With US tariffs still firmly on the agenda, and with beef and lamb possible targets, the question now is what would this do to our export volumes and price? It’s hard to know, but we’ll dive into a bit of economic theory and come up with some possible scenarios.
Writing this took a bit of refreshing on some micro and macroeconomics theory, along with some international trade economics. It’s been quite some time since we’ve had to delve this deep into the box of university textbooks.
Tariffs are essentially a protectionist measure designed to increase domestic production through artificially increasing prices and decreasing imports. If you search tariff diagrams, you’ll find the tariffs placing a wedge between supply and demand, resulting in a lower total quantity at a higher price.
The wedge is made up of government revenue, but there is resulting ‘welfare loss’, which is basically waste in the trade. The price of goods increases for domestic consumers and producers. The quantity of imports is reduced, which in theory, will decrease the price of imported goods. This, in turn, will decrease the price of goods in the exporting country, although that will be diluted by other markets.
How much the increase in the price of goods at the consumer level decreases demand, and therefore the quantity of imports, depends on a thing called the ‘elasticity’ of demand. The elasticity refers to how much less of a good the consumer will buy given the price increase.
There are some studies in the US that estimate the elasticity of demand for ground beef. This article (see here) uses it in relation to how plant-based meat might impact beef prices.
In the paper, beef demand is estimated to be inelastic, with a 1% increase in price corresponding to a 0.26% decrease in the quantity demanded. If a 25% tariff on imported beef is fully passed on to the consumer, this elasticity would suggest a 6.5% decrease in the quantity of beef demanded.
What does it mean?
Figure 1 shows Australian beef exports to the US, which are running at record levels. Figure 2 shows the price of 90CL beef exported to the US, also at record levels. US tariffs are likely to bolster US cattle prices, which are already close to record levels. With inelastic demand for ground beef in the US, and alternative markets available for Australian exports, it’s hard to see tariffs on beef significantly impacting saleyard cattle prices here.
Key Points
- There is speculation that the US will impose tariffs on agricultural imports
- The impact of tariffs will be to increase prices at the consumer level in the US.
- Negative impacts on Australian beef exports and prices look to be limited.
Click on graph to expand
Click on graph to expand
Data sources: ABS, DAFF, Steiner, MLA, Mecardo
