Understanding Hydrocolloids and Their Importance

The definition of a hydrocolloid is simply an ingredient that forms a gel when mixed with water.  This category includes ingredients like pectin, xanthan gum, guar gum, agar, and carrageenan.  Hydrocolloids are either naturally sourced from plants, seaweeds, citrus peel or produced by fermentation.  These tools are not only indispensable in creating the desired texture in products ranging from ice cream to toothpaste, they also stabilize products and are the reason many of our favorite foods are even possible!  The U.S. heavily relies on imports for most hydrocolloids, as domestic production is limited.

Tariffs and Their Immediate Impact

Tariffs are essentially a tax on imported goods, increasing their cost for U.S. businesses. When tariffs are imposed on hydrocolloids or their raw materials, buyers face higher ingredient costs. This can lead to:

• Increased Prices: The added cost of tariffs is often passed down the supply chain, resulting in higher prices for end consumers. Tariffs have a cascading effect through the supply chain and the end consumer always ends up footing the bill.  
• Supply Chain Disruptions: Tariffs may discourage imports, leading to shortages of critical ingredients and forcing brands and manufacturers to try and seek alternatives.  Hydrocolloids are so specialized that there often aren’t good alternatives, and many products are left to use sub-standard ingredients or pay a premium.        

Harvesting of Red Seaweed for Carrageenan Production.

| Source: iStock/ Nazimpressions

The Cascading Effects of Tariffs Through the Supply Chain

Tariffs have a ripple effect down the entire supply chain:

1. Imposition of the Tariff: The government of a country places a tariff on certain imported goods, increasing their cost. For example, if a country imposes a 10% tariff on carrageenan, the price of carrageenan for importers goes up.
2. Impact on Importers: Companies that import these goods now face higher costs. To maintain their profit margins, they pass some or all of these costs to the next link in the supply chain, such as brands, manufacturers or distributors.
3. Manufacturers or Distributors: Businesses using the imported goods as raw materials—like carrageenan for chocolate milk—now face higher production costs. This affects their pricing strategy.
4. Retailers: Retailers purchasing finished products from manufacturers or distributors also experience price increases. To cover these costs and sustain their margins, they typically raise the prices for consumers.
5. Consumers: By the time the goods reach consumers, the accumulated tariff-related cost increases have led to higher retail prices. The consumer ultimately bears the added cost of the tariffs.

Broader Economic Implications

The effects of tariffs extend beyond immediate price hikes:

• Inflationary Pressures: Higher costs for hydrocolloids can contribute to overall inflation, particularly in the food, beverage and pharmaceutical sectors.  Once inflation causes prices to go up, they typically stay there and continue to rise over time.
• Competitive Disadvantage: U.S. manufacturers relying on hydrocolloids may struggle to compete with international counterparts who have access to untaxed or lower-cost materials.  Most hydrocolloids are not produced in the U.S. 
• Innovation Stagnation: Increased costs and supply chain uncertainties can hinder research and development efforts, slowing down or squashing innovation.
• Monopolization: High tariffs can price smaller brands, entrepreneurs, and innovators completely out of a market space.  This can provide an environment that allows large National and Multinational brands to form monopolies. 

Conclusion

While tariffs aim to protect domestic industries, their impact on specialized markets like hydrocolloids can be profound.  Most hydrocolloids are not produced in the U.S. due to raw material availability, environmental factors, established supply chains, and the cost of production. Many hydrocolloids are derived from specific seaweeds and tropical plants that are not found in North America.  The U.S. does not have the right environment to grow these crops.  Because many of these crops grow easily in places like India, the Philippines, and Indonesian the supply chains are already well established, and it would be extremely difficult and expensive for the U.S. to attempt to enter these trade markets.  

The U.S. has dealt with trade wars and retaliatory tariffs within our agriculture and food markets before.  These have historically negatively impacted U.S. farmers, food manufacturers, and the entire food and beverage supply chain.

Pectin produced in Europe, Asia, and South America is used to make delicious confections in the U.S.

| Source: iStock/ Qwart

Here are some notable case studies of tariffs affecting the agricultural sector:

1. U.S.-China Trade War and Soybeans: During the U.S.-China trade war, China imposed retaliatory tariffs on U.S. soybeans, significantly reducing exports to one of the largest markets for American farmers. This led to a surplus of soybeans in the U.S., causing prices to plummet and farmers to face substantial income losses.
2. NAFTA and Retaliatory Tariffs: In response to U.S. tariffs on steel and aluminum, Canada and Mexico imposed retaliatory tariffs on U.S. agricultural products, including pork and dairy. This disrupted trade flows and created challenges for American farmers who relied on these export markets.
3. Historical Context of Tariffs on Corn and Wheat: Tariffs on corn and wheat have historically affected trade with countries like Mexico. High tariffs reduced the competitiveness of U.S. exports, leading to shifts in trade dynamics and economic pressures on farmers.

Trade in Agriculture and the Food and Beverage sectors rely on a global bargaining process where each country or region plays to their strengths and bargains for what they are lacking.   Tariffs are best used when the U.S. is strong production of something like soy but weak in the production of something like carrageenan.  A good use of a tariff is to keep U.S. soy competitive in the U.S., however it would be poor strategy to levy tariffs on carrageenan producing countries, like Philippines or Indonesia, when the U.S. cannot satisfy the market demand for its own businesses.

References

Impact of Tariffs on Agricultural Exports

The Economic Impacts of Retaliatory Tariffs on U.S. Agriculture | Economic Research Service

What might be the impact on agriculture of 25 percent tariffs targeted at Canadian and Mexican Imports?   | Ohio Ag Manager