US-Sino trade deal is more about politics than busi­ness

De­spite warm words, those who think the soya bean can help thaw the ide­o­log­i­cal Cold War be­tween East and West are likely mis­taken ‘This week’s cor­dial­ity is un­likely to last longer than the elec­tion cam­paign’

The Daily Telegraph - Business - - Business Comment - Garry White Garry White is chief in­vest­ment com­men­ta­tor at wealth man­age­ment com­pany Charles Stan­ley Ben Mar­low is away

Af­ter months of es­ca­lat­ing ten­sions sparked by tech­no­log­i­cal ri­valry, Chi­nese and US of­fi­cials put on a sur­pris­ingly united front this week. Not only were mar­kets re­as­sured by the fact that both sides were ac­tu­ally talk­ing again, but the US de­clared that the phase one trade deal signed in Jan­uary was still in­tact. This is de­spite the fact China is clearly not liv­ing up to its prom­ises to buy sub­stan­tially more US goods as part of the agree­ment.

The sooth­ing state­ments re­minded in­vestors that, al­though there is much that di­vides Beijing and Wash­ing­ton, there are some ar­eas where both sides can­not do with­out each other right now. This is par­tic­u­larly true in the case of soya beans.

Soya beans are a cor­ner­stone of the Chi­nese diet. They are the base in­gre­di­ent in soy sauce and tofu and are a vi­tal feed­stock for the coun­try’s chick­ens and pigs. China needs soya bean im­ports to feed its 1.4bn peo­ple and the US and Brazil are the largest pro­duc­ers.

The crop is also one of the most im­por­tant ex­ports for US farm­ers, a key part of Don­ald Trump’s elec­toral base. Get­ting China to “play fair” and re­duce its trade deficit was a key elec­toral prom­ise for the cur­rent White House in­cum­bent. Over the next few months, this in­ter­de­pen­dency in agri­cul­tural trade may help thaw re­cent ten­sions as the US pres­i­den­tial race starts to heat up. Un­for­tu­nately, this thaw is prob­a­bly only tem­po­rary.

A large jump in pur­chases of farm prod­ucts was the key el­e­ment in Jan­uary’s deal, but the eco­nomic chaos wrought by Covid-19 has meant that pur­chases have ac­tu­ally slumped. Cus­toms data re­leased on Tues­day showed that China bought just 38,331 tons of soya beans from the US in July com­pared with 911,888 tons in July 2019. The im­ports were also down from the 267,553 tons of US beans im­ported in June. In­stead, China has been turn­ing to Brazil to make its pur­chases. In July, China pur­chased 8.18m tons of the oilseed from Brazil, a 27pc year-on-year rise.

An anal­y­sis by Bloomberg cal­cu­lated that US im­ports to China would need to hit $71bn (£54bn) over the first half of 2020 if Beijing was to meet its com­mit­ments. But the level of im­ports in the first six months of the year was just $33.1bn, only slightly ahead of the $32.5bn recorded in the first half of 2019.

Beijing and Moscow are also seek­ing to join forces in the pro­duc­tion of soya beans. On Mon­day, Beijing pro­posed a “soya bean in­dus­try al­liance” with the two coun­tries plan­ning to co-op­er­ate in all ar­eas of the sup­ply chain. Beijing in­sists this will not in­ter­fere with its com­mit­ment to raise im­ports from the US.

De­spite the unin­spir­ing data, the talks be­tween US trade rep­re­sen­ta­tive Robert Lighthizer and his Chi­nese coun­ter­part were de­clared a suc­cess. China’s com­merce min­istry said the two sides held a “con­struc­tive dia­logue” and agreed to con­tinue push­ing for­ward the phase one trade deal’s im­ple­men­ta­tion. The of­fice of the US trade rep­re­sen­ta­tive said it had “ad­dressed steps that China has taken to ef­fec­tu­ate struc­tural changes”. In what was in prac­tice a cam­paign­ing mes­sage to Trump’s agri­cul­tural base, the press was briefed that China would buy a “record amount” of Amer­i­can soya beans in the sec­ond half of 2020, a state­ment that sent soya bean fu­tures traded in Chicago to a seven-month high.

The cur­rent ad­min­is­tra­tion is cling­ing on to the trade deal as an area of per­ceived suc­cess be­cause it be­lieves this will help with its re-elec­tion strat­egy. The trade talks and phase one deal em­pha­sise the ar­eas where Amer­i­cans think Mr Trump is more com­pe­tent than ri­val Joe Bi­den – jobs and the econ­omy.

Bash­ing China on tech­nol­ogy trans­fer and un­fair corporate prac­tices will not be as ef­fec­tive as a cam­paign­ing strat­egy be­cause Democrats have roughly sim­i­lar poli­cies on these is­sues. In ar­eas such as hu­man rights, Mr Bi­den is likely to be much tougher on Beijing. That’s why over the next 10 weeks, we are likely to hear much more about soya beans than semi­con­duc­tors. It doesn’t mat­ter that the trade deal is not taken se­ri­ously by many economists, the aim is to con­vince the ru­ral US vot­ers who helped put Mr Trump into the Oval Of­fice in 2016 to turn out and give him a sec­ond term. It’s about politics, not trade.

We shouldn’t re­ally be sur­prised by all of this. The Jan­uary trade tar­gets al­ways seemed ut­terly un­achiev­able but the slump in eco­nomic ac­tiv­ity as a re­sult of the global pan­demic has given both sides a “get out of jail free” card when it comes to the ac­tual num­bers. Don­ald Trump has been able to claim a “win” against China – and Beijing man­aged to avoid any fur­ther escalation in tar­iffs.

De­spite the warm words ex­pressed by both sides, those that think the hum­ble soya bean could help thaw the wider ide­o­log­i­cal Cold War be­tween East and West are likely to be mis­taken. This week’s cor­dial words are un­likely to last longer than the elec­tion cam­paign – and China will con­tinue to di­ver­sify its agri­cul­tural pur­chases and form new al­liances. The only rea­son many US farm­ers are stay­ing afloat is be­cause they are re­ceiv­ing gov­ern­ment as­sis­tance. These pay­ments can­not last for­ever – and the farmer ob­vi­ously know this. Clearly, Mr Trump needs as much pos­i­tive soya-bean spin as he can get. But, when it comes to the im­pact on trade, the fig­ures speak for them­selves.

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