Sunday, February 18, 2018

China Mulls Soybean Trade Retaliation

Chinese officials have been mulling retaliatory trade action against imports of U.S. soybeans. While soybeans loom as a big target in a trade war, such an action would cripple dozens of Chinese importers and undermine the country's new "open economy" strategy in agriculture.

One commentary on the Chinese Internet this week called soybeans "potentially China's strongest weapon" as trade friction with the United States heats up. The commentator suggested that a measure limiting soybean imports could cause President Trump to lose the 2020 election by hitting farmers in the U.S. Midwest. Yet the commentator also noted that limiting the soybean supply could lead to higher pork prices in China since soybean meal is an important component of pig feed.

China's Commerce Minister Gao Feng struck a conciliatory tone in comments at a February 8 news conference which was largely about trade friction with the United States. Minister Gao said the Ministry had met with industry associations to explore possible impacts of trade measures against imports of U.S. agricultural commodities (soybeans and cotton were mentioned specifically by the journalist who asked the question). Gao's main comment was that some "production-type" enterprises had raised concerns about the effects of limiting imports. [erratum: another article discovered later suggests that the companies were worried about the effects of imports.] The Minister then emphasized the importance of resolving trade difficulties to achieve mutually beneficial outcomes and to turn friction into energy. Minister Gao made similar conciliatory comments about beneficial trade and cooperation in the Ministry's earlier announcement of the antidumping investigation of U.S. sorghum imports.

A trade action against soybeans -- the biggest component of international trade in farm products -- would undermine China's efforts to craft its image as a proponent of global trade. In his response to a separate question, Minister Gao emphasized that a "new pattern of externally open agriculture" is central to China's rural revitalization strategy featured in the "Number one document" issued by communist party leaders this month. According to Gao, the strategy for China's rural makeover features greater engagement with global markets in which Chinese companies have greater control over a swelling flow of agricultural imports, Chinese farmers link up with commercial entities to export high quality farm goods demanded by the market, and China gains a stronger voice in multilateral organizations that set the rules for international trade.

Bolstering China's image as a proponent of global trade is a long-term strategy critical to the "One Belt One Road" initiative as well as to broader geopolitical objectives. Officials may hesitate to undermine their long-term image-building project in order to score points against Americans in a tit-for-tat trade skirmish.

A February 5 commentary noted that China has major domestic commercial interests that rely on soybean imports. The commentator observed that China's soybean industry has demanded action to limit soybean imports on several occasions over the past 15 years, but authorities have never imposed any major measures. This commentary pointed the inconsistency of launching antidumping investigations against imports of U.S. DDGS and sorghum, yet never conducting an investigation against imports of soybeans even though China's soybean industry is purportedly under the greatest pressure from imports.

According to the commentator, China's soybean industry called for an action in 2004 after a sudden drop in U.S. soybean prices devastated Chinese importers holding contracts to import at high prices (the so-called "soybean crisis"). In the commentator's opinion, China "lost the perfect opportunity" because there was little knowledge of how to launch trade remedy measures and many in the Chinese industry were willing to be rescued by being acquired by foreign companies.

The commentator recalled that a trade action against soybeans had been proposed in 2009 to retaliate against punitive U.S. tariffs on Chinese tires. However, powerful companies "inextricably tied" to soybean imports opposed the move, the commentator said. Instead, he pointed out that China chose to launch an antidumping action against imported U.S. chicken meat -- a much smaller trade item than soybeans.

According to the commentator, some individuals opposed to last year's antidumping tariffs on U.S. DDGS argued that antidumping duties could not be justified for DDGS if they were never imposed on soybeans.

In fact, the DDGS and sorghum antidumping trade actions were taken largely to facilitate China's own commodity dump: selling off China's massive corn reserves into its domestic market at prices below the government's acquisition cost. Imported DDGS and sorghum are substitutes for corn, and an article in the China Times reported that targeting DDGS and sorghum for punitive duties makes it easier to sell off the government's corn stocks by reducing the supply of cheap substitutes. China Times linked the sorghum antidumping investigation to the directive in this year's "Number one document" to accelerate the disposal of government grain inventories by improving auction and sale mechanisms.

None of the commentaries delve into the facts that make a punitive tariff against U.S. soybeans improbable. Here are a few additional considerations.

China's capacity to shift soybean purchases to other suppliers is limited. China imports two-thirds of the soybeans traded in the world, and about 35-40% come from the United States. Brazil already has been increasing its exports to China at a frantic pace for several years. Soybeans from southern hemisphere countries -- the main alternate suppliers -- are available mainly during April-September, and cannot substitute for U.S. soybeans imported by China during the northern hemisphere shipping season of October-April.

Punitive tariffs on soybean imports would hurt Chinese importers as much or more as it would hurt American farmers. Most soybeans are imported by hundreds of Chinese companies -- both state-owned and private. Multinationals--who were banned from further expansion ten years ago--no longer dominate the industry. Aggressive investment by Chinese players over the last decade has made domestic companies the primary operators of China's soybean crushing plants which are already plagued by excess capacity and razor-thin margins.

China's own soybean producers would benefit minimally from limits on U.S. imports. China's entire soybean harvest equals roughly two months of imports. Most of China's soybeans are now used for food processing industries at premium prices and do not compete directly with imported soybeans used for crushing to make vegetable oil and soybean meal for animal feed. Chinese farmers in the northeast expanded soybean production this year, but had difficulty selling the additional beans and the government had step in to buy them.

Chinese companies could import soybean oil and meal to some degree instead of importing soybeans. (precedent: when China tightened cotton import quotas several years ago, the textile industry started importing yarn which is not subject to a quota.) Imports of substitute oils like palm, rapeseed, sesame, olive oil would rise.

Smuggling and paperwork subterfuge would skyrocket. Customs officials would have to do extensive checking of paperwork and testing of shipments to verify the stated origin. Customs officials would have to be watched closely by anti-corruption investigators.

Chinese officials may recall stampedes at a supermarket by shoppers eager to get discounted cooking oil when soybean prices were in the stratosphere ten years ago.

The lack of protein in animal feed was a bottleneck for China's livestock sector until China started importing soybeans in the 1990s. Soybean meal now provides most of the protein in animal feed. The two biggest consumers of soybean meal -- pigs and chickens -- are in vigorous expansions this year. Watch for fake and adulterated soybean meal and disease outbreaks among poorly nourished livestock and poultry if soybean supplies shrink.

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