‘Cautious Optimism’ in Phase One Trade Goals with China

Wendong Zhang, Center for Agricultural and Rural Development, 515-294-2536; wdzhang@iastate.edu
Dermot Hayes, Center for Agricultural and Rural Development, 515-294-6185; dhayes@iastate.edu
Xi He, Center for Agricultural and Rural Development; xihe@iastate.edu
Nathan Cook, Communications, Center for Agricultural and Rural Development, 515-294-3809; nmcook@iastate.edu

May 28, 2020

Ames, IA – On January 15, the U.S. and China signed a partial trade agreement—the phase one deal—to reduce the economic pressures of the trade war that started in 2018. In the first quarter of 2020, progress on the deal has been slow due to the COVID-19 pandemic, which has slowed global demand and disrupted trade, and due to China diversifying away from U.S. agricultural imports because of the trade war.

However, a new study from the Center for Agricultural and Rural Development (CARD) at Iowa State University, “China’s Agricultural Imports under the Phase One Deal: Is Success Possible?,” finds that China is working in earnest to meet trade targets, and that current market forces and price differences for key commodities might allow it to meet trade obligations.

Based on first quarter exports and the usual seasonal patterns of corn and soybean trade, the study predicts China will import $18.6 billion in U.S. agricultural and related products in 2020. The trade target amount is $36.5 billion, which means that if China is to meet the goal, it will have to increase its U.S. imports later this year.

Historically, China increases its U.S. agricultural imports after corn and soybeans are harvested in the fall, but there are some market signs they are increasing imports now, possibly to help hit upcoming trade goals.

“Over the past few weeks there was an out-of-season uptick in corn and soybean export sales, which suggests that China is trying to make its target,” said Dermot Hayes, a professor of economics at Iowa State and a co-author of the study. Wendong Zhang, an assistant professor of economics at Iowa State, and Xi He, a postdoctoral researcher at CARD, both authored the study with Hayes.

“This cautious optimism is supported by large price differences between key commodities in the U.S. and China documented in the report, as well as China’s recent decision to rebuild national inventories of corn and soybeans,” Hayes said.

China has decided to add 20 million tons of corn to its national inventory, but projections show domestic production falling short of consumption by 15 million tons this year, so it’s likely that China will import more than its 7.2 million ton annual import quota. That could be really good news for the U.S., as the U.S. and Ukraine are the only large exporters eligible to send corn to China.

The uptick in soybean sales is good news for U.S. farmers as well. In recent years, Brazil has accounted for an increasing share of China’s soybean imports. “Brazil’s projected soybean production in 2019/20 was more than 122 million metric tons, up from 115 million tons in 2018/19,” said Zhang. “U.S. market analysts are especially worried, as Brazil sent record monthly soybean exports to China in April and the peak season for U.S. soybean exports won’t start until close to fall harvest.”

On the other hand, a recent surge in COVID-19 cases in Brazil and trade disruptions due to flooding have caused Chinese traders to consider U.S. corn and soybeans at a time they would normally turn to Brazil.

U.S. pork producers have already seen China accepting a record amount of imports in 2020. “From January to April, China imported a record-level 291,609 metric tons of U.S. pork, which is 300% higher than the amount it imported from January to April in 2017,” Zhang said.

Zhang says that the EU’s projected pork production will increase slightly in 2020, but China’s import demand for pork is surging and they will very likely purchase record amounts of U.S. pork. China’s willingness to buy more U.S. pork goes beyond the trade agreement—its domestic producers have been forced to cull tens of millions of pigs due to African swine fever, a highly virulent and deadly pig disease.

“ASF cases are much lower now, but there is no vaccine yet,” Hayes said. “ASF risks are disproportionately higher for small-scale farms that lack strong biosecurity measures, and ‘backyard’ production accounts for about 20% of China’s pork production.”

The trade deal further increases China’s obligations for U.S. agricultural products to $43.5 billion in 2021. Zhang said the COVID-19 pandemic has brought global trade levels down significantly in 2020, but regardless of what happens with the pandemic, they will be extending their study into 2021 trade. “We didn’t examine the 2021 outlook because the phase two deal terms could possibly change following the November elections. However, as of right now, the 2021 targets will be challenging for China to meet,” he said.

For over 60 years, the Center for Agricultural and Rural Development at Iowa State University has conducted innovative public policy and economic research on local, regional, and global agricultural issues, combining academic excellence with engagement and anticipatory thinking to inform and benefit society.