Investing.com -- The latest wave of U.S. tariffs has raised concerns about a renewed trade war and potential ripple effects across global supply chains, after the U.S. administration this week announced “reciprocal” tariffs targeting imports from key trading partners.
Already, China has responded with tariffs of its own, imposing a 10% duty on U.S. exports such as sorghum and soybeans, and a 15% tariff on wheat, corn, cotton, and other products. The escalation has triggered worries among market participants that agricultural products could once again bear the brunt of the fallout if these actions go unmitigated.
Back in the 2018 trade war, China retaliated with a 25% tariff on U.S. soybeans, leading to weaker U.S. farmer sentiment and a decline in agricultural machinery sales. Soybean cash receipts fell by about $4 to $5 billion during the 2018-2019 period, showing a decline of around 12%.
According to UBS, while the current tariffs on soybeans are lower than the 25% imposed during the 2018 trade war, the risks to U.S. agriculture remain significant, particularly if countermeasures are not implemented.
Although the Trump administration is reportedly considering support payments to farmers, UBS noted that many farmers prefer open trade to government subsidies. If no support is provided this time, the economic fallout could be more severe even with the lower tariff rate.
UBS also highlighted that Mexico, which accounts for 40% of U.S. corn exports, could pose a risk if it chooses to retaliate or shift to alternative suppliers. This could put around 7% of U.S. corn cash receipts at risk.
However, the bank views the risk to corn as more limited than soybeans, since corn is less reliant on exports and has a more flexible global demand base.
UBS added that the ongoing uncertainty is a headwind for farm equipment manufacturers already struggling with excess inventory and weaker demand. As a result, the bank expects earnings for agricultural machinery companies to trend toward the lower end of guidance ranges.