US and China in a soybean stand­off

With both the US and China resorting to tariff hikes against each others’ exports, the global economy is staring at a full-fledged trade war between two of its largest economies. Most people see this stand-off as an outcome of US president Donald Trump’s efforts to rejuvenate domestic manufacturing at the cost of Chinese exports. What was being ignored, and has come out in the open after China decided to impose 25% tariffs on soybean imports from the US, is the implication this trade war can have on agricultural trade between the two countries.

That the US export market has played an important role in the rise of China as an economic superpower and leading exporter in the world is well known. China’s merchandise trade surplus (trade in goods) with the US was just $6 million in 1985, the earliest period for which China-US trade data is available from the United States Census Bureau. In 2017, China’s merchandise trade surplus with the US was $375.6 billion. China’s merchandise trade surplus with the US is greater than its overall trade surplus of $209 billion in goods and services in 2017. (Chart 1)

To be sure, China’s merchandise trade surplus is much greater than its trade surplus in goods and services. According to World Bank data, China’s merchandise trade surplus in 2016 was $ 494 billion, while its trade surplus in goods and services was just $ 249 billion. The US had a trade surplus of $38 billion in service trade with China in 2016.

What does not come out in the headline numbers on China’s in- creasing merchandise trade surplus however is the story of its growing trade deficit in agricultural trade with the world, and especially the US. According to statistics from the United Nation’s Food and Agriculture Organisation (FAO), the average share of food imports in China’s total food production between 1961 and 1965 was 1.2% by volume. This figure jumped more than eight times to 9.7% between 2009 and 2013, the last five years for which data is available. While China’s growing reliance on imports to take care of its food requirements is an important facet of its growth trajectory, what is even more remarkable is the dominance of just one commodity, soybeans, in China’s agricultural imports. According to FAO data, soybeans had an average share of just 2% in China’s total agricultural imports in value terms in the 1970s. This figure has risen to 32.8% in the present decade.

What explains this rapid increase in China’s soybean imports FAO statistics give a break- up of domestic consumption of a product by various end-use categories: food, feed, processing, waste, seed and other uses. In the last decade, more than three-fourth of China’s domestic soybean consumption has been used for processing (Chart 2 ).

This is largely the story of soybean fulfilling animal feed requirements for China’s rising meat consumption. Rapid growth in incomes, especially in urban areas, led to a large increase in consumption of meat, especially pork in China. According to FAO, per capita consumption of pig meat in China was 11.39 kg/person/year in 1980, very close to the global average of 11.86 kg/person/year. By 2013, the latest period for which data is available, this figure increased to 38.43 kg/person/year for China, more than double the global average of 16 kg/person/year in that year.

Among the biggest beneficiaries of Chinese opulence leading to rise in pork and hence soybean consumption, has been the US. An analysis of US agricultural trade data shows that soybean exports to China have increased consistently and now account for more than one-fifth of its bulk agricultural exports. Soybeans as a whole have a more than 40% share in bulk US agricultural exports (Chart 3 ).

With China putting a 25% tariff on soybean imports from US, this market is bound to undergo serious disruption in both countries. According to China’s official news agency Xinhua, pork prices have fallen by more than half between 2016 and now. According to Bloomberg, soybean imports from the US had a duty of 3% earlier. With a 22 percentage point hike in tariffs, soybean and hence pork prices will most likely go up. To be sure, China’s rising domestic production of soybeans – farmers are being subsidised to increase cultivation – might reduce its import-dependence for the product. However, it is unlikely that it will neutralise the impact of the tariffs. US soybean imports accounted for 40% of total soybean imports in China in 2016. China as a whole accounted for more than 60% of global soybean imports in 2016. Latin American countries like Brazil, Uruguay and Paraguay could also gain from the Chinese duties on US soybean. Irrespective of the management in soybean sourcing from other importers or domestic production, there is bound to be a significant impact of soybean tariffs on US imports on the Chinese economy.

The implications might be more unsavoury for the US and President Donald Trump tho- ugh. Soybean farmers had voted overwhelmingly for Trump in the 2016 elections and they are known to be partial to Republicans with donations. According to Washington based non-profit research organisation Centre for Responsive Politics, 78% of their donations have gone to the Republican Party in 2018. “Soybeans are the top agriculture export for the United States, and China is the top market for purchasing those exports,” said John Heisdorffer, a soybean grower from Iowa state and president of the American Soybean Association in a statement on July 6 when the first round of tariffs went into effect. “The math is simple. You tax soybean exports at 25%, and you have serious damage to US farmers,” he added.

It is hardly surprising that Trump was tweeting about the plight of America’s soybean farmers due to tariffs (which his own actions have triggered) last week.

(With inputs from Yashwant Raj in Washington and Sutirtho Patranobis in Beijing)