At the turn of the century, the economic community was enamored by the compounded growth rate of China’s economy, which often exceeded 10%. While relatively small compared to the U.S., North America and Europe, concern was mounting about their growth rate and positive balance of trade.
I wondered just how much time we had left before the fear of China becoming an economic force would become a reality.
A Look Back. A decade ago, I commissioned my daughter Ashley (fresh out of college) to do a study on China’s growth rate. If its economy grew 8% to 10%, compounded year over year, how long would it take before China would exceed the U.S.? It turned out to be a couple decades or so, depending on real versus estimated GDP. I speculated that if true, the Western world would not allow that to happen, and one effort might be an orchestrated minor global recession to slow China’s growth to 4% to 5%. After all, soft-landing recessions are not uncommon in our history.
Then came the U.S. financial/housing debacle in 2007/08. With it, any soft landing in the global economy turned into a collapse in equities and created European Union concerns (remember Greece?). The U.S. spent money like water to correct the situation as a depression would be worse than dealing with China.
Global growth slowed, but China didn’t go away as it had billions of surpluses (Western world trade-deficit money) to support their economy at a rate greater than our TARP or other stimulus we and Europe put into place. Our trade deficit with China came back to haunt us as China used our money to help compete.
Now comes the current tariffs, and we are looking at a situation that impacts more than agriculture and soybeans. It is an attempt to revisit slowing down economic aggression by China. Eliminating the trade surplus is one way, but it will take a joint front by Europe, the U.S., Mexico and Canada to accomplish—along with other Asian countries, such as Vietnam and Thailand, who compete well in the labor market. India gets little notice but is a “sleeper” for North America and Europe to cultivate.
Perhaps this is a simplistic view, but I have been watching over my shoulder for something to happen to thwart Chinese dominance. I suspect eventually the U.S. would have to do what President Donald Trump has accelerated and other presidents didn’t have the guts to do. Even the politically correct, economically liberal side of the aisle would have to do it eventually.
“The tariff retaliation by China has changed just about every aspect of global grain flow and price discovery.”
The Path Forward. So even if I am half right, making the tariffs go away and the American farmer happy is of little consequence to the long-term focus. A surplus of food is not a negative for our economy. We have proven we can deal with a weak ag economy in the past.
It’s becoming evident the disputes with China are not just about soybeans, but other things such as intellectual rights and, perhaps more importantly, China’s goal to be globally dominant, as revealed in their 2020 plan. The free world cannot afford to let that happen.
The tariff retaliation by China has changed just about every aspect of global grain flow and price discovery, from what I have come to know over my lifetime. Whether it becomes a “cold-war tariff” that lasts for years/decades is yet to be seen.
As of mid-November, U.S. and Chinese trade negotiators were making plans to meet, giving prices a boost and a bit of optimism for a return to normalized trade. Let’s hope sounder minds prevail.
Just 40% of the global growth in soybeans has come from the non-Chinese sector. To replace China’s portion could take 10 years and a reset in our ag sector, which we have yet to reckon.
Read More from Jerry:
Corn’s Ongoing Dilemma
Oct. 24, 2018
This summer, I pointed out the paradigm shift in soybean trade that came to light in early 2018. In actuality, it began in 2017 as China began lowering the acceptable percentage of foreign material in U.S. imports, while not putting Brazil to the same standard.
To Store or Not
Sept. 26, 2018
In both corn and soybeans, on-farm storage will help pay for bins again, but doing so requires expertise, timing and a good sense of market outlook.
The 800-lb. Gorilla
Sept. 10, 2018
In September 2011 I wrote a TP column entitled “the 800-lb. Gorilla”. I referenced a meeting I had years ago with a Chinese group regarding the insatiable demand of China.
Find market insights, in-depth analysis and audio reports from Jerry at AgWeb.com/gulke
Jerry Gulke farms in Illinois and has interests in North Dakota. He is president of Gulke Group Inc., a market advisory firm. Contact him at (707) 365-0601 or GulkeGroup.com.
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