Author: Tristan Kenderdine, Future Risk
Trade policy may be easy to change quickly, but trade practice is institutionally sticky. The reality of bilateral trade is not the simple fungibility of share or futures markets but the deep structural issues: port logistics, shipping and transport, commodities contracts and productive capacity lagging supply and demand factors. Despite Beijing’s intent to impose tariffs on a range of agricultural products including soy and sorghum from early July 2018, institutional reform in China’s trade policy is opening China’s market to more agricultural commodity imports.
From 2014, high-level agricultural policy documents show China clearly moving towards opening agricultural trade in grains and oilseeds. Policymakers have had to face the fact that the state had spent too much on state procurement and were stuck with stockpiles and distorted markets. Further motivation was the fact that domestic grain and oilseed prices have been as much as double international prices. Without being able to increase domestic yields due to land, water and technology constraints, the inexorable move has been towards imports.
China is slowly becoming a net importer of grains and oilseeds. The so-called ‘Insurance Plus Futures’ agricultural price reforms are only pilots at this stage. But the pilot policies are designed to build the institutional capacity upon which to later expand China’s import regime.
The domestic debate in China on the issue of imports has already been resolved. The recent trade frictions with the United States simply mean that deciding from whom to import has become politicised. The real variable is the ease or difficulty involved in switching suppliers at the national level. Can China really switch to Brazilian or Russian beans to replace US imports at such short notice to carry through on trade threats?
Brazil has had a bumper soy harvest which has naturally eaten into the traditional US export season. As Brazil harvests from February to June, while the US harvests from September to November, it is always cyclically cheaper to buy fresher Brazilian and Argentinian beans in the February–June period. Then US exports take off again from September.
This year the chips fell China’s way, but it is normally not so simple to change the industrial chain of commodity imports based on political will. There is a structural element to grain and oilseed imports that is not so easy to change in the short term. And since most of this trade is not done on futures but on contracts, trade is generally slow to respond to price changes.
In a straight war of attrition of political legitimacy between US primary producers and Chinese peasants, the United States will lose out first. The Chinese and US governments and the big four so-called ‘ABCD’ agricultural commodities traders can all weather big hits. But in a war of attrition, the Chinese government can run their producers into the ground with impunity.
In Japan, Australia, Canada and the United States the economic and legal status of primary producers are fundamentally different, with landholders having greater commercial-bank borrowing power and able to heavily lobby government. In Japan for instance the governing Liberal Democratic Party is politically beholdento Japan Agricultural Cooperatives members, preventing the government from liberalising rice imports.
The Chinese Constitution is ‘based on the alliance of workers and peasants’ and there is strong rhetorical value placed on the peasantry and on the obligations of governance legitimacy to rural China. But Chinese farmers have extremely limited access to commercial banks and agricultural credit cooperatives, and do not own their land. China’s farmers do not have anything close to the institutionalised voice that primary producers in Australia have, for example, through the prominent federal National Party of Australia.
So it will always be the US producer that breaks first, which will lead to political pressure on the US senate agriculture committee. China’s tariffs on soy and sorghum are a very calculated political move targeting US producing states, as any US agricultural states that are not major soy producers are major sorghum producers. China was always going to win this particular fight, but Brazil’s successful harvest helped hand China an early trade battle victory.
US agricultural producers will suffer the consequences of the escalating trade battles, and China’s moves will help shift agricultural price-setting legitimacy towards the West Pacific. For other agricultural exporting countries like Canada, Australia, Brazil and Argentina, there may be a temptation to see US self-destruction as a short-term windfall. But the institutional legitimacy that the United States has lost will likely prove damaging in future negotiations with China. China can continue to play different suppliers against each other, while US trade protectionism will only Balkanise the global soft commodities trade.
Replacing Pacific trade partners through agroindustrial investment in the Eurasian hinterland is not without significant costs and serious political risk for China. But in the long term, China is busy investing in agroindustrial capacity in Russia, Kazakhstan, Ukraine, the Middle East and East Africa to ensure future supply without having to rely on Pacific trade partners.
Tristan Kenderdine is Research Director at Future Risk. This article is in part a synopsis of ‘Insurance Plus Futures: Agricultural Commodity Price Reform in China’ in Asia and the Pacific Policy Studies.