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Trump’s phase one trade deal is likely to unravel

Beijing and Washington are expected to sign a ‘phase-one’ trade deal on Wednesday, but it is unlikely that China can meet Donald Trump’s demand for $50bn of farm purchases.

China and Washington are expected to sign a ‘phase-one’ trade deal on Wednesday, but it is unlikely that China can meet Donald Trump’s demand for $50bn of farm purchases.
Garry white employee

by
Garry White

in Features

13.01.2020

Although the signing ceremony on Wednesday 15 January will reassure markets that progress is being made, no preliminary text of the agreement has been released yet. With some of the targets Washington looks likely to impose on Beijing being particularly ambitious, it may not take long for this agreement to unravel.

President Trump said last month that the intermediate deal will be signed on 15 January at the White House with “high-level representatives of China”. This was confirmed last week by a spokesman for China’s Vice Premier Liu He, head of the country’s US trade negotiating team, who said he will be in Washington ahead of the signing on Wednesday.

A major step-up of agricultural purchases by Chinese companies will be a central part of the agreement, but it seems unlikely that China will get anywhere near the levels being demanded by Donald Trump. The agreement is expected to require the doubling of China’s $24bn (£18.3bn) in pre-trade war US agricultural purchases to between $40bn to $50bn a year. This target would mean Chinese purchasers shunning lower-cost products from places such as Brazil and Ukraine and purchase the majority of its farm goods from the US. This is utterly unrealistic.

Indeed, last Tuesday, Beijing said it will not increase its annual low-tariff import quotas for corn, wheat and rice to help boost up purchases of farm goods from America. China’s senior agriculture official Han Jun said the quota was offered to global markets and “we won’t adjust it for one country”. It is notable that no-one from the Chinese government has made a public commitment on the key points of the potential deal highlighted by Donald Trump.

Cheaper elsewhere

China is not even being subtle about its purchases from other counties. The week before a deal is expected to be signed, Bloomberg reported that private buyers from the Asian nation had bought about 10 cargoes of soya beans from Brazil. This has crushed hopes that a major purchase of the US product would be made in the wake of the signing next week. It also sends a sign to US farmers that the country will not buy product from them if it can be found cheaper elsewhere. Brazil has seen a record harvest of the grain used for animal feed this year, which has kept prices subdued.

Another factor making Trump’s agricultural targets look suspect is that demand for soya beans has slumped because African Swine Fever has resulted in the slaughter of almost half of China’s pig herd. This has reduced demand for animal feed – a situation that looks set to continue for the rest of the year. There is an opportunity for US livestock farmers, as China imports more meat due to its falling production, but grains are a more significant part of US-China trade.

Indeed, the situation could be getting worse as Chinese state media have reported that organised criminals have been exploiting the crisis by intentionally spreading the disease. They then force farmers to sell their pigs for a low price before smuggling the meat and selling it on as a healthy product, taking advantage of the fact that the price of pork has more than doubled because of the supply crunch. These crime gangs are even using drones to drop infected items into farms, according to reports from state-owned agencies. All of this implies that it will be quite some time until Chinese demand for soya beans increases significantly.

Slowly opening its markets

Of course, the agreement is not only about agriculture and there are some realistic bright spots likely to be contained within the text. Last week, Beijing confirmed that it will open up oil and gas exploration to private and foreign companies. It said companies with net assets of at least 300 million yuan ($33m) will be able to apply for licenses. This move is likely to be positive for foreign businesses and China itself, as the fact that only state-owned companies have been granted exploration permits has held back growth in domestic oil production, making the country over-reliant on imports.   

China is also expected to stick to an agreement not to manipulate the value of the yuan. The People’s Bank of China (PBOC) has not intervened in currency markets at all this year and let market forces push up the yuan’s exchange rate. China had previously depreciated the yuan as a buffer to take the sting out of US tariffs. The PBOC has repeatedly pledged to keep the yuan “basically stable” at a reasonable and equilibrium level.

However, it is farm purchases that are the most important factor for Donald Trump, as rural Americans make up a significant part of his base – one that he needs to keep on board ahead of November’s presidential election. Should Chinese companies fail to make a marked improvement in purchases of American farm products, then this trade truce is at risk.

China has already secured a win in this agreement after the December tariffs were scrapped, so a significant increase in farm purchases is needed so President Trump can declare the win he so desperately wants. With Trump’s agricultural targets appearing impossible – even in the best of circumstances – it is likely that later this year we will back to the situation where tariffs are being raised and sentiment on global trade will be hit once more. This trade war is far from over, despite the positive declarations we will hear this week.

A version of this article appeared in Friday’s Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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