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China’s trade restrictive actions against Australia — what they say about China’s compliance with notification requirements and the importance of market-economy conditions in global trade

One of the challenges companies and trading partners of China have faced in having the global rules of trade actually honored by China has been the informal actions of China’s government at the central, provincial and local level which result in clear violations of WTO obligations as well as the fear of retaliation companies trading with China may face if specific examples of non-compliant actions are raised bilaterally or through dispute settlement.

In yesterday’s Global Business Dialogue TTALK entitled “China and Aussie Cotton,” the challenges that Australia’s cotton producers are facing in China are reviewed including apparent verbally communicated requirements to Chinese cotton purchasers not to buy Australian cotton. See Global Business Dialogue TTALK of October 22, 2020, “China and Aussie Cotton,” https://myemail.constantcontact.com/CHINA-AND-AUSTRALIAN-COTTON—-TTALK-FOR-OCTOBER-22.html?soid=1101547782913&aid=L4XRKbnPF_A. The post has links to various sources for the concerns raised in the post.

A good summary paragraph from the TTALK piece follows:

“All of that said, this has been a tense year for China-Australia trade, as China has taken aim at one Australian export after another to signal its displeasure with Australian policies. Australian barley, beef, and wine were hit with import restrictions earlier. Last week it was coal and cotton – what might be called Australia’s black and white exports to China. This time, though, China’s restricted policies were not in black and white. They were instead oral instruction to Chinese buyers of those products not to buy from Australia.”

As the WTO Members consider reforms needed to improve the functioning of the global trading system, the challenges Australian producers are facing in having access to the Chinese market should help inform some of the critical challenges and needs.

Obviously, there are transparency requirements on all WTO Members on actions taken that affect access to a Member’s market. It is unlikely that any of the non-written actions, policies or practices taken by the Chinese government at the central, provincial or local level that affect foreign goods or services or foreign investors are notified to the WTO. If so, this is a major problem in the third leg of the WTO structure – notifications and oversight. While similar problems may exist for other WTO Members, the Australia example is a clear instance where China has discriminated against products of a trading partner without formal notification or justification.

Similarly, the Australian example raises concerns about China using the influence of the state to distort trade outcomes. This is, of course, the core concern of the United States, Japan, Brazil and others that the global trading system is premised on market-economy conditions within WTO Members and that systems like that of China don’t fit well under existing global rules. The state directing companies not to purchase commodities like cotton from foreign suppliers is inconsistent with such market-economy conditions.

For any reform initiative to permit the WTO to ensure conditions of fair trade in the global market, state actors need to sit out the vast majority of trade actions involved in the production, sale, import and export of goods and services. There have been proposals to date to address some of the notification deficiencies that exist, but nothing really focused on informal actions of states. Similarly, the U.S., Japan and the EU have also identified a series of issues (industrial subsidies, forced technology transfer) where the existing rules of the WTO are inadequate to address some of the distortions caused by economic systems like that employed by China. It is unclear that the areas being considered deal with some of the distortions flagged in the Australian case or the issue of threats or acts of retaliation by a WTO Member against companies engaged in trading with the Member or who have invested in the Member. While China is certainly a Member where companies often complain privately about retaliation or threats, China is not alone in that regard.

Without serious reform to address these and other existing problems as well as update the rules to reflect 21st century trading realities, countries will need to increasingly look outside the WTO for tools to address the distortions created.

U.S. – China Phase 1 Agreement; Opportunities and Challenges for U.S. Agriculture

President Trump and Vice Premier Liu He will sign the Phase 1 Agreement between the U.S. and China on January 15, 2020 according to press reports. While the specifics of the phase 1 agreement are not yet public, the agreement has been reported as having China agree, among other provisions, to increase imports from the U.S. over two years by as much as $200 billion including upping agricultural imports to $40-50 billion/year. If achieved, such purchases would help reduce the massive trade deficit that the U.S. has with China.

There is no doubt that China’s retaliation against U.S. exports, including importantly U.S. agricultural exports has reduced the role of U.S. products in the Chinese market. Thus, Administration efforts to achieve movement by China on its purchases of goods is understandable, particularly with a country with an economic system so different than a market economy. Presumably, China will construe its purchasing obligations as a best efforts one, and the U.S, will view the commitments as more binding. While the latter construction indicates the U.S. is seeking at least partially managed trade with China, that outcome is understandable in light of the failure of China to actually become a market economy since joining the WTO.

To the extent that China in facts ramps up procurement of U.S. agricultural goods, that will obviously be helpful to U.S. agricultural interests. Questions have been raised as to whether $40-50 billion/year in purchases by China are achievable based on past procurement levels and U.S. existing production/exports.

For example, the highest exports of agricultural products from the U.S to China since 2003 were in 2013 and 2014 when domestic exports of HS Chapters 01-24 were $22.6 billion in each year. Soybeans accounted for some 67% of total U.S. agricultural exports in 2016 when U.S. domestic exports were $21 billion. U.S. exports of all agricultural products in 2018 were down to $7.8 billion with soybeans down from $14.2 billion in 2016 to $3.1 billion in 2018, thus accounting for the vast majority of the decline is U.S. agriculture exports to China. Because of some efforts by the Chinese to increase agricultural imports from the U.S. during the second half of 2019, U.S. exports will likely be around $12-13 billion for 2019 (possibly higher depending on actual levels of state directed purchases that ship in the last two months of the year).

The ability to generate exports to China of $40-50 billion depend on market demand in China, competitiveness of U.S. products (or state direction) and the capacity within the U.S. agricultural sector to either ramp up production, ship from inventory or divert product from third countries. With growing per capita GDP in China and with internal production issues on products like pork flowing from disease, it should be the case that Chinese demand for imported agricultural products will increase in the 2020-2021 period.

While U.S. producers have been suffering from low commodity prices for a number of years, total U.S. agricultural exports have not changed significantly during the 2016-October 2019 period, raising questions on the ability of the U.S. to dramatically expand exports to China without diverting product from third countries. For example, total U.S. agricultural exports were $134.9 billion in 2016, $137.1 billion in 2017, $138.5 billion in 2018 and $115.8 billion in the January-October period of 2018 down to $111.0 billion in the first ten months of 2019.

When the U.S. shipped $21.0 billion of agricultural products to China in 2016, China accounted for 15.6% of U.S. exports. For there not to be diversion of exports from other countries, U.S. exports in 2020 would need to $170.7 billion for the U.S. to export $40 billion of agricultural products to China and $180.7 billion for the U.S. to export $50 billion to China with China accounting for 23.4% – 27.7% of total exports. The total dollar value of exports can fluctuate based on level of commodity prices as well as changes in volume shipped. When commodity prices were higher, US exports had been as high as $149.2 billion in 2014. Moreover, when there was strong upward global demand and upward pressure on prices, U.S. agricultural exports increases from $69.0 billion in 2006 to $112.8 billion in 2008. Thus, there is at least one period where dramatic growth in US global exports of agricultural products was achieved over a two year period.

The U.S. will continue to face significant competition for sales in China of agricultural products, making the large growth identified in the press about the agreement more challenging, though partially offset by the role of the state in China particularly in many agricultural products. For example, a number of important agricultural exporting countries have FTAs with China (New Zealand and Australia) which will likely leave many U.S. agricultural products less competitive even assuming that retaliatory tariffs on particular products from the U.S. are waived to permit expanded U.S. exports. Beef and wheat would be two likely product areas affected by the FTA tariff differential. Similarly, other major exporters, like Brazil, have provided alternative sources for key agricultural products like soybeans and will likely compete hard to remain important suppliers based on their expanded production levels and supply record in the 2018-2019 time period.

USDA has published several GAIN reports looking at (1) 2020 reduced MFN tariff rates on agricultural products and (2) the current retaliatory tariffs on U.S. agricultural products. The latter can be waived by China if it chooses to increase U.S. competitiveness. The two GAIN reports are embedded below and show the relatively high MFN tariffs on many agricultural products applied by China and the large retaliatory tariffs U.S. agricultural producers currently face on many agricultural products.

China-Lowers-Applied-MFN-Tariff-Rates-on-Selected-Agricultural-Products_Beijing_China-Peoples-Republic-of_12-25-2019

China-Calls-Off-Additional-Tariffs-on-US-Products-Planned-for-December-15_Beijing_China-Peoples-Republic-of_12-15-2019-1

Changing weather patterns and the uncertainty of future direction on retaliatory tariffs (U.S. and China will have the ability to reimpose tariffs or add tariffs based on implementation) may make expanding U.S. production problematic at least in the immediate future.

Thus, there is at least a fair amount of uncertainty as to how the targeted purchase levels in agriculture by China will be achieved by U.S. producers/ exporters in 2020-2021 and what the agreement will mean for opportunities going into the future.

That said, there is no doubt that the Chinese market is an important one for agricultural goods. China has used retaliatory tariffs to drastically reduce U.S. exports in 2018-2019, and the U.S. has had many ongoing challenges with SPS (sanitary/phytosanitary) or TBT (technical barriers to trade) issues in China shutting out competitive U.S. products. The phase 1 agreement when signed and implemented offers important opportunities for U.S. producers. Soybean producers, wheat producers, pork and beef producers, tree nut producers and many others will hopefully find significantly expanded opportunities in China. The Administration has been clear that any agreement must be enforceable and has indicated that there are enforcement mechanisms in the new agreement. Time will tell how the new agreement, when it enters into force in the second half of February 2020, works in fact and whether the U.S. and China have managed to find a way forward that will work for both countries at least on the Phase 1 agreement issues.