- Analysis continues to flood in suggesting that if China continues to insist it will buy US goods according to market conditions, it cannot meet Donald Trump’s demands
- With 28 per cent of US exports to China not covered by the deal, economist Chad Bown suggests that these exporters could be cut out of the equation
Almost a week after the signing of the phase one trade deal with the United States, scepticism is continuing to mount as to whether China will fulfil its side of an agreement that "may be doomed from the start".
Of particular concern is China's commitment to buying an additional US$200 billion of US goods over two years, including a clause that would bring its imports of US farm goods to more than US$40 billion a year.
"A close look at the data shows that the numbers are even more unrealistic than first believed," wrote Chad Bown, a trade specialist at the Peterson Institute for International Economics (PIIE), in a new report. "Even worse, hostilities might renew, leading to a re-escalation of trade tensions currently on hold."
At the crux of much of the widespread pessimism is China's repeated mantra that imports must be based on market conditions, a stance that was reiterated on Tuesday by Li Xingqian, head of the foreign trade department, who told a press conference in Beijing: "We will expand imports from the United States based on the principles of the market and World Trade Organisation rules, and will not affect imports from other countries."
A close look at the data shows that the numbers are even more unrealistic than first believedChad Bown
These criteria appear to jar with a deal that will inevitably cause trade diversion, experts have said. Unless there is a surge in demand in China, which is unlikely given the slowing growth in the world's second largest economy, the US purchases will come in place of others.
But for Washington, an immediate issue is that the primary American agricultural export " soybeans " is simply not competitive.
"If China says it's down to market conditions, then the US will have to be competitive. And the reality is that the US is not competitive by a long shot already, and it hasn't been before either," Andrei Agapi, associate pricing director for agriculture at S&P Global Platts in Singapore, told the South China Morning Post.
He added that since September, when China started issuing tariff waivers for US soybean imports, the price has surpassed that of Brazilian beans, which replaced them during the height of the trade war.
"When you speak to some of the China bean traders in the interior of the country, and they look at the total (US) dollar figures (quoted in the deal) and where the market is now, they throw their hands up and say there is no way they could even run that much in the country " it would throw the entire domestic supply chain into disarray," said Peter Meyer, head of grain and oilseed analytics at S&P Global Platts, speaking on the Commodities Focus podcast.
Some trade watchers suspect that if China is to keep its side of the agreement, it will be forced to sidestep market conditions and manage it from the top down.
"With a managed trade agreement like this, targets are presumably established, but I suspect that it will mean state trading companies like COFCO will be doing a lot of the buying," said Joseph Glauber, senior research fellow at the International Food Policy Research Institute and a former lead agriculture negotiator at the Office of the US Trade Representative.
China has already acquired half of its soybean demand for the year ahead, largely composed of the record Brazilian harvest which will come to market in February, Agapi said. Furthermore, its demand is set to be lower than in previous years due to the African swine fever outbreak which has led to the death of a quarter of the world's pigs.
"It may be good for US producers in the short-run, but if much of this ends up in storage, it is hard to see how this will be sustainable over time," Glauber added. "This very well may be a big goodwill gesture to get through the next year " i.e., through the election " but it is hard to see that this will be very sustainable over time."
But for Bown at the PIIE, this is not just a soybean issue. US exports of cereals such as sorghum, wheat and corn could hurt Australia, Vietnam or Thailand, seafood sales could hit Canada and Russia, while higher energy sales have the potential to hurt Australia, Indonesia and Qatar, and more manufacturing sales will hit the European Union, Japan and South Korea.
Andrew Tilton, Goldman Sachs' chief economist for Asia-Pacific, told a media roundtable in Hong Kong on Tuesday that the purchases may be possible, but that "it would obviously take political will and maybe some easing of import restrictions in a couple of areas".
"The surprise for us in the official document was that the amount on the agriculture side is less and the energy side was more. That might be relevant because there were a couple of sectors where orders would count as purchases. There are often long-term energy contracts that are signed, but it's less typical in the agricultural space to see that," Tilton said.
Given that 28 per cent of US exports to China comes in industries not covered by the deal, Bown suggested that these exporters could be cut out of the equation.
The surprise for us in the official document was that the amount on the agriculture side is less and the energy side was moreAndrew Tilton
"Thus, in legal terms, China has little incentive to import those US$51.6 billion of uncovered products from the US in 2020 or 2021," he wrote.
"To compensate angry trading partners aggrieved because of the trade diversion, China could purchase more uncovered products from them and reduce imports from the United States. That would be painful for American companies and workers whose products Trump has chosen not to put into this agreement."
With Chinese traders winding down for a week-long Lunar New Year holiday that will close commodity markets from Friday, all eyes will be on US Department of Agriculture databases this week to see if purchases have begun.
Additional reporting by Chad Bray
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