Doubts Remain Over U.S.-China Phase One Trade Agreement

01:19PM Jan 16, 2020
China trade
China trade
( MGN Image )

A lot of anticipation surrounded yesterday’s signing of the U.S.-China Phase One trade agreement. However, in the end, livestock and grain markets appeared to shrug off the result, says Len Steiner of Steiner Consulting Group.

The agreement did not contain any surprises, he adds, but left lingering concerns about the ability of China to fulfill its commitments and the lack of any discussion about current punitive tariffs on U.S. ag products.

In USDA’s summary of the key provisions regarding agriculture, China agreed to expand the allowable product scope for U.S. pork and pork products, including bungs, intestines and processed products.

“Going back to November of last year, there was talk that China had committed to purchase between $40 and $50 billion of U.S. agricultural products per year and the text of the final agreement did indeed include such commitments. There were no specific targets for individual commodities so participants are now left guessing as to how these commitments will be achieved,” Steiner says in his Daily Livestock Report

In Annex 6.1 of the agreement, China commits to purchase an additional $12.5 billion of agricultural products from the U.S. in 2020 compared to the baseline 2017 year. The commitment is then increased to $19.5 billion in 2021 again from the baseline 2017 year. 

Steiner says the document did not include a reference for the baseline year purchases, but USDA trade data shows the value of U.S. agricultural product exports to China in 2017 was a combined $24 billion. That would put total U.S. dollar sales to China in 2020 at around $36.5 billion and then $43.5 billion in 2021.  

Through November of 2019, USDA data shows the total value of U.S. exports to China was $14.578 billion, with soybean sales at $7.991 billion and pork product sales at $1.042 billion.  

“Going from say $16 billion for all of 2019 to $36.5 billion is quite a jump, hence all the speculation and uncertainty as to how that will be achieved,” he says.

Punitive tariffs remain
Traders also reacted to what was not in the text of the agreement – namely a change in the punitive tariffs on imports of U.S. beef and pork, Steiner says. However, President Trump said tariffs would come off in a Phase Two agreement. 

“Pork is a litmus test for the phase one deal with China. The worst kept secret in the world is China’s serious shortage of pork and rampant food price inflation. If China is unwilling to drop its tariffs on U.S. pork, it’s difficult to envision the country meeting the $40 billion per year agriculture purchase commitment,” David Herring, president of the National Pork Producers Council and a hog farmer in Lillington, N.C., said in a NPPC statement.

China’s commitment to purchase products in the U.S. is a step forward, but U.S. producers continue to face a significant disadvantage relative to other countries not facing punitive tariffs. 

“One could argue that China may be able to meet some of these commitments by using government-owned entities, which makes the tariff a non-issue. However, the existence of the tariff could continue to weigh on the value of U.S. pork since private Chinese buyers will likely lower their bids in order to account for the value of the tariff,” he explains. “While many still talk about the consumer paying tariffs, on this side or that side of the ocean, the reality is always a bit more clouded. It all depends on who needs the other more.”

The U.S. market is loaded up with pork. China needs a lot of pork.

“Time will tell which side will absorb the bulk of the tariffs, but it certainly would have been preferable if U.S. producers competed with European or Brazilian producers on an even field,” Steiner says. 

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