Potential Chinese Retaliation Against US in Trade Dispute

28 March 2018

Tariff policy on United States (US)/China trade has dominated economic news lately. The Chinese government, feeling threatened by statements from US officials, have countered with retaliatory rhetoric against US agricultural interests. Our proprietary data and analysis product, Gro, functions perfectly as a tool to understand this dispute’s potential agricultural impact. This report will demonstrate how Gro subscribers can both explore and prepare for possible outcomes of a trade war between the US and China.

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Soybean Exports Take the Lead
Cotton Demand Remains High
Hides and Skins
Coarse Grains Could Be Sourced Elsewhere
Pork Demand is Growing
Conclusion

Soybean Exports Take the Lead

Soybeans top the list of the US’ Chinese agricultural exports by a wide margin. Valued at $12.36 billion in 2017, soybean exports to China reached 31.9 million tonnes. While soybeans are not included on the list of items to receive proposed tariffs, there is speculation on whether this important crop could be targeted next. China is the largest buyer of soybeans globally and uses the commodity for livestock feed meal, vegetable oil, and biofuel.

Because the US currently ships about two-thirds of its soybean exports to China, an imposition of retaliatory tariffs would have devastating impacts on US farmers. Although the US was the world’s biggest 2017 producer at 119.5 million tonnes, China could quickly turn to other top growers to fill the country’s booming demand. Last year Brazil and Argentina produced 114 million tonnes and 57.8 million tonnes, respectively, with India coming in at 9.5 million tonnes. China could also choose to boost domestic soybean production at the expense of corn. This would have the added benefit of helping to fulfill the Chinese mandate to draw down the country’s massive corn stockpile.

Cotton Demand Remains High

Cotton is the second largest US agricultural export to China, valued at $970 million in 2017 with 525,618 tonnes traded out of 4.5 million tonnes produced. China is currently the top consumer, second biggest producer, and third largest importer of cotton globally. Domestic demand exceeds production, keeping imports high. Recent United States Department of Agriculture (USDA) 2017/18 estimates project that global production and trade will increase, but that China’s imports will decline slightly as the country taps into its reserve.

A declining Chinese reliance on foreign cotton would impact US cotton production and trade relations between the two countries. Other top producers include India and Pakistan, who last year produced 6.2 million and 1.78 million tonnes, respectively, with production in both countries forecast to remain relatively stable for 2017/18. In a pinch, China could easily replace US cotton with imports from these top producers.

Hides and Skins

Outsized US demand for meat products also helps support the country’s highly profitable hides and skins industry. Given the amount of meat consumed within the US, there is often a large surplus of livestock hides and skins created as byproducts. Roughly 90 percent of these hides, skins, and leather products are then exported (sometimes after significant processing) to meet global demand. Trailing only soybeans and cotton by value, US exports of hides and skins to China were worth $950 million in 2017.

China could easily satisfy its hide and skin demand by importing from other countries. Much like the US, Brazil slaughters many more cattle than domestic demand for hide and skin products would dictate, yet its hides and skins exports to China are still small in comparison to the US’. China could also source more hide and skin products from neighboring India, but the majority of those products are sourced from buffalo rather than cattle.

Coarse Grains Could Be Sourced Elsewhere

US coarse grains come in fourth on the list of top five agricultural exports to China, valued at $840 million in 2017. This includes barley, sorghum, and oats, but excludes corn. Coarse grains are important for both the US and China because of their use in animal feed. US sorghum production for 2017/18 is forecast at 9.2 million tonnes, while exports are expected to drop 381,000 tonnes to approximately 6.2 million on the assumption that Chinese imports will decrease. US barley production and exports are forecast at 3.09 million tonnes and 130,633 tonnes, respectively. Oat production in the US is set to reach just 755,706 tonnes, with exports forecast at 30,845 tonnes.

Although the US is the top producer of sorghum, its production of other coarse grains falls well below other countries’ outputs. Last year the European Union (EU) produced 58.7 million tonnes of barley, while Russia produced 20.1 million tonnes. Oat production last year reached 8 million and 5.4 million tonnes in the EU and Russia, respectively. US sorghum, barley, and oats could very easily be replaced with exports from other countries like Russia and the EU.

Pork Demand is Growing

One proposed tariff targets pork and other pork products. Total pork exports to China reached 3.21 million tonnes out of 11.7 million tonnes produced in 2017, valued at $741 million. Although China is a top five global producer of pork, this tariff could have a high impact on the US pork industry. China is forecast to increase pork production and decrease imports this year due to rising domestic consumption, and the country could also turn to top-exporting EU to replace any US product. However, US pork production is forecast to increase by four percent this year, largely due to rising domestic consumption and high demand in neighboring Mexico. Although US production is expected to rise, the industry would still feel the effects of high tariffs and declining trade with China that remains critical to US agriculture.

Conclusion

Retaliatory tariffs could have huge impacts on US farmers and global agricultural trade. In a semi-conciliatory move, China’s proposed list has targeted less nationally significant products such as pork, wine, ethanol, and horticultural goods. The five highest-valued agricultural exports from the US to China could be next, particularly soybeans, which are by far the most important commodity traded between the two countries.

In many cases, China can source the things it needs from other top-producing countries. US decision makers should carefully assess how far they can push China before a further, inevitable, painful response. Avoiding a tit-for-tat cycle should be a strong priority of both parties. Subscribers to Gro Intelligence can access and analyze a breadth of the world’s knowledge on these important commodities in order to keep up with the developing trade dispute between the US and China.

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