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’
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.