The China trade deal: Phase one of what for US farmers?
IATP | 14 January 2020
The China trade deal: Phase one of what for US farmers?
by Dr. Steve Suppan
President Donald Trump announced that on January 15, President Xi Jinping will come to the White House for the signing ceremony of an 86-page Memorandum of Understanding (MoU), characterized by Trump as “Phase One” of a trade deal that includes a temporary and partial truce in the U.S.-China tariff war. (In fact, Vice Premier Lui will sign for China.) The Office of the U.S. Trade Representative (USTR) said MoU will be released on the day of the signing. What does what we know of the so-called Phase One deal mean for U.S. agribusiness exports to China and, down the value chain, for U.S. farmers?
According to Robert Lighthizer, the U.S. trade representative, China will buy at least $40 billion of U.S. agricultural goods in each of the next two years. It will endeavor to buy another $5 billion each year. (Inside U.S. Trade, December 13, 2019. Subscription required.) Ambassador Lighthizer said the specific sub-sector commitments, such as oilseeds and cereals, will not be made public. As a result, it will be difficult to reconstruct whether the implementation of the MoU will, in any product or in aggregate, make up for the U.S. agribusiness export losses to China during the past two years. A Chinese government news conference announcing the deal in December did not mention a dollar figure for purchase of U.S. agricultural goods.
In any event, more agribusiness exports are unlikely to result in higher prices paid by exporters for U.S. farmer production. Barring major supply decreases from other exporting countries, vast structural oversupply will keep prices low and even below the cost of production. The 2018-2027 Agricultural Outlook report of the UN Food and Agriculture Organization and the Organization for Economic Cooperation and Development anticipates such a price trend.
The cost to U.S. agriculture and taxpayers of the U.S. China tariff war has been high. According to a Congressional Research Service briefing, retaliatory tariffs on imposed by China on U.S. agricultural goods resulted in a decrease of 25% in U.S. agricultural export value from about $20 billion in Fiscal Year 2017 to about $16 billion in FY 2018. The USDA reported the FY 2019 value of U.S. agribusiness exports to China to be $10 billion. There are two ways to estimate the U.S. agricultural export decline. The first is to simply compare the FY 2017 $20 billion agricultural export value to the FY 2019 $10 billion value and estimate a loss of $10 billion over two years. Alternatively, if you make a steady state assumption that FY 2019 and 2018 agricultural export sales would have remained at the FY 2017 level of $20 billion in the absence of the trade war, then the estimated trade war cost to U.S. agriculture is about $14 billion.
Those losses led to about $23 billion in taxpayer funds distributed thus far through the USDA’s Market Facilitation Program (MFP) for covered products to “farming entities,” including to an “alternative” agricultural lender. According to a December 2019 analysis, the top 5% of the farming “entities” by MFP covered acreage received 31% of the MFP payments while the top 10% took in about half of the total.
Most, though not all, MFP payments are made to compensate qualified entities for decreased agricultural exports to China. A recent Congressional Research Service report analyzed in detail the impact of agricultural tariff retaliation against U.S. exports by Mexico, Canada, the European Union, India and Turkey. However, the report did not correlate MFP payments to tariff retaliation impacts.
Producers of exports not covered by MFP, such as Maine’s wild blueberries and lobster, got no help whatsoever, despite the loss of wild blueberry and lobster sales to China. Though the MFP payments in aggregate offset the loss of anticipated export sales, for farmers financially vulnerable from six years of low commodity prices and high costs of production, the tariff war likely contributed to the 24% surge in farmer bankruptcies since September 2018.
Will the agriculture related costs of the trade war be reduced by the implementation of Lighthizer’s Phase One terms? Trade economists are doubting the overall value of what USTR has made public about the two-year deal. Scott Kennedy, a China expert cited by The Washington Post said, “If it’s what I think it is, it’s not even close to worth it,” i.e., close to the costs of the trade war to the U.S. economy.
U.S. agricultural and trade economists likewise doubt China’s need or ability to buy $40 billion of U.S. agricultural goods per year, much less the $50 billion touted by President Trump. Chad Bown at the Center for International Economics and Scott Irwin of the University of Illinois are among the doubters. However, they don’t explain the reasons for their doubt.
Han Jun, the Chinese vice minister for agriculture and one of the Chinese negotiators, gave one possible reason to doubt the full realization of the agricultural terms of the new trade deal. Vice Minister Han is reported to have said that China’s annual low tariff import quotas for corn, wheat and rice are global tariffs and “we won’t adjust it for just one country.” The World Trade Organization (WTO) policy of treating all WTO members equally in terms of tariffs and import quotas is called “Most Favored Nation.” If China decides likewise to maintain its tariff import quotas for other U.S. agricultural goods, the Phase One agricultural goods purchase objective might be achieved only if those import quotas are increased in 2020 or 2021. Furthermore, historically, China has avoided import dependence for its critical margin of food security. A Reuters article cited a Chinese grain trader: “If such volume (of products) come (sic) to China, it will be a disaster for us (in the domestic market).”
Alternatively, China may unilaterally remove quotas for imports in its national and corporate interest, e.g., for hog carcasses, particularly those shipped by Smithfield, a U.S. subsidiary of the Chinese owned WH Group. China could remove tariffs and import quotas on U.S. feed grain exports, particularly soybeans, as it rebuilds its hog industry devastated by African Swine Fever (ASF). However, Chinese Vice Minister for Agriculture Yu Kangzhen warned in early January, “The risk of [ASF] outbreaks will rise with the rapid increase in the number of live hogs.” So the need to import soybeans for hog feed will fluctuate according to the likelihood of further ASF contagion that will decimate Chinese hog herds, albeit less drastically than the current devastation. In sum, as Chinese hog herds are repopulated, China will import what it needs, when it needs it, under the umbrella of WTO rules. (See IATP’s 2014 report, China’s Pork Miracle?)
At the beginning of the WTO’s 25th anniversary, China is celebrating its leadership among WTO members. (Inside U.S. Trade, December 13, 2019) The U.S. is rejecting China’s WTO reform proposals and characterizing the current terms of China’s WTO membership and its state led economic development model as threats to the WTO’s relevance and viability. (Inside U.S. Trade, December 9, 2019) Notwithstanding whatever may result from the two-year Phase One deal, the longer term U.S. demands for WTO reform (supported by Ambassador Lighthizer’s former law partner, WTO Deputy Secretary Alan Wolf) are unlikely to be achieved without tradeoffs, including possibly a China and India demanded phase out of developed country agricultural subsidies currently characterized as not distorting trade in the WTO Agreement on Agriculture. (Inside U.S. Trade, July 23, 2018)
A phaseout or even decrease in taxpayer subsidies paid to farming “entities” and passed on to seed and chemical companies, and now to data consultants, is a far cry from what sold U.S. farmers on China’s membership in the WTO. In 2000, the president of the National Corn Growers Association characterized China’s accession to the WTO and its U.S. to China commitments as a “great one-way deal for U.S. agriculture.” But trade deals, even agricultural trade deals, are never one way. Yet, as IATP wrote last June, the Trump administration’s WTO negotiations strategy publicly consists only of demands with no proposed trade-offs.
In the Phase One deal, Ambassador Lighthizer exulted over “very specific” Chinese commitments to protect U.S. patents, trademarks and copyright. Given the difficulty of achieving the Phase One export targets, it is not cynical to conclude that U.S. farmers in two years will not be exulting about the agricultural terms of the Phase One deal.
The Phase Two negotiations are to address U.S. demands to restructure the Chinese economy by eliminating State Owned Enterprises, state subsidized loans and industrial subsidies, and allowing U.S. headquartered banks to take over Chinese banks. As the Financial Times pointed out when the U.S. first tabled its demands, it is very unlikely that China will relinquish control over its economy. Nor, we would add, is China likely to want to allow Wall Street to buy a controlling interest in its banks, while the Trump administration eliminates Obama administration rules designed to prevent another global financial services crisis that negatively impacted China.
In Phase Two negotiations, the Trump administration will not be able to offer farmers as sacrificial pawns without bankrupting Secretary Sonny Perdue’s favorite agribusiness “customers.” In order to achieve the U.S. strategic goal of containing China, a future U.S. administration may have to return to what the U.S. has abjured – working with allies to achieve some common objectives through WTO negotiations.
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