Last week, former Minister of Finance Lou Jiwei recommended striking back first at American soybeans, then cars, then aircraft, in remarks at an economic forum in Zhejiang Province last week.
A more developed argument for targeting U.S. soybeans appeared in a March 30 Global Times column by Cheng Guoqiang, Professor at Tongji University in Shanghai and former long-time researcher/advisor on farm trade for the State Council's Development Research Center. Cheng advocates "necessary countermeasures" against U.S. soybeans in accord with WTO rules to "defend China's national interest," "defend the spirit of WTO," and to counter "protectionist" U.S. measures that "show contempt for the multilateral trading system."
Cheng argues that retaliation against soybeans will have the greatest impact since they are the no. 2 U.S. export to China, with 2017 sales valued at $14 billion. Soybeans account for 58% of U.S. agricultural exports to China and 11% of all U.S. exports to China. He points out that U.S. soybean farmers rely heavily on exports, with 44% of production exported and 62% of those exports going to China last year.
Cheng claims that soybeans are politically strategic because production is concentrated in Midwestern States that were critical to President Trump's victory in the 2016 election. Cheng thinks pressure from these agricultural states will bring Trump to the bargaining table.
As the northern hemisphere begins its planting season, Cheng claims that clamping down on U.S. soybeans could encourage farmers in the Black Sea region and other areas to plant more soybeans and reach their "suppressed" potential as soybean suppliers. He suggests that South American producers could also receive a "signal" to produce even more.
Several other essays on the topic appearing last week briefly recounted the same arguments for targeting soybeans and puzzled over why soybeans were not included in the initial list of U.S. products China has targeted for retaliation:
- "Why is Striking Back Against American Soybeans in a Trade War Unlikely?" by analysts from a futures trading company
- "China-US Trade War: Can Soybeans be the Killer?" by blogger Shi Hanbing, an "independent economic analyst."
- "Use Soybeans to Hit Back in US Trade War? Expert: Not That Simple," by microblogger "The Intellectual" posted by The Paper which quotes an "expert" who is never identified.
These commentaries drilled deeper into the data about soybean trade and production than Dr. Cheng did, and each arrived at conclusions like "The Intellectual's" statement: "China and American soybeans are inseparable" ["中国离不开美国大豆"].
Each commentator recounts the meteoric growth of China's soybean imports--from 300,000 metric tons in 1995 to 96 million metric tons (mmt) in 2017. Imports grew 14 percent during 2017. China now consumes nearly a third of the world's soybeans and produces only 4 percent. "The Intellectual" commented that, "Soybeans are indispensable to China." Chinese people cannot maintain their much-improved living standards without imported soybeans, he wrote.
China imports an estimated 85 percent of the soybeans it consumes, according to the "striking back" authors."The Intellectual" explains that the extreme reliance on imports came about due to a strategic choice to focus limited land resources on producing high-yielding cereal grains. Wheat, corn and rice yield 3 times as much grain per acre as soybeans, "so soybeans had to be the victim" as China sought to meet food security targets, "The Intellectual" explained.
With China's current soybean yield of 1.8 metric tons per hectare, it would need 53 million hectares of farmland to grow the 97 mmt of soybeans the country imported during 2017. China currently plants about 7 million hectares of soybeans and 35 million hectares of corn. China says it has 135 million hectares of cultivated land in total.
China imports such a large share of the world's soybeans that there would be nowhere else for China to fill its soybean deficit if it stopped buying U.S. soybeans. Last year China's imports equaled 64 percent of the 151 mmt of soybeans traded in world markets. While China is the world's biggest buyer, it has little bargaining power because there are only two major supplying countries. The "striking back" authors reported that Brazil supplied 53 percent of China's soybean imports and the United States supplied 35 percent last year. Argentina is the third supplier with a 7 percent share. "Our country basically has to choose between importing from Brazil and the United States," the "striking back" authors commented.
There is no other supplier that could fill China's deficit if U.S. soybeans were limited. China's growing demand has already prompted a huge increase in Brazilian production that has reduced reliance on the United States. Blogger Shi Hanbing argues that Brazil already supplies half of China's soybean imports and has reached its limit as a supplier. Moreover, he points to USDA reports that say both Brazil and Argentina are expected to have diminished soybean harvests this year, shrinking potential soybean supplies.
In view of these facts, all three commentators conclude that the main impact of imposing a steep tariff on U.S. soybeans will be to increase the cost of soybeans to Chinese buyers. The commentators anticipate that the higher cost of soybeans will have a "chain reaction" passing on price increases to meat and vegetable oil in China, causing an increase in the CPI.
The "striking back" authors recommend that China save retaliation against soybeans as its "ace card." Blogger Shi suggests that the Chinese population eat less meat and switch to eating salads.
For now, China seems to have little recourse to retaliate against U.S. soybeans without hurting itself, perhaps as much as it hurts U.S. soybean growers. In the long run, this will surely prompt Chinese leaders to double down on their efforts to nurture new soybean suppliers in order to reduce China's reliance on two soybean suppliers.
Ironically, a similar effort by Japan many years ago helped catalyze the emergence of China's top supplier. After a U.S. export embargo during the 1970s raised questions about its reliability as a supplier, soybean importer Japan looked to diversify its soybean supply by investing in Brazil--a minor soybean producer at the time. A lot of other events, R&D, and policies had to line up to make it happen, and it took decades, but Brazil has now emerged as the top soybean exporter in the 21st century. Brazil's massive supplies also are the chief reason for low soybean prices--the "unfair" phenomenon Chinese soybean commentators normally chatter about and blame on the United States.
Now Chinese government and agribusiness leaders will surely get busy trying to create the next Brazil somewhere in the world.