Hopes were high when the United States signed the Phase One trade deal with China Jan. 15. But it may be months or even years before American farmers and ranchers see increased exports to the Asian nation.
More than a year in the making, the 91-page agreement addresses many non-tariff barriers inhibiting trade between two of the world’s biggest economies. On the agriculture front, the Trump administration hit several singles with the trade deal, which many hope will turn around two years of declining agricultural exports.
Some of the ag provisions address issues relating to sanitary and phytosanitary standards and other non-tariff barriers to trade. These are beneficial provisions that finalize agreements pursued by a number of past U.S. administrations and should help boost agricultural exports to China over the long-term.
China also promised to provide more protection for the intellectual property of U.S. companies and to stop requiring American businesses to share their technology as a cost of doing business with China. Those are critically important provisions.
But perhaps what received the most attention in the Phase One deal were the promises by China to increase imports from the U.S. to address the trade deficit. On this front, there is reason to be skeptical. China pledged to increase purchases of U.S. products and services by at least $200 billion over the next two years. That includes what the U.S. Trade Representative’s Office described as a “dramatic expansion of U.S. food, agriculture and seafood product exports.” The deal calls for China to increase its purchases of U.S. agricultural products by $32 billion in the next two years. That equates to $80 billion worth of American farm goods. To meet this target, U.S. soybeans, pork, meats, cotton and dairy products will need to be on China’s shopping list.
Consider the fine print
Before U.S. agricultural producers begin celebrating, we should read the fine print. The agreement states, “The Parties acknowledge that purchases will be made at market prices based on commercial considerations and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year.” This is a loophole big enough to fit a combine.
If purchases will be made at market prices based on commercial considerations, then there is no certainty that Chinese companies will buy a set amount of U.S. agricultural products in the coming years. Before the outbreak of the trade war with China, U.S. agriculture was exporting around $20 billion in products every year to China.
Since the start of the trade war, however, other countries have stepped into the vacuum caused by the falloff in U.S. ag exports. As just one example, while U.S. wheat exports to China have plummeted, Canada’s wheat exports to China increased 400% in the last two years. Given all of this, there is little reason to believe that sales of U.S. ag products to China will suddenly double if pegged to market prices.
And, of course, the even bigger elephant in the room remains the U.S. tariffs and China’s retaliatory tariffs. During the trade war, the Trump administration dramatically increased tariffs on imports from China. China retaliated by placing tariffs on U.S. exports, including agricultural products that we ship to China. China was once the largest market for U.S. agricultural products but has dropped to fifth largest due to the retaliatory tariffs.
Under the new trade deal, the Trump administration agreed to cut the tariff rate it had imposed on products on Sept. 1, 2019, by half, to 7.5%. But the Trump administration did not remove the tariffs of up to 25% it had placed on over $200 billion in imports from China prior to Sept. 1. Tellingly, China did not remove any of the retaliatory tariffs it had placed on U.S. ag exports. Unless and until the retaliatory tariffs are removed, U.S. ag products cannot compete on market prices in China, and there is little to no chance of a significant increase in ag purchases by China.
What will China do?
Some have wondered about China’s ability to buy those additional farm goods. They believe China’s purchases of agricultural products won’t materialize until the second half of 2020. They see China waiting until the U.S. harvest is underway, when prices are typically lower. Others believe that China will likely be a big market this year but neither safe nor stable. Markets by and large have reacted negatively to the Phase One deal, with commodity prices continuing to slide.
Now adding a whole new level of complexity since the deal was signed is the deadly Wuhan coronavirus. Expect China’s economic output to decline and purchasing to soften. Expect trade supply chains to be disrupted and bottlenecks to emerge at China’s ports. China has criticized the Trump administration’s travel restrictions as overreach. Given this, we could see U.S.-China relations weaken further, which would cast additional doubt on the potential for significant ag purchases from the U.S.
U.S. Secretary of Agriculture Sonny Perdue called the Phase One trade deal “a bonanza” for American farmers, ranchers and producers, saying the agreement finally levels the playing field for U.S. agriculture. I like his optimism, and there are positive provisions in the deal. But it will be a while before America’s agricultural businesses can reap the deal’s benefits. Until those purchases actually take place, keep operating as lean and mean as you can.
Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at firstname.lastname@example.org.