The US and China have steadily been building trading relationships since the Nixon administration. China has become one of our largest partners and the benefits of trading with them are obvious. With 1.3 Billion people they are the world’s largest customer base and they have the low manufacturing costs and cheap labor to produce goods for the US customer base. Their diet consists of soybean based foods. They possess the largest pig herd in the world and import most of their soybeans to feed them. Soybean trade from the US makes sense. The Chinese market accounts for the vast majority of US soybean exports. If the US were to double their soybean sales to every other country in the world, it would not equal what they have sold to the Chinese.
During the past 2 ½ years, the US and China have been engaged in a trade war that has escalated rapidly and had many unexpected twists and turns. In September of 2019 the two sides negotiated to break the trade deal into three phases and ease tension by delaying the threatened December 15 US tariff increase. Talks suffered a setback at the G20 summit and president Trump made a statement Dec 5th that phase 1 has no deadline and would probably have to be dealt with after the election. The US demanded that China return to buying it’s former numbers of soybeans while keeping the tariffs that the US levied in 2017. China imports 84 million tons of soybeans and traditionally has bought ⅓ of those from the US. When all seemed lost, a deal was announced in which the US rescinded all tariffs except the initial 2017 (which were reduced) in exchange for China lifting it’s restriction on buying goods. Trump has claimed that the US will be selling 50 billion dollars worth of agriculture goods to China. This would be a significant increase from last year’s sales of 8.6 billion dollars worth of goods. Most economists don’t see how China could achieve buying this amount without breaking the markets.
Chinese Leverage
China has changed since the trade war started. The Chinese pork industry had an African swine fever outbreak which forced them to kill off around 300 to 350 million pigs (nearly a quarter of the world’s pork supply). China traditionally imported US soybeans as hog feed. Chinese women working outside the home in larger numbers and a stronger middle class is causing the population to shift towards a more western diet which consumes less soybean based foods. Soybeans used to be a hefty bargaining chip that the US could use against China. With decreased demand for soybeans China now has leverage to negotiate in the other sectors of the economy. China has been able to increase their leverage in negotiations because they are seeking alternative markets for soybeans instead of the US. All crops have a window when they can be sold effectively without saturating the market. The US dominates sales during Aug-Jan while Southern Hemisphere countries such as Brazil and Argentina do the majority of their business in the Feb-July. China can buy the bare essentials from the US until February and Brazil can once again supply them with what they need.
Searching for New Partners
Despite the deal made, it is clear that US soybeans will have a diminished role in China. In 2019 China announced that they are looking to form a trade organization that will rival NAFTA and the European Union. They are in talks to form a trade alliance with Russia, Brazil, South Africa, and India (tentatively called BRICS). The clear winner of the trade war is Brazil. BRICS and China will be investing in 8 new ports on the Brazilian coast and a railroad through the northern part of the country. Brazilian ports have doubled their capacity and still have a wait time of 30 days to fill a ship. As new infrastructure is completed over the next 4-5 years the wait time will be reduced. Argentina has also increased its production of soybeans in the hope of getting more sales from China. China recently invested heavily in Eastern Russia to get them to agree to produce more soybeans and is in talks to double production there by 2024 allowing them a larger share of the Aug-Jan cycle. Russia harvested 4 billion tons of soybean in the 2019 harvest. China has stated that they will only buy from the US on a needs based system. These deals will work to phase out their need to import from the US.
The Damage Done
Most economists agree that trade wars don’t have any winners. Most projections indicate that US soybean markets won’t return to their 2016 numbers until 2024, and there is agreement that China’s market may never be the same.The phase 1 deal remains tenuous at best with no details released to the public,and there’s no evidence that China will buy 50 billion dollars worth of agricultural goods like President Trump is promising. China has never imported that much and with the investments that they have made in other countries, they would have to break those deals or buy to the point that they would stockpiling soybeans. In the course of 3 years, the US has gone from the dominant exporter of soybeans in the international community, with a near monopoly on the largest soybean market in the world, to being a safety valve. The days of our dominance of the Chinese market are coming to an end. Domestic animal feed sales in the US have given some relief to farmers, but the demand will not replace lost sales from China.
Starting these wars was reckless. The US underestimated their opponent and in the end lost billions of dollars of revenue and spent billions of dollars of taxpayer money to subsidize an industry that would have been better off if it had just been left alone. We lost a trade partner and standing in the international markets. This probably isn’t the end of it and farmers across the country are definitely are doing worse than the “bad deal” we had at the start of this.