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Trade: Follow the soybean

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

The EU and the US have agreed a trade truce. US President Trump tweeted that the EU had agreed to buy US soybeans "immediately." But the soybean saga shows why tariffs are an out-of-date policy.

Unless EU officials were filling their suitcases with soybeans to take home, the EU cannot promise to buy more US soybeans. Private food producers and farmers buy soybeans. Political leaders cannot make positive promises on trade in today's private free market.

Soybeans are a global market. China's government put a 25% tax on Chinese consumers of US soybeans. China cannot grow enough soybeans itself. It lacks the water to grow soybeans. If China does not buy US soybeans, it must buy more soybeans from Brazil (the world's largest grower).

If China is buying more from Brazil, Brazil will sell less to Europe. Fortunately, the US now has spare soybeans it can sell to Europe. So Europe will buy more US soybeans. It would have done so even if Jean-Claude Juncker had not gone to Washington.

Private companies make decisions on trade. Modern global markets shuffle supply chains to evade trade taxes. If you want to know why tariffs are an out-of-date idea, follow the soybean.