for example, have already decreased dairy production due to the lessened demand for exports.
China, Canada and Mexico are the largest export customers of U.S. dairy, and trade tensions with all three nations mean that dairy farmers are struggling to find a place for their production. Though this means we get lower prices for their dairy products at the moment due to surplus, this loss of income means that many farms are being forced to close.
As far as imports, the Trump administration is currently considering hefty tariffs on 90% of imported European cheeses, which would amount to roughly $2 billion worth of cheese in annual sales, or around half of the overall U.S. cheese market. This could result in price hikes that would greatly affect small and midsize food service businesses.
3. French wines
In the wake of additional tariffs against French vineyards, low and mid-priced French wines could become more expensive. The tariffs come as retaliation for France’s new tax on major technology companies such as Apple and Amazon. Business Insider reports that the cost of champagne and merlot specifically could climb should the Trump Administration follow through with the threats. As the largest importer of EU wines, tariffs levied by the U.S. could both change the costs of bottles at home while also hurting vineyards abroad.
In some cases, American-produced items can be affected by tariffs if their supply chain crosses through other countries. Fish is a perfect example.
Many fish that farmed in the U.S. are then sent to China for “substantial transformation,” such as packaging, preparing, or even breading and frying. When these items are then re-imported for sale in the U.S., they have to be marked as Chinese goods due to Country of Origin laws. If the government were to increase the tariffs on fish, U.S. fisheries may opt to package and prepare fish domestically, allowing them to avoid the tariff and lessen the effect on prices.
While talk of avocado tariffs has died down, they’re worth looking at as an example of how the mere threat of tariffs can alter the market. Back in June, the Trump Administration threatened tariffs on Mexican imports, which by itself was enough for avocado prices to spike. Soon, restaurants were increasing menu prices on avocado-based items or even offering alternative versions with replacement ingredients.
Navigating prices in an interconnected world
To understand the cost of tariffs, you have to consider the give and take of the world economy. Initially lower prices don’t always mean a thriving industry. Though surplus of a food item in the U.S. may lower prices at first — as has been the case with meat and milk — fewer imported goods or shuttered US businesses will ultimately mean a lower supply, thus raising prices. The full impact of tariffs on prices may not be clear until the market has time to level out.