Introduction

Trade friction between the world’s two largest economies has led to a tariff arm wrestling generating conflict that can ignite a trade war. After the U.S. started imposing tariffs on imported steel and aluminum products from China on March 23, China responded on April 2 by imposing tariffs on $3 billion of U.S. products, including a 25% tariff on pork, and 15% on fruits, nuts and other agricultural products.

On April 2, Washington published the list of another 25% tariff on $50B imported products from China, and Beijing responded immediately with 25% on a list of $50B U.S. goods including soybeans, DDGS, beef and other agricultural products. Although the second wave of tariffs won’t be effective, depending on further procedures and actions, they have brought greater concerns in related industries on both sides because the impact would be much bigger than the first wave, especially for the agricultural sector here. On April 5, President Trump added a list of additional $100B Chinese imports to be tariffed.

 

U.S. Pork production and export to China

U.S. is the world’s third largest pork producer, and the largest pork exporter. The production is concentrated in the Midwest and North Carolina. We exported about 1/3 of our output at a value of $6.5B in 2017. China is our 3rd largest market after Japan, Mexico, Canada and South Korea.

China is the world’s largest pork producer and consumer. China produced 97% of the pork it consumed in 2017, but does buy some pork from the world. The U.S. is the largest exporter to China with sales of $1.1billion in 2017. It was estimated that Chinese overall pork demand elasticity is between 0.34 to 0.85 by three different studies, which means a 1% price increase would reduce its demand by 0.34% to 0.85%. The issue is that not all pork price will rise after the tariff but only pork imported from the U.S., which may mean a much bigger reduction in this pork. It is likely that the 25% price increase on U.S. pork will reduce U.S. sales to near zero. In addition, China will easily be able to buy the U.S. shortfall from countries in the European Union, Canada, Brazil and Mexico.

It has gone a long way for US pork entering the Chinese market, and the path was not smooth. Besides its effort to enhance its domestic production by encouraging investment in large scale modern hog producing operations to replace the low productive traditional operations, the Chinese government does not allow pork from hogs fed with Ractopamine, a common additive in the U.S., citing food safety reasons. The combined pork exports of Denmark and Germany to China surpass the U.S., partly because Ractopamine is not used in the EU. The world largest pork processing firm, Smithfield headquartered in the U.S., was acquired by the Chinese WH Group in 2013, and shipped Ractopamine free pork to its processing operation in China. Since then, pork products from the U.S. have become more visible in Chinese markets. A recent report from USDA ERS states that China’s imports will rise as its domestic production costs and prices rise, providing opportunities for more imports. This suggest an optimistic expectation for American farmers to sell more pork to China, at least until this unexpected tariff increase. The 25% tariff on U.S. pork will make U.S. pork uncompetitive in Chinese market relative to domestic products and other exporters, and will provide an opportunity for EU countries like Germany and Denmark as well as Canada, Brazil and Mexico to expand their market share in China.

 

U.S. Soybean production and export to China

The U.S. cultivates about 1/3 of the world soybean acreage and exports over ½ of its output. The 4.4 million bushels of beans in 2017 were almost all produced in the Midwest, involving a quarter of a million farms.

U.S. soybean exports generate the highest revenue among all agricultural categories at the value of $21.6B. About 30% of our soybeans go to China, the largest export destination, six times that of the second largest exporters on our list, the entire EU. The beans are crushed to make soybean oil that enters the fast growing food processing and food service sectors in China, although the more consumer appealing non-GMO oils dominate the retail market. The soybean meals become high quality protein feed for the poultry, pork, dairy, livestock and aquaculture.

The export demand elasticity for U.S. soybeans was estimated in several studies ranging from 0.4 to 1.1, quite elastic. This means if price increases by 1% the export demand volume will drop by 0.4% to 1.1%. A 25% price increase may mean the annual loss of up to $1.5B export revenue per year, and this estimated loss rises to $1.7B to $3B based on a global production and trade model developed recently. That analysis also estimated that the Chinese economy would face significant losses in economic wellbeing due to the higher soybean prices. In fact, for a 25% tariff, both the U.S. and China lose about $3 billion per year.

Again, this vacancy will be filled by other competing exporting countries, such as Brazil and Argentina. Brazilian economic well-being could increase $2.7 billion per year. The Chinese government has also tried to increase its soybean planting acreage at the cost of corn, a commodity over stocked in its inventory. The change will increase the world production capacity in the long run and hurt U.S. famers for years to come.

 

What’s next?

President Trump tweeted April 9 that he and Chinese President Xi are good friends, a signal that negotiation is not given up. One day later, Xi announced Chinese efforts in improving its economic openness and trade fairness at the Boao Forum for Asia, welcomed immediately by Trump. Hope exists that the tariff on soybeans and other agricultural commodities on the second list will not be imposed, and the one on pork can be resolved before too long.

 

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