U.S./China Trade War: Short-term Pain, Long-term Pain

Posted on 09/03/2019 6:39 AM

No longer just a trade war, but an economic and geopolitical contest

A series of mostly negative dominoes are starting to unfold relative to the lengthy and ongoing U.S. trade war with China that has proven easy to start but difficult to end or contain as both countries seek to win a conflict that will have major repercussions for the U.S. ag sector ahead and perhaps the global power structure from defense to economic issues.


 

President Donald Trump
Most observers agree President Trump and the U.S. needed to take China on regarding their theft of intellectual property and its subsidies across many trade markets, especially the ag sector. But most also thought the president sought the wrong approach by going solo and not working with allied countries. Trump dismisses those negatives by noting Republican and Democratic administrations in the past failed to get China on the right trading path, and our allies were even more sheepish in their inability or simply not wanting to confront China. A trade war has now turned into an economic war and that has elevated implications ahead, including a more aggressive China in world foreign and economic affairs.

 

China President Xi Jinping
In the early days of the U.S./China trade conflict, both Xi and Trump were in the “best friends” category. But the relationship has turned far more silent if not cold. Xi has more leeway to maneuver than Trump, but he also has his hawks who want to see a more aggressive tone confronting what they believe to be self-defeating U.S. tariffs. Others in China want no concessions ahead of the Oct. 1 celebrations of the 70th anniversary of the founding of the PRC. In recent weeks, Xi and other Chinese officials have looked at Trump's erratic moves and have concluded they not only can't trust his word, but the president, in China's belief, lies and switches positions at a moment's notice. Many in China want to await the outcome of U.S. 2020 elections, a distinct possibility very frustrating to Trump.

 

Xi’s big problem: Hong Kong protests

China watchers say Hong Kong events (protests, reaction, etc.) potentially are far more consequential than even the trade dispute. It is a direct challenge to Xi and his leadership and isn’t going away. How he handles this... and the global response... may have much greater impacts for China and Xi.

 

Trump’s big problem: himself
Trump watchers say he loves to ratchet up pressure and loves turmoil, then cuts a deal. It is all about leverage. Many of this crowd think he will cut a deal with China. But when and the details? Others say no way, that Xi has determined to wait out 2020 U.S. elections. Still others think that both Trump and Xi need an agreement, before U.S. elections.

 

Three steps back and a half-step ahead
From the U.S. perspective, the two countries in May were at least 90% to the finish line in reaching agreement. But then China backtracked from the U.S. perspective. China watchers say once the U.S.-pushed agreement was translated, there was no way the top officials in China, especially Xi, could follow through on the commitments. Accelerating and new tariffs then surfaced in the tit-for-tat war, with both countries even arguing about whether conversations were held.

 

Market Facilitation Programs do not make U.S. farmers whole
Even President Trump has said, errantly, what usually is written by big city paper writers... that the $28 billion in MFP-announced trade aid over two years ($12 billion in 2018 and $16 billion in 2019) will make U.S. farmers whole. “I’m making the farmers more than whole,” Trump said. “The farmers are doing better than if China, frankly, were buying.” That is not only fake news but is an insult to the ag sector. The recent and dramatic USDA change in farm income forecasts leave little solace among farmers and ranchers, many having cash-flow problems now and definitely looking at the 2020 season. New farm income numbers do suggest improvement with a higher level of working capital now reported. However, government payments have accounted for nearly 19% of net farm income for the last four years (2016-19). There still remains a significant gap between farm assets and net farm income even with the new USDA projections. Meanwhile, farm-state lawmakers may have to confront what looks like a coming refrain about the last two farm bills: an anemic farmer safety net needs fixing. As one farm policy expert said, “There’s a lot of sensitivity to suggesting the MFP payments make farmers whole. These continue to be tough times for many/most in the farm sector, the revised farm income estimates notwithstanding. Farmers understandably have little patience for attempts to identify what is caused by trade disputes vs. what is caused by other factors. It is important to remember, though, that ‘fixing’ the trade dispute will not solve all problems in the sector.”

 

Trump says companies, not trade policies, to blame for business setbacks
In a potential sign of desperation, Trump rejected the notion that his trade policies were having a negative impact on the U.S. economy, instead blaming “badly run and weak companies” for any business setbacks. But more U.S. businesses and farmers say they are suffering amid the prolonged trade war. Trump on Friday said “the U.S. doesn’t have a tariff problem… we have a Fed problem” and again urged the Federal Reserve to cut interest rates.

 

In any war, objectives are important
When he began his trade war, Trump said his goal was to improve conditions for American companies operating in China, reduce the trade deficit between the two nations and create a more level playing field for American companies competing with Chinese firms. He promised to secure a historic trade deal that would result in China buying billions of dollars’ worth of American farm products and stop Beijing from “stealing” technology from U.S. companies. When it was clear China would not give in to America’s demands, Trump turned more punitive, stressing the two countries as economic enemies and geopolitical rivals, advocating a rapid “decoupling” between nations that have become economically dependent on each other over the past two decades. This has elevated concerns about a potential and perhaps major downturn in the world and U.S. economies.

 

This is not just a soybean war
On Sunday, China began charging a 33% tariff on U.S. soybeans, compared with just 3% for those coming from Brazil or Argentina. But other U.S. commodities have felt the China pullback pain, including the U.S. fruit and meat industries, among others. On Dec. 15, China will start taxing American autos and auto parts at a 42.6% rate, compared with 12.6% for those from Germany or Japan.

Trade war impacts on soybeans and other crops:

  • Drastic decline in U.S. soybean exports to China. U.S. soybean exports to China were 1.324 billion bushels in 2016-17, 1.036 bil. bu. in 2017-18 and 485 million in 2018-19 after a full season on Chinese tariffs on U.S. soybeans, and to African swine fever (AFS) that reduced China's appetite for feed.
  • In 2016-17, exports to China were 61% of total U.S. exports. This proportion has declined to 27.8% in 2018-19.
  • This contributed to a decline in total U.S. soybean exports from 2.166 billion bushels in 2016-17 to 1.74 billion in 2018-19, down 18.1%.
  • The May 2018 USDA projection for total China soybean imports in 2018-19 was 103 million tons; the current estimate is 83 million tons.
  • Exports declined from 50% of U.S. production in 2016-17 to 38% in 2018-19.
  • U.S. ending stocks of soybeans have swollen to a record high 1,070 million bushels in 2018-19 from 302 million bushels in 2016-17 and now account for nearly 25% of annual usage.
  • Supply pressure on soybean prices depressed soybean futures prices relative to corn futures. In July, the SX/CZ ratio was the second lowest since at least 1981.
  • The negative cash price impact has been even greater in North Dakota, South Dakota and Nebraska. This region had the greatest dependence on exports to China out of the PNW.
  • Relatively low soybean prices compared with corn and other commodities shifted U.S. acreage out of soybeans with soybean acreage declining to 76.7 million acres, down a massive 12.5 million acres or 14% from the previous year. Soybean acreage is the lowest since 2011. The decline in soybean acreage was also compounded by historically unfavorable planting weather this spring.
  • Chinese soybean imports actually declined, partly due to the reduced access to U.S. soybeans and higher prices for Brazilian soybeans and contraction in hog production due to African swine fever (ASF).
  • ASF is really important. If the trade war were resolved tomorrow, we’d still have reduced demand for soybeans for some time to come, as ASF has reduced consumption of meal by pigs in China by far more than it has increased consumption by other livestock and poultry in China or other countries. If there were to be a slowdown in the global economy (which might be attributed, in part, to the trade war), that would have further negative impacts on global demand for agricultural products.
  • China soybean imports were 94 million tonnes in 2017-18 compared with 83 million tonnes in 2018-19 and minimal growth of 2 million tonnes to 85 million estimated for 2019-20. In prior years, Chinese imports were averaging increases of 5 million tonnes annually and accounting for over 60% of world soybean exports and most of the growth in world soybean exports.
  • In 2016-17, the U.S. accounted for a 39% share of Chinese soybean imports. In 2018-19 the U.S. share is 16.6% and is likely to continue to decline going forward as China increasingly switches to other origins. The total shift by Chinese private crushers to non-U.S. origins, especially Brazil, has resulted in dramatically higher prices for Brazilian soybeans compared with the U.S. (Brazilian farmers are receiving $8.50 a bu. for soybeans vs $7.50 for a North Dakota farmer). Prior to May 2018, Brazilian soybeans traded at a 20-30 cent/bu. premium to U.S. soybeans, FOB Gulf. During June-Oct of 2018, China drove Brazilian soybeans to a 250 premium over U.S. soybeans. This encouraged soybean expansion in Brazil while discouraging soybean acreage in the U.S. As we move towards the last half of the Brazilian marketing season and their planting season, the Brazilian premium to U.S. Gulf is again surging upwards to above 100 cents/bu encouraging Brazilian soybean farmers to expand soybean area (and take out more rainforest).

China has end arounds
The Chinese government’s tight control over the economy means Beijing has more options, including flooding the financial system with money or ramping up government spending. On farm imports, countries like Brazil, Argentina, Australia, Canada and others were more than happy to fill the prior U.S. market share for several commodities.

 

Mr. Tariff Man is delivering on higher U.S. tariffs
Preaching for decades for other countries to reduce tariffs and encourage free or fair trade, the U.S. now has a higher average tariff rate with the rest of the world than many developing countries, including China, Russia and Turkey.

 

It's now become a “world war” impacting major industries
The global economy is beginning to reconfigure, from logistics to autos to farm products to currencies and is one of the likely events that will be blamed if the U.S. and/or world economy dips into a recession. American imports from China fell by 12% the first half of the year, while exports to China dropped 19%. Chinese trade with other countries has increased, offsetting some of the fall from the U.S. Some major multinational companies are trying to quickly reduce their reliance on China. Vietnam is one country very pleased with Trump's trade war, having won lots of new business and investments.

 

Long-term impacts

Agriculture trade: China is making investments and purchases in other countries (South America, Africa, Australia, Canada, etc.) to garner its needed food and feed products. The exporting countries will do what happened after the Carter Grain Embargo in 1980... they will increase plantings and improve their infrastructure. Never again will China rely on the U.S. for major purchases, especially soybeans and high-tech products. While action against Chinese trade practices and intellectual property theft were necessary, many analysts say sole reliance on tariffs has caused much greater damage to U.S. farmers and businesses than is currently understood. As noted, the action has opened the door to rapid expansion of grain acreage in the grass lands of Brazil plus the Amazon region and that will hurt U.S. farmers for years to come. It has seriously limited U.S. farmers' investment in new equipment and technology while stimulating South American and Eastern Europe producers to expand productive resources.


U.S. ag sector: The jolt felt by China's rapid move away from U.S. farm products hit when the U.S. ag sector was already in a recession, and now that could turn uglier if carryovers of corn and soybeans get even more burdensome, especially if there's a return to trend-line yields in 2020. People have been asking what the market would look like if the U.S. did not have poor planting and yield problems this year. A recent FAPRI outlook gave us an early glimpse at the 2020-21 season: under $8 soybeans and a $3.40 corn average, with harvest prices coming in even lower. And FAPRI has more robust export demand in their forecasts. Some other analysts have a higher corn carryover and an even lower corn price.


U.S. election impacts: If the trade war continues, or if Trump caves and gives in to a tepid agreement, rural sector voters may simply not vote their traditional Republican way, or they will take a long look whether any Democratic presidential candidate has a rural and economic platform beyond retrograding to grain reserves and acreage idling programs, and for the economy a plan far different from the deficit-busting plans of so many Democratic candidates. Republicans in Congress fret that what they thought to be a relatively safe Senate control after 2020 elections is now no longer the case. Most believe the Democrats will continue to control the House after 2020 elections. As for the race for the White House, Trump cannot lose one farm state he won in 2016, and he must hold most of the industrial states he won in 2016 to have a chance at re-election.


Currencies: Although many scoff at the idea, the lingering trade war will hasten the day the U.S. dollar will have major competitors, even the yuan in Latin American countries.


For China: Some observers believe the U.S. and in some cases some of its allies “have handed Argentina and many Latin American countries in a silver platter to China.” Brazil is trying to grow by deforesting further the Amazon and expanding its agricultural frontier in order to accommodate China. As for Argentina and perhaps other countries: a further distancing from the U.S. and Europe, and closer ties with China. One analyst has this scenario: “Argentina and others will need Chinese loans and investments as private capital. Some predict a return to the National Grain Board or some other controlling body in Argentina as China becomes the number-one buyer, fund provider, infrastructure builder. Argentine landowners will suffer as capital controls mean the impossibility of selling land for dollars or repatriating funds out of the country. The trade war has given China the chance to control more of the food supply it needs outside. China can now pursue its road and belt initiative unhindered, gain access to exporting countries' commodities whilst selling its manufactured goods, dams, nuclear plants and soon planes and electric cars, and tractors to replace John Deere. This would have taken longer under previous WTO rules and free trade agreements.” And, China is making education a key factor. For critical areas of engineering and computer science — skills that China hopes to use to dominate in areas like artificial intelligence, quantum computing, financial technology and space — Chinese schools have moved to the top. U.S. News & World Report ranks Tsinghua #1 in the world in both engineering and computer science. MIT ranks 3rd and 8th (behind 3rd place UT-Austin), respectively. Tsinghua is three times as large as MIT.

 


 

Add new comment