The President’s trade war with China could threaten legal cannabis, a booming industry with broad bipartisan support. Here we explore how new tariffs may impact both marijuana and hemp.
President Donald Trump’s escalating trade war with China could be having adverse effects on the United States’ legal marijuana and hemp industries.
For more than a year, Trump has tangled with China over alleged unfair trade practices. In August 2018, the President imposed a 25 percent tariff on products imported from China, and has since threatened to “slap duties on another $325 billion of goods.”
China, which has long prospered from international trade with the United States, has responded by imposing or proposing tariffs on $110 billion of American goods and is threatening qualitative measures that would most directly impact U.S. businesses operating in China.
Picking up steam, this trade war between the two countries is now posed to put a dent on the legal U.S. cannabis industry. With marijuana now legal in more than three-fifths of U.S. states, the American cannabis market has been growing at a quick pace and creating good-paying jobs in an era when most post-recession jobs have been at the lower end of the scale.
Many Americans have long bemoaned the large trade deficit between the U.S. and China, as well as the widespread loss of manufacturing jobs to the East Asian country. But these voices were insufficiently strong to break the widespread consensus that free trade is good for America and its consumers.
Trump has been criticized by some for the manner in which he has imposed tariffs and some have questioned their effectiveness at encouraging U.S. companies to bring their manufacturing operations back home. While 41 percent of American companies are considering moving their factors from China, fewer than 6 percent intend to head back to the U.S.
Public opinion on tariffs and free trade is mixed. In a recent poll, nearly half said they believed the tariffs would be bad for the country, while 40 percent believed they would be good.
The effects of the trade war between the U.S. and China have already been felt in the U.S. cannabis market. Here we take a look at how the tariffs battle could be impacting both marijuana and hemp industries.
The Trade War’s Effect on the Marijuana Industry
The U.S.-China trade tensions are adversely affecting several sectors of the legal U.S. marijuana industry. While much of the cannabis and cannabis concentrates on the market today are grown and sold domestically, most of the devices used to consume them come from China.
In particular, a large majority of vaporizers and related components, such as vape pen batteries and cartridges, come from Chinese suppliers. Many makers of tins and jars designed as packaging for marijuana flower also generally come from the East Asian country.
Kevin Hogan, president and co-founder of Oregrown, a vertically integrated cannabis company in Oregon, told Marijuana Business Daily recently that vaping marijuana has become by far the most popular way to ingest it.
The international trade war is also expected to negatively affect domestic cannabis cultivators that must purchase lighting equipment from China-based manufacturers for indoor growing facilities. Companies that rely on Chinese-made steel and aluminum for extracting equipment could also be directly affected.
“If I was in the vape industry or the lighting industry or greenhouse industry, I would be pretty concerned that costs were going to go up as the result of a trade war,” Hogan told Marijuana Business Daily.
While larger companies can better absorb these costs, the tariffs are particularly onerous to smaller ones. American companies looking to avoid the impact of high tariffs must find new suppliers outside of China. Often times, however, companies have no choice but to pass along price hikes to consumers.
Aster Farms, an Oakland, CA-based cannabis company that packages its products in custom tins that it manufacturers in China, has been especially affected by the tariffs. Their orders have been hit with 25 percent taxes.
Their CEO Julia Jacobsen is quite unhappy at this turn of events.
“While many people think the cannabis industry is striking it rich, with the current regulations and supply chain we are all operating on extremely thin and often negative margins, so any increase in our costs of goods hurts,” Jacobsen told Forbes.
Companies are likely to initially absorb the cost without dramatically raising the cost of their goods by cutting costs of manufacturing. Some companies have been able to avoid the negative effect of tariffs by ordering the components they need from manufacturers rather than produce the parts themselves.
The dispute over tariffs could also hurt publicly traded companies operating in the marijuana space, since the stock market has been especially impacted by tariff announcements. Additional tariff costs could weigh down margins for the relatively young marijuana industry, which is still finding its feet. Now many are worried this will lead to a recession.
Incidentally, marijuana use for any purpose is illegal in China.
Recreational marijuana use is currently legal in 11 U.S. states and Washington, D.C. and medical marijuana is now legal in 33 states. The industry is expected to grow to a combined $25 billion by 2025.
Legal marijuana currently enjoys support from an overwhelming majority of Americans.
Trump’s position on marijuana reform has been murky. He has come out in favor of medical marijuana and legalized hemp by signing the 2018 Farm Bill, but does not seem in favor of pushing for full legalization. Former Governor of Massachusetts Bill Weld, who is running a long-shot primary against Trump, is in favor of full legalization.
Among those running for the Democratic presidential nomination, Joe Biden is the only serious candidate who does not support full legalization. After a long career as a proponent of the War on Drugs, he has come out in favor of decriminalization. U.S. Senators Bernie Sanders (I-VT), Elizabeth Warren (D-MA), and Cory Booker (D-NJ) have been strong advocates of legalization measures while in the Senate and are running on similar platforms.
The Trade War’s Effect on the Hemp Industry
The U.S. hemp industry may also be impacted by the escalating trade war. Several products and components related to the hemp industry are now subject to the 25 percent tariff, including hemp seeds and true hemp products.
Because the domestic cultivation of hemp only recently became legal, many American companies that sell hemp-derived products, including cannabidiol (CBD) supplements, still rely on imported hemp to manufacture the products they then sell to U.S. consumers. About $3.3 million worth of hemp was imported into the U.S. from China in 2017.
For many American farmers, hemp is helping them mitigate the threat of a prolonged trade war. China, the fourth-largest purchaser of American agricultural products, has threatened to stop importing all agricultural commodities from the U.S., but the amount of hemp the country buys is minimal. Hemp acreage in the U.S. has more than quadrupled in the past year, and farmers see the growing demand for hemp as an opportunity.
But farmers who purchase Chinese-made farming and processing equipment could feel the effect of tariffs sooner than later. Fortunately, certain manufacturing equipment can be purchased from countries in the European Union for a comparable price, thus softening the blow.
“I look at the European Union as having some of the best industrial hemp technologies that exist,” Bob Hoban, president of the Hoban Law Group, told Hemp Industry Daily.
Hoban, who has made a name for himself within the industry specializing in cannabis law, does not feel that the tariffs will ultimately do great harm to hemp farmers.
U.S. hemp cultivation was legalized in the Farm Bill last year. More than 40 states have approved hemp production as a commercial commodity or in a pilot program.
The hemp industry is expected to grow to 1.9 billion a year by $2025. There are 25,000 reported uses for the plant, which has a long history in America.
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