14/12/2020 - 09:00

US, China recalibration hurts Australian trade

14/12/2020 - 09:00

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The US-China deal getting in the way of our trade.

Donald Trump will be out of The White House by the end of January, but his legacy is likely to remain for some time.

And it will have a significant effect on Australian trade.

One of the outgoing president’s most far-reaching decisions on agriculture was the trade war between China and the US. Mr Trump hit out with tariffs against Chinese imports, which resulted in China slapping hefty tariffs on a range of US agri-products. 

The result was that China sought to source a large volume of products from nations other than the US, the most notable example of this was its move to import soybeans from Brazil rather than the US.

The threat of a continued escalation brought both parties to the negotiating table at the end of 2019, with China and the US agreeing to the first phase of a deal. Under that arrangement, China would purchase a large volume of various products in 2020 and 2021. 

In particular, China has to ramp up purchases of US agricultural commodities. 

The terms of the deal were that China would purchase $US36.5 billion worth of agricultural products, a significant rise above the $US24.1 billion in the pre-tariff year of 2017.

The phase-one deal between China and the US is a major challenge for Australian agriculture, as it’s expected China will have to preference goods from the US in order to protect its export markets. 

Has China achieved its target?

The data for this analysis has been taken from the monthly numbers provided by the Chinese customs authority. To determine the agricultural products, the import values for a range of products from January to October have been selected 

China has ramped up purchases in recent months, with $US5.7 billion in the period August-October, versus $US3.5 billion for May-July. 

As mentioned, China has a target of $US36.5 billion in agricultural purchases from the US by the end of 2020. As a result, China should have imported $US30.5 billion by the end of October to meet the pace required. 

As of the most recent customs data (October), China has imported $US15.5 billion worth of products. This is 51 per cent of target. 

At present, China will need to import $US21 billion of goods during November and December. Clearly, while the export program has been ramping up, it will not achieve its target. It is unlikely the Chinese will even hit the 2017 level of $US24.1 billion.

How does this affect Australian agriculture?

Earlier in this piece, I mentioned how tariffs resulted in China purchasing soybeans from Brazil. This is the reality of trade: when barriers are put in place, the flow of commodities changes. We already see this with the change in flows in the barley trade to China.

My concern was that this trade deal would discourage Australian purchases. In January, I examined the products that looked at risk of being replaced by US product.

The commodities of most concern were: wood products; wine; beef; milk; almonds; crustaceans; barley; skins; and malt extract.

Those following the news will know that wood, wine, beef, crustaceans and barley have all had major issues related to China in recent months. That leaves only almonds and milk as the majors from our list not affected.  

In 2019, Australia experienced a 13 per cent rise in agricultural trade with China, while US fell 23 per cent. 

During 2020, this has reversed, with Australian exports down 16 per cent and those from the US up 30 per cent. 

What next?

China will not meet the target set by the US, and in 2021 this target rises from $US36.5 billion to $US43.5 billion. The big question will be whether the relationship between the US and China changes with the new president. 

There are expectations that Joe Biden will take a soft approach; however, I do not think sentiment towards China has improved in the US. 

If the target remains for 2021, then China will continue to preference US goods. If this eventuates, it wouldn’t be surprising to see the trade pain continue. 

Andrew Whitelaw is a manager of commodity market insights at Thomas Elder Markets (TEM)

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