The two Chinese businessmen who came to Bill Bloxom’s office last week were cordial but gloomy.
For years, the men have traveled from Shenzhen to Washington state to buy massive quantities of apples, sweet cherries and other produce for their business back home. Those shipments are handled exclusively by Bloxom’s Seattle-based exporting firm, FC Bloxom & Co., and this year, Bloxom had expected their orders would add up to around $4.5 million — or enough to fill 200 cargo containers.
But with rumors last week that the Trump administration was preparing new tariffs on Chinese imports, Bloxom’s guests issued a polite warning: If the White House carried out its tariff threat and China retaliated, their order would likely shrink. “They spoke to me very frankly,” says Bloxom. “If these tariffs go in and their price goes up, they’ve got to look for sources elsewhere.”
Sadly, by the time the two businessmen flew back to Shenzhen this week, the predictions had come to pass: On Friday, the United States imposed new tariffs on China, which retaliated on Monday with a slew of tariff increases on U.S. products, effective June 1. And suddenly, Bloxom’s export deal was at risk.
That’s bad news for the growers, shippers and packers that Bloxom works with in Eastern Washington — people who, until recently, saw China as a critical market for their massive output. With cherry growers just weeks away from harvest, Bloxom says, “I don’t know how many Chinese orders I’ll have for them.”
Similarly dire predictions are cropping up across Washington this week as growers, processors and others in the state’s massive agricultural sector grapple with the latest escalation in the U.S.-China trade war.
The pain will be widespread. Washington is the nation’s third-largest exporter of food and other agricultural goods: In 2017, the last year before various trade disputes broke out, nearly a third of the state’s agriculture output, worth nearly $7 billion, was sold abroad.
Already, tariffs imposed by China, Mexico and other unhappy trading partners have cost Washington state producers many tens of millions of dollars in lost exports of everything from cherries and salmon to wheat, apples and potatoes.
Barring a last-minute breakthrough in trade talks between the United States and China, those losses will increase when China’s latest series of tariff increases goes into effect next month.
But the consequences for Washington’s agricultural sector will go beyond the immediate pain of lost sales.
When tariffs make U.S. farm goods unattractive to foreign buyers, those buyers really do “look for sources elsewhere” in countries, such as New Zealand or members of the European Union, that compete with the United States but aren’t currently involved in a trade war.
And once foreign buyers switch to those new exporters, trade experts say, they’re hard to win back.
One reason is cost: Shifting to new sources typically requires importers to make big investments in building new supply chains and marketing programs — investments they’d probably have to write off if they came back to buying American.
As important, consumers in the importing countries often become accustomed to the new supplies of apples, potatoes and other items, which makes importing companies even more loath to switch back to American suppliers.
That’s partly what happened during a trade dispute between the United States and Mexico, which slapped heavy tariffs on U.S. farm imports last year.
Among the biggest losers were frozen potatoes, which are one of Washington state’s biggest exports. In 2017, state potato farmers sent $36.9 million worth to Mexico alone, according to the Washington State Potato Commission.
But after the Mexican tariffs were imposed, Washington state exports to Mexico fell by 26%, in part as Mexican importers switched to cheaper suppliers in Europe and elsewhere, says Matt Harris, the commission’s director of governmental affairs.
Washington potato farmers now fear a similar loss of market share in China, which spent around $113 million on Washington potatoes in 2016. But as new tariffs make Washington’s potatoes more expensive, Chinese importers can be expected to seek cheaper alternative sources. Even after the dispute is settled, Harris says, Chinese importers may find that Chinese consumers actually prefer non-American potatoes “and we don’t need the United States.”
Given that risk, observers expect Washington’s farmers and processors to fight hard to keep their Chinese customers.
For example, last fall, just before the first round of Chinese tariffs went into effect, many Washington potato processors stepped up their shipments to China to beat the tariffs, a tactic called “front loading.”
This year, industry insiders say, potato processors might try to beat tariffs by diverting their potatoes to processing facilities in Canada, which is not in a trade war with China; the French fries and other processed products could then be exported to China without a tariff.
But such workarounds “can be very challenging logistically and can involve major costs to get set up,” warns economist Mark Gibson, an expert in international trade at Washington State University. “So it might not be worth undertaking unless you expect this to be a long-term trade disruption.”
Indeed, because the duration of the current trade war is unpredictable, many state producers and exporters may simply try to absorb the extra cost of the Chinese tariffs so they can keep selling directly to their Chinese customers.
But given the thin profit margins that farmers are already enduring, it’s not clear how sustainable that strategy will be.
That’s a critical question for Heath Gimmestad, the agronomy manager at Friehe Farms in Moses Lake. The farm grows 4,500 acres of potatoes, all of which are processed at a nearby Simplot facility into frozen French fries and other products, much of it for the export market.
Technically, those potatoes are insulated from the trade war: Simplot has contracted to buy the 2019 crop at a set price. But negotiations for the 2020 potato crop contract are about to start and Gimmestad worries that processors will use the tariffs to pressure farmers to take a lower price, much as processors did during the Great Recession.
“Ultimately,” says Gimmestad, “I think they will come back to the grower community and say, ‘if we are faced with these tariffs, will you guys participate in keeping this [export] business by figuring out how to grow potatoes for less money?’” And with potato farmers’ margins already paper thin — Gimmestad says he makes between $15 and $25 per acre — “there’s not too many more places to give,” he says.
A spokesman for Simplot declined to comment on the upcoming contract negotiations other than to say that the company is “fully committed to the American farmers who serve as our suppliers, partners and customers and we’ll continue to look for ways to help support them.”
In the end, it seems, this will all come down to timing. If President Donald Trump and Chinese President Xi Jinping can resolve the trade disputes in the next few months, the damage to the state’s growers, shippers, and other agricultural players may be short-lived.
But there are more pessimistic scenarios.
Robert Hamilton, the state Department of Commerce’s senior trade policy adviser to the governor, notes that there’s “bipartisan support in Congress to get tougher with China” — a stance that could portend a protracted dispute. “With respect to China, there’s going to be strained relations for a while,” he predicts.
For Washington producers not yet exporting to China, such concerns may discourage them from trying. “I get the sense that small and midsize companies are more wary of entering the Chinese market than they used to be,” Hamilton says.
But for the thousands of producers and others that are already selling, or trying to sell, to China, the impasse raises difficult questions. Agriculture is a long-term enterprise, says Bloxom. Growers and processors make multiyear investments in everything from equipment to storage facilities to trees — all of which makes sudden change, whether to a new crop or a new customer, next to impossible. “It’s like turning a tanker,” says Bloxom.