How a Global Collapse Would Affect American Farmers
Are we heading for a global financial collapse? What can we expect from the trade wars? Should we build a wall? Geopolitical strategist Peter Zeihan answers these questions and more.
SF: What is the top global issue?
PZ: The trade war. People are underestimating the impact the trade war is going to have on the global system. This is the year that historians will look back upon and point to the beginning of the end of 70 years of international stability.
We are currently on a break from the trade war. The tariffs are locked and loaded and ready to go. With a tweet from the administration we will have 25% tariffs on about half of what the Chinese export to the U.S. The Chinese do not have the capacity to respond in kind, because there is not enough of a trade portfolio there for them to tariff.
SF: What is the end goal of the trade war?
PZ: That is the big question I have for the Trump administration. Is it for the Chinese to be subordinate to American interests for the next half century? Or is it to destroy them as a country? From the way the Trump administration seems to work, it looks like the second option.
SF: How will American farmers come out?
PZ: It will shake out very well for America, and for American farmers far better than most sectors, but there will be ups and down. The process of the old system breaking down will cause instability. It won’t be fun.
SF: What is the worst-case scenario for the U.S.?
PZ: In the long term, the worst thing we can do is try to preserve the global order. You can maintain a system with global reach when you are one-half of global GDP as the U.S. was after WWII, but today the U.S. is only 20% of global GDP.
The whole premise of the old structure was that the U.S. would stabilize the system and support your economy so long as you sided with us against the Soviets. The Soviets are gone, so the strategic rationale for that system is gone. We can’t support that kind of system any longer. So this was all going to break down. The only way this ends badly for the United States is if we try to preserve the old system.
SF: What is the worst-case scenario for the Chinese?
PZ: That they are not a functional country. The strategic environment that the United States created to fight the Cold War is what allowed China to unify and develop. Without that environment the whole thing falls apart. [President] Xi Jinping and his administration are terrified that the whole system is going to collapse, and they are absolutely right. It is going to, and it won’t go down quietly.
SF: Let’s switch to Mexico. How important is Mexico?
PZ: If there is one country on this earth that the United States should actively seek to maintain and expand good relationships with, it is Mexico. The reasons are economic, security, trade, drugs, and population. About one sixth of the American population has roots in Mexico. It would be ridiculous for us to ignore that.
SF: Should we build a wall?
PZ: If your goal is to keep legal labor bottled up in Mexico and to keep Mexican labor cheaper, then the wall is a good idea. A wall would encourage a poorer Mexico. If you have a big wage differential, you get more illegal migration. The wall forces all of it to be illegal migration. They will just go through tunnels. It is a 2,000-mile-long border. There is no way to patrol it effectively. Securing a border when you have a 5-to-1 income split is just not possible; all you do is criminalize it.
So, if your goal is a poorer Mexico, an increased drug trade, and more illegal migration, the wall is a great idea.
SF: U.S. farmers have a shortage of labor. Is Mexico the answer?
PZ: Mexican birth rates have been shrinking for two decades and we are now past the point of no return. Two years ago was the peak of Mexican labor availability in the United States. It’s only going to shrink from now on. And the peak for Central American labor in the U.S. is two years from now, and then it will shrink.
The only alternative at this point, if your goal is to bring in seasonable labor, is to work with the Department of Homeland Security and the State Department to bring in refugees. That is the only market available. I don’t see that as being viable in today’s political climate.
SF: What is the answer?
PZ: You have to figure out how to get by with less labor. There are a few models to follow. The Dutch are probably the best in the world at applying technology to agriculture. They already have fully automated tractors. Some countries have already broken ground for you on that topic. You don’t have to invent the wheel from scratch.
SF: What’s happening in Brazil?
PZ: Brazil is a very capital-intensive system. It’s impossible for a family farm to get going in Brazil. The capital costs for infrastructure, land development, and inputs are just too high. Brazil is the most economically unequal society in the world. The richest people there are all in agriculture, so farms in Brazil tend to be 10 to 15 times the size of what they are in the United States. The political mood in Brazil is pretty sour in part because of that inequality issue. Crime is incredibly high. The population is getting pissed off and starting to get rebellious.
Brazil just elected a law-and-order president, Jair Bolsonaro, who is perceived to be uncompromising on crime. He is also a big supporter of big agriculture. In the short term, this means more slash and burn, land development, and plowing under the rain forest.
As the global order breaks down, Brazil’s agricultural challenges will increase. In the next year or two, depending on how fast things globally go to pot, Brazil looks really good. After that, you are looking at a catastrophic collapse in Brazilian output because the inputs such as fertilizer are going to be harder to get. Brazil agriculture doesn’t work without massive inputs.
Brazil today is as good as it’s going to be. It has the perfect environment. Outward finance is strong, the ability to tap the international system for fertilizers and fuel is strong, and the government is very pro-ag. All of that turns inside out in the next three years.
SF: Where do you see world meat demand going?
PZ: I see global demand for animal protein dropping, but the markets that the U.S. has the most exposure to will be great – Southeast Asia, Mexico, and Central America. These are the places American farmers should look at.
Mexico, especially when it comes to beef, is far and away No. 1 for us. In Mexico, beef is considered a staple like it is here. When they get a little bit of money and can afford something better, they switch from Mexican beef to higher quality American beef. Any economic growth in Mexico immediately translates to support for the beef supply chain in the United States. I’ve always been a fan of Mexico as a destination for value-added agricultural exports.
In China, pork is a luxury good. If you get a period of economic duress you cut that out of your diet.
SF: Could livestock diseases affect the global meat supply?
PZ: When it comes to keeping diseases out of herds, no country in the world is as good as the United States. If a swine disease is going to hit everyone, our pork herd is going to be declared safest first.
SF: Is the U.S. headed for an economic recession?
PZ: A hard trade break could cause a recession at any time, but leaving that aside, I don’t see any reason why the United States would be in recession in the next 14 months. The fundamentals look pretty good.
There is likely to be a political crisis in Europe, Britain, Canada, China, and Turkey. So a global recession in which the U.S. does not participate might start this year. That would have implications for agriculture.
Most of the U.S. economy is domestic, so it would take a really bad trade crisis to hurt us. We are in the process of ratifying and implementing trade deals with Korea, Mexico, and Canada, and we will probably add Japan and Britain to that this year. That is half of our trade portfolio. If those are implemented by early 2020, you are looking at the U.S. being pretty resistant to a global breakdown.
If you had asked me two years ago what happens when the global system breaks down, I would say the United States is going to have a recession for a couple of years. We are now looking at that transition period being shorter and less painful. The deals we put together replaced what we had in the old order.
SF: What’s happening with global population demographics?
PZ: Even in the developing world, the birthrate drop-off is faster than expected. Fewer people age 15 to 40 are having kids. The money that used to go toward diapers, feeding kids, and housing kids is being put toward better cars, better living conditions, and better food. We are seeing a value-added expansion in middle classes around the developing world.
That’s great for growth now, but not in the long term. Once these consumers without kids age toward retirement, spending falls off a cliff and there is no replacement generation. That is what Europe and Korea are going through right now.
The boomers generate all the capital that drives global finance. The majority of them flip into mass retirement in 2022. We are still in this capital-rich environment, but it’s going to flip on its head in just three years.
SF: Anything else farmers should watch?
PZ: We are looking at simultaneous financial crises in the Euro zone, in Britain, Canada, Turkey, Brazil, and India. The amount of money that’s going to be flowing into American finance just to find a safe haven is mind-boggling. We are talking multiple trillions of dollars. A lot of it will go into T-bills, which will keep overall borrowing costs reasonable. If they can, they are going to try to get at farmland.