Minding Ag's Business

Tariffs Play into China's Hands

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor
China's been trading for 3,000 years, a history that helps it take a long-term view of the trading landscape. (DTN file photo)

Sometimes words echo from an old notebook. They call out, months or even years later, urging me to take a second look.

I'm not sure what triggered it last week, but something I heard at the Kansas City Federal Reserve's annual ag symposium last summer -- just a few weeks after the U.S. initially placed tariffs on $250 billion of Chinese goods -- rattled through my head. So I dug out my notebook, pulled up my recording of the panel session and listened to it fresh.

"I think we're playing right into their hands," said Ann Duignan, a managing director for J.P. Morgan and machinery sector analyst. "I actually believe that China's government is happy about the tariffs that are in place right now. If you think about China's strategy, it's always a long game. China has been trading for 3,000 years. They're taking the long view."

Fast forward a year, and her words seem prescient. Both sides have dug in, negotiations appear to have hit an impasse and the blame game, now elevated to white papers and press releases, is the only show in town.

China issued a white paper over the weekend that argued the U.S. is solely to blame for the breakdown in negotiations. The paper outlined what it says are instances of U.S. leaders backtracking on agreements, and while it doesn't call the U.S. disrespectful outright, it lays out a definition of respect and lists the ways it thinks the U.S. violated it.

"Mutual respect means that each side should respect the other's social institutions, economic system, development path and rights, core interests, and major concerns. It also means that one side should not cross the other's 'red lines.' The right to development cannot be sacrificed, still the less can sovereignty be undermined. As regards equality and mutual benefit, we must ensure that the two sides in the consultations operate on an equal footing, that results are mutually beneficial, and that any final agreement is a win-win one. Negotiations will get nowhere if one side tries to coerce the other or if only one party will benefit from the outcomes." (Here's a link to a translated version of the white paper: https://www.bloomberg.com/…)

In a joint press release, the office of the U.S. Trade Representative and the Treasury Department argue it is China that backtracked on previously agreed upon provisions.

"One such position was the need for enforceability, a position necessitated by China's history of making commitments that it fails to keep. But our insistence on detailed and enforceable commitments from the Chinese in no way constitutes a threat to Chinese sovereignty. Rather, the issues discussed are common to trade agreements and are necessary to address the systemic issues that have contributed to persistent and unsustainable trade deficits." (You can read the whole thing here: https://ustr.gov/…)

After reading China's white paper, another thing Duignan said last summer resonates: that the trade war with the U.S. is just noise to the Chinese.

"And, if anything, it's positive noise for them because they're not looking like the bad guys," she said, arguing that it's a fight the U.S. picked. "And what are we likely to see as a result? We're probably going to see expansion of agriculture in different regions, while every other country believes they can pick up our market share. Whose hand is that playing into, exactly? China's strategy for food security."

Tariffs haven't even been in place for a full year, but it's already shifting global trade flows. U.S. exports to China have fallen off a cliff, and while they made a few good-faith purchases when trade discussions were at a more amicable point, USDA's forecasts for both old- and new-crop exports are well behind where they were before the trade war began.

At the same time, business in Brazil and Argentina has been brisk. The U.S. even sold soybeans to Argentina because traders there found it more profitable to sell their home-grown soybeans to China and then crush the U.S. beans. (I still find this fact incredible.)

USDA estimates Brazilian farmers will raise a record 123 million metric tons, or about 4.5 billion bushels, in the 2019-20 marketing year. That's an increase of 6 mmt due to a combination of increased acreage and higher yields.

While Brazil is ramping up production to feed Chinese demand, it's worthwhile to remember that China has been doing its part to make Brazilian soybeans cheaper by pouring money into infrastructure projects. The ultimate goal of those projects is to lower the cost of getting goods to port, which largely occurs by truck, thereby lowering the overall cost of buying soybeans from Brazil.

According to the Soybean Transportation Coalition, it costs $83.90 to transport one metric ton of soybeans from Davenport, Iowa, to Shanghai, and $95.17 from Sioux Falls, South Dakota. Soybeans in northern Mato Grosso are cheaper than the U.S. right off the farm, but it costs significantly more to get them to port: The trucking bill alone makes up almost $80 of the $109.37 per metric ton transportation costs. (Check out the chart here: https://soytransportation.org/…)

China's efforts to bring better infrastructure to Brazil would serious erode one of the U.S.'s greatest trade advantages: efficient transportation.

I think Duignan's point -- that we're playing into China's hands -- is even truer today than when she said it last summer. China has heavily invested in diversifying its sources of competitively priced soybeans as a part of its strategic, long-term food security plans. U.S. tariffs simply hasten that process.

Katie Dehlinger can be reached at Katie.Dehlinger@dtn.com

Follow her on Twitter @KatieD_DTN

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