How Trump Could Pledge China Phase 1 Compliance for the U.S. Ag Sector

Posted on 06/25/2020 2:24 PM

It's still too soon regarding fate of Phase 1 Chinese commitments, but...



Talks with some U.S. farmers signal a desire to get President Donald Trump to pledge what is being dubbed “China Compliance Program” (CCP) payments should Chinese leaders not follow through on their Phase 1 commitments to purchase $36.5 billion in U.S. farm products in 2020 and $43.5 billion in 2021. Odds of such a program being announced administratively are too soon to say. There would also be election-year implications if Trump were to lose re-election, putting pressure on presumptive Democratic candidate Joe Biden to make a decision on any such program if it were announced by Trump but not yet implemented.


The Trump administration knows specific commodity dollar amounts that China has pledged to purchase via Phase 1 details but has not revealed them because of a request from China. White House trade advisor Peter Navarro on Wednesday revealed that one sector, the U.S. lobster industry, has a China commitment of $150 million in purchases.


Final U.S. Census trade data for 2020 will not be available until sometime in February 2021, so if any such program were announced, payments (or a final assessment of the first year of the Phase 1 accord) would not occur until after the trade information becomes available. “If these would be Spring 2021 payments, how does this do Trump any good... doesn’t the next round of payments have to come by October to get the results Trump needs?” one contact asked. Others counter that just like Market Facilitation Program (MFP) payments that were announced but paid later, the news generated good will among U.S. ag stakeholders.


Based on the latest U.S. Census trade data available, U.S. ag product trade to China in April was up 34% from March. U.S. ag exports to the rest of the world were down 13%, which sources say shows the impact of Covid-19 and other economic factors on U.S. ag trade, which some say means U.S. farmers should be part of the coming Phase 4 of Covid relief and that China alone cannot resolve cash-flow problems in the U.S. ag sector.


“President Trump should pledge to the U.S. ag sector that if China does not live up to the Phase 1 purchase levels, farmers will not again be negatively impacted by China trade issues,” one farmer said. Another producer said, “Trump should announce that while the United States fully expects China to fulfill Phase 1 terms, if they do not, he will send China a 'You Owe Us” for the amount of money U.S. farmers would have seen for various commodities with the purchase commitments China signed off on via the trade accord.” One industry analyst said, “The U.S. made a lot of direct payments to Brazil for cotton... and other countries to resolve trade disputes. This actually makes sense to me... If China buys $30 billion of ag goods in 2020, fine — send us a check for $6.5 billion and we’ll distribute to farmers and we’ll call it good.”


A farmer marketing consultant said, “Farmers would not again be so negatively impacted by the China trade issue. My gut reaction on this is there are always risks in farming that a market will experience disappointing demand, or even demand destruction, that will negatively impact farm revenue... and those events can make the decision to plant one crop over another, ultimately, the wrong decision. And in this case — this demand was 'promised' demand... if the demand falls short, maybe there should be compensation... after all, growers made their decision based on what they knew to be true at the time.”


One should not dismiss the growing significance of China in the world ag product import market. In 2014, China purchased a total of $124 billion in ag products worldwide; in 2019 that tally was $133 billion. They are on a pace for $140 billion for 2020. For perspective, U.S. ag exports to all origins for fiscal year 2020 are forecast by USDA at $136.5 billion; U.S. ag imports from all origins are forecast at $130.2 billion.


Congressional sources say some Democratic lawmakers are already concerned about “all the taxpayer money” being distributed via the Trump administration's use of USDA's Commodity Credit Corporation (CCC) Charter Act, and that any such program could cloud ongoing discussions relative to Phase 4 of additional Covid/stimulus ag aid funding likely to be decided on by late July.


Other sources wonder if any such a China-related program would be acted on and continued should President Trump lose re-election. One contact said, “If presumptive Democratic presidential candidate Joe Biden wins the presidency and does not back any China Compliance Program payments, the Democratic Party would likely experience a major push back from the rural sector in future elections.” However, another contact said, “Should Biden win the presidency, there would or should likely be a look at joining the Comprehensive and Progressive Agreement for Trans-Pacific (CPTPP) — recall that the TPP was the Obama/Biden mechanism to counterbalance China in the region.”


Bottom line, according to one trade analyst: “Much of this comes down to the text in the Phase 1 deal. If China does not buy as much as they promised, what are the ramifications based on the clauses in the deal? The strength of the promises made by the Chinese will be backstopped by the text of the agreement. Sending an invoice to China for the balance will only be met with laughter I would think.”


Others note there has been much focus on China living up to its promise but not enough on the possible overpromise that the White House has made to U.S. farmers regarding this deal. “If farmers are now going to suggest that they based their intentions on this deal with so many analysts being skeptical of the ability of the Chinese to execute, there is ample blame to go around if this deal fails,” one source added.


Observers should not ignore the Covid impact which may complicate China's attempt to meet the Phase 1 deal terms. Said one Canadian-based source, “In my opinion, the U.S. is now on the 'We need to be made whole farm subsidy treadmill' which is market-distorting in itself and has long-term effects to supplies that are not discussed enough. As the U.S. attempts to rely less on China economically, at this point agriculture appears to be putting all of its ag commodity eggs in that basket.” But as trade data previously detailed shows, U.S. ag exports to countries other than China are down significantly while exports to China are the reverse pattern.


Still others wonder about what any such program would mean for U.S. World Trade Organization (WTO) commitments, a question already being raised by some over the MFP and CFAP programs.



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