The United States (US) and China have been engaged in a trade war for some time. While the American approach can be compared to 'shooting with hail', China's approach is much more like 'shooting with a sniper'. China is trying to hit very specific American products, such as soybeans and other agricultural products.
Those products are produced by the new Chinese import duties so expensive that Chinese buyers now get their soybeans from other countries. And that has not gone without consequences in America. The recent US agricultural sector report from central banks shows that the situation has deteriorated and continues to deteriorate.
Falling income
Due to the loss of demand from China, the income of farmers in the US fell in the second quarter of 2018. In addition, soybean exports to China have almost completely stopped. American soybean producers therefore have to sell their beans to others. The good news is that they are doing well. The bad news, however, is that this is at a significantly lower price happens. The price of soybeans has fallen by 17% in recent months. As a result, many farmers are unable to meet their monthly repayment obligations on time.
At the same time, soy farmers are turning to the bank more often to borrow money. This is because they need to maintain their income so that their business can be kept running. However, due to increasing financial problems, banks are rejecting more of those applications. And if a bank approves an application, it often charges a higher interest rate than was previously the case. Not only because the risk of default is higher, but also because interest rates generally rise due to interest rate increases. the Fed.
No changes
Considering the state of affairs in the field of the trade war between China and the US, there are few reasons why the situation will change quickly. Bankers from America's agricultural regions indicate that they expect American farmers' incomes to continue to decline in the near future. That in turn will negatively affect the region's economy. Bankers from the region see that the 'non-agricultural sectors' are also being slowed down by the problems in agriculture.
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However, a statement by China makes it even more likely that the damage to farmers (particularly soybean producers) could become structural. China's Secretary of State for Agriculture Affairs said in an interview that China has managed to import enough soybeans from other countries. According to him, this could become more than a temporary avoidance maneuver. It means that even after the trade war, China can choose to ignore American soybeans, because it has noticed that other countries can also provide a sufficient supply of good soybeans.
High prices for agricultural land
One bright spot for US farmers is that farmland prices remain high. However, with the prospect of further interest rate increases of the Fed and the ongoing trade war with China, it doesn't take much imagination to imagine a scenario in which land prices come under downward pressure. It is something that will further reduce the chance of taking out a loan and increase the interest rate (the collateral becomes less valuable). The Fed meetings and the policies of American President Donald Trump can count on an extraordinary amount of attention. And that is anything but a trivial observation.
The reason China is targeting that part of the US is the fact that the Republican Party and Trump had a tie in the last election victory have achieved in the agricultural states. With the negative consequences of the trade war with China becoming increasingly apparent, this could have consequences for the parliamentary elections in November this year. In the midterm elections, which were held in recent weeks, Republican candidates scored very poorly.
More uncertainty?
If the Republicans score poorly and lose their majority, this could lead to more uncertainty (with regard to economic policy). However, it can also cause tensions within the Republican party. It is quite possible that more and more party members are turning away from their Trump, who therefore has less support within his own party. And we haven't even mentioned the investigations into ties with Russia during the last election. That investigation could even lead to the initiation of impeachment proceedings.
Finally, it can also influence Fed policy. Its board may consist of 7 people. Now there are 3 members, which means that President Trump can nominate 4 new members. He is already working on that, but ultimately the American parliament must approve the candidates. Should the Democratic party gain control of parliament, a stalemate is possible in that area. This just shows what import duties on steel and aluminum can do.