Farm406

farm finance By Anton Bekkerman Rural Communities Are Likely to Feel Greater Impacts of New Tariffs, and It's Not Because China Retaliated The most recent 10% tariffs placed on $200 billion worth of Chinese goods include items frequently purchased by U.S. consumers. • The tariffs will increase U.S. companies' costs of acquiring and marketing these products. However, some portion of these costs will be passed on to consumers in the form of higher prices. • The extent to which prices rise depends on numerous factors, including the number of consumers in a market and the number of retail outlets. • In rural communities—especially in the northern Great Plains—where population densities are low and the number of stores are limited, firms are much more likely to pass through additional tariff costs by charging higher prices. • These impacts may be exacerbated by the fact that median disposable incomes also tend to be lower in rural communities than in more urban locations. In September the Trump administration announced that it will impose an additional $200 billion worth of tariffs on imported Chinese goods. While this announcement represents a further escalation of the on-going trade dispute with the Asian country, the policy is unique to previous trade restrictions in that it imposes a 10% tariff on many final consumer goods. This tariff is set to rise to 25% at the beginning of 2019. The products included on the tariff list range from various seafood items; prepared vegetables and fruits; nuts; pastas; soaps, shampoos, make up, and hairspray; rain jackets; machinery belts; particleboard; yarns and fabrics; saw blades, hammers, and wrenches; manure spreaders; air conditioners; engines, gear boxes, and radiators; spark plugs; televisions; to mattresses and lamps. While the tariffs will directly impact only the companies that import and sell these items (by increasing their costs), it is almost certain that the actual incidence of the cost increase will be partially passed on to consumers in the farm406 12 form of higher retail prices. What is important to note, however, is that the amount of the additional costs that will be passed on to consumers depends a lot on where those retailers operate. And rural communities are likely to experience a higher pass-through of these costs. Here are at least two reasons. First, the ability of retailers to pass through costs and raise prices depends on the population size of the community within which the retailer operates. In locations with larger populations, tastes and preferences tend to be more diverse and the choice of products available to consumers is also greater. Therefore, as the figure to the left shows, retailers pass through a smaller proportion of their cost increases to consumers in these more densely populated locations. In smaller communities, a larger portion of 10% tariff is likely to be borne by consumers. As the figure shows, even though the size of the tariff is the same in both types of communities—higher and lower population—the changes in the actual prices paid by consumers and those received by producers is different. In the higher-population communities, retailers have a more limited ability to pass through the tariff costs to consumers, resulting in a smaller change in consumer prices. However, in lower-population communities, the pass-through is significantly higher, with the consumers taking on the greater burden of the trade restriction. A second, somewhat related factor that's likely to create more pronounced impacts on smaller, rural communities, is the fact that in these communities, there may be fewer retailers who compete against one another. When there are more companies that are competing with each for customers,

• Cover