U.S.-China Trade War Enters Second Year

Published on: 13:57PM Aug 08, 2019

On July 6, 2018, the U.S. government formally imposed its first round of tariffs on a specific list of 818 products imported from China.  The initial tariff level was at 25 percent, and imposed on goods valued at about $34 billion.  The goal of the tariffs was to compel the government of China to come to the table to negotiate about an array of trade concerns, including persistent violations by Chinese companies, including state-owned entities, of U.S. intellectual property rights, and various actions by the Chinese government that in effect forced U.S. companies to transfer technology to Chinese counterparts.  On the same day, the government of China imposed tariffs on a list of U.S. products also valued at $34 billion.

In the 13-month period since the initial salvos, more and higher tariffs have been imposed by both governments while negotiations have waxed and waned, with the two countries reportedly coming close to a deal in May 2019, then those talks broke down. President Trump retaliated for what he described as Chinese efforts to ‘renegotiate’ the deal.  At that time, he raised tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent.

The two leaders, Presidents Xi and Trump, met in late June on the sidelines of the G-20 meetings in Osaka, Japan, and committed to re-start negotiations.  President Trump also claimed that his counterpart had agreed to buy more U.S. agricultural products, but those purchases were slow to materialize.

On August 1, 2019, the U.S. government announced that it would impose a 10 percent tariff on another $300 billion worth of imported goods from China, to begin on September 1.  Less than a week later, the U.S. government asserted that the government of China was acting as a currency manipulator for failing to defend the yuan in international currency markets.  This action will allow the U.S. government to confer with the International Monetary Fund about how to offset China’s alleged manipulation, but the step will likely have little or no impact.

In retaliation, the government of China announced that it was stopping all purchases of U.S. agricultural goods, and was considering imposing tariffs retroactively on goods contracted for after August 3, 2019.

U.S. farmers have borne the brunt of China’s tariff retaliations during the course of this trade war, as the value of U.S. agricultural exports to China fell more than 50 percent between 2017 and 2018, from $19.47 billion down to $9.15 billion, and the decline has continued through the first half of 2019. The hardest hit have been U.S. soybean farmers, who exported 31.7 million tons of their crop to China in 2017--accounting for 57 percent of all U.S. soybean exports in that year--but only 8.23 million tons in 2018.  They were able to find alternative markets for some of their soybeans, but total U.S. exports were down nearly nine million tons between 2017 and 2018.

Using authority provided under the CCC Charter Act of 1948, the Agriculture Secretary made available $14 billion to offset farmers’ losses in 2018, by far the largest share to soybean farmers.  At the time, Secretary Perdue insisted that this was to be a one-time package, and farmers should not count on getting similar levels of assistance in future years.

However, as the trade war with China dragged on with no end in sight, President Trump announced on his Twitter account in May 2019 that a second package of assistance would be provided to farmers, although his initial tweet suggested it would be realized as a direct purchase of commodities which would be distributed as international food aid contributions.  That concept proved to be infeasible, as the major crop affected, soybeans, is not typically utilized to a significant degree in U.S. international food aid programs.  This package will total up to $16 billion.

More details of this latest package have been announced in the last few weeks.  Farmers will be eligible for direct payments per acre, with the rates to be based on the extent to which farmers in each county has been affected by Chinese tariff retaliation.  Those payment rates will range from $15 to $150 per acre.  Farmers who were unable to plant a crop on some of their farmland this spring due to wet weather will be eligible for the minimum payment rate as long they planted a cover crop on that land by August 1.  Sign-up for the program will begin later this month, with the first tranche of payments to be dispensed shortly afterwards.  Additional tranches will be paid later, which may be reduced or withheld depending on what happens with future negotiations.

In addition, $100 million has already been allocated to U.S. agricultural trade associations to help access new markets for their member producers, and $1.4 billion will be spent purchasing other products, such as pork, dairy products, and produce, to be distributed to needy Americans through entities such as food banks and soup kitchens.

These so-called Market Facilitation Program payments, scheduled to total $28 billion over two years, have already been challenged by other WTO member countries as potentially inconsistent with U.S. obligations under the Uruguay Agreement on Agriculture.

This trade war has already dragged on far longer than most analysts anticipated, and it is difficult to predict when it will be resolved.  What is clear is that both sides harbor significant doubts that the other party is negotiating in good faith.