The U.S. and China trade deal marks the beginning of a major shift in the global market of agriculture.
Phase one of the U.S.-China trade deal was officially signed last week by President Trump and China’s Vice Premier Liu He. While some view this signing as a small step for U.S. and China’s trade relations, it’s a step nonetheless towards resolving an 18-month long economic conflict between these two global economic powerhouses. In this article we will discuss the following:
- How and why a trade war between the U.S. and China occurred;
- What significant changes happened in the signing of phase one;
- How it affects U.S. agriculture and commodities; and
- Predictions on what to expect next.
What started the trade war between the U.S. and China
July 2018 marked the beginning of the trade wars between China and the U.S. when President Trump imposed record-high tariffs on Chinese imports. In response, China imposed its own retaliatory tariffs and turned to other countries for their import needs, particularly agricultural goods such as soybeans, corn, wheat, dairy, and meat.
The Trump administration’s reasoning behind increasing tariffs on imported Chinese goods was to reduce the trade deficit between China and the U.S., a deficit that according to the U.S. Census Bureau topped $419 billion in 2018. President Trump also labeled China as a “currency manipulator” last August for using competitive devaluation of its currency. This title put further pressure on China for trade accountability beyond the World Trade Organization (WTO).
Once the largest market for U.S. agriculture goods, China dropped down to 5th as the trade wars escalated. American farmers and ranchers have felt the effects of this shift in the global market. To assist farmers and ranchers, the 2018 Farm Bill allocated $16 billion for the Market Facilitation Program (MFP) to offset the loss of income from the trade war, a $6.4 billion increase from 2018.
Key Changes in Phase One of the U.S. China Trade Agreement
The 86-page agreement will go into effect in 30 days from when it was signed. President Trump dropped the “currency manipulator” label, while China agreed not to engage in competitive devaluations to boost their own exports. Wendy Cutler, Vice President of the Asia Society and former U.S. trade negotiator, illustrated a key difference between this trade deal and past ones. “It does not rely on independent panelists to adjudicate a dispute. Rather it’s up to each side to decide on its own whether the other is violating its commitments. How this will play out remains unseen.”
Existing tariffs on $360 billion worth of Chinese goods—two-thirds of China’s exports—will remain intact to keep China accountable to phase one of the trade agreement. The U.S. has also agreed to drop initial plans of imposing tariffs on an additional $160 billion of Chinese imports and cut existing tariffs on $110 billion worth of Chinese goods in half.
Intended Effects of the Trade Deal on U.S. Agriculture and Commodities
In the deal, China has agreed to buy $76.7 billion of U.S. agricultural, energy, and manufactured goods in 2020—a 41 percent increase from 2017. President Trump stated that China will buy $200 billion in American products over the next two years. According to AgAmerica’s chief economist Dr. Penson, China has agreed to purchase over $36 billion of American agricultural commodities alone in 2020. This will likely affect global trade with other countries as well. Dr. Penson estimates a $10 billion loss in Brazil soybean export sales. If all goes as planned, phase one of the trade agreement will lead to a significant increase in global exports for commodities like pork, beef, chicken, and wheat for U.S. agriculture.
Potential Effects on U.S. Agriculture
The intended increase in global exports to China has the potential to shift the decreasing trend of U.S. manufacturing activity and increase in American farm bankruptcies. December marked the lowest point of growth in manufacturing jobs at only 0.5 percent, and according to the American Farm Bureau, farm bankruptcies are up 24% compared to the previous year.
The Economic Benefits of Increasing Global Exports to China
Reaching an agreement between the U.S and China trade market will bring some relief to the U.S. job market and overall economic growth. Since the start of the trade wars in 2018, an analysis by the Tax Foundation reported over 10,000 jobs cut in August alone due to trade difficulties. While the U.S. job market is still in an upward trend, the trade wars slowed its pace and would continue to strain job growth if an agreement was not reached.
Phase one of the U.S.-China trade agreement also brought a deeper level of accountability for Chinese exports that was not there before. High tariffs were left on $360 billion worth of Chinese goods, something that was unheard of before this trade war began; and average tariffs have risen from 3% to 21% since January 2018. Although phase one of the agreement will decrease tariffs to an extent and prevent the enactment of further tariffs, high tariffs will continue to be a part of the new norm on both sides in the agricultural global market.
In the past year alone, there was a 16% or $62 billion decrease in the trade deficit. A combination of an increase in U.S. exports to China and a decrease in exports from China will shrink the trade gap further.
What’s Ahead for the Trade Agreement Between the U.S. and China
There seem to be conflicting reports on what’s next for this trade deal. President Trump stated that they plan to undergo phase two immediately, but Chinese officials say phase one must be successfully implemented first before moving on to phase two. Most trade experts expect to see 2020 and the upcoming election come and go before we see any phase two negotiations take place. However, organizations like the NCGA urge the Trump administration to move forward with negotiations to resolve retaliatory tariffs that continue to affect their business sooner rather than later.
Skeptics of phase one like Eswar Prasad, a Cornell University economist and former head of the International Monetary Fund’s China division of the U.S.-China trade deal, say it’s a step in the right direction but lacks the substance needed for long-term reform that affects the U.S. agricultural and manufacturing industries. Analysts believe phase two will prove to be more difficult to negotiate due to China’s clear ambition to become a global leader in advancing technology like artificial intelligence.
Keeping the American farmer informed and prepared
AgAmerica Lending is there for the American farmer through the unpredictable nature of the agricultural global market. Whether it’s trade wars, tariffs, natural disasters, or a sudden shift in commodity prices, AgAmerica values the importance of the American farmer and supports their goal of long-term success. Help secure your financial future, speak to our land loan specialists today to learn how we can create a custom farm loan to help you access more working capital for your agricultural operation. Contact our team at firstname.lastname@example.org or by calling 844.516.8176.