Research
The US-China Trade War Begins: Background and Implications for F&A
On 6 July, the US began collecting tariffs on USD 36bn in Chinese imported goods, fulfilling a pledge by US President Donald Trump to respond to alleged unfair trade practices. Beijing has already responded in kind by announcing tariffs on US imported goods. The trade war brewing between the US and China since March has now officially begun and carries the potential for protracted, escalatory damage to global industries and trade, in particular for the food & agribusiness sector.
Below is the relevant timeline of events:
- 22 March: US imposes tariffs on Chinese products, including 25% on steel and 10% on aluminium.
- 23 March: China retaliates by announcing 15-25% tariffs on US products worth USD 3bn, including pork, wine, fruits, nuts, and vegetables.
- 6 July: after several rounds of disappointing bilateral trade talks, the US imposes 25% duties on Chinese products worth USD 34bn including heavy machinery. China responds tit-for-tat with duties targeting US F&A, including soybeans, corn, wheat, rice, sorghum, beef, pork, poultry, fish, dairy, cotton, vegetables, nuts, and more.
Looking ahead, there is a strong risk of further escalation from the US. Mr. Trump has ordered 25% tariffs on USD 16bn in Chinese goods for later this year and also threatened to raise the stakes further if China retaliates or fails to make trade concessions, by imposing a 10% tariff on USD 200bn in Chinese imports. These actions seem to follow Mr. Trump’s strategy of using the US-China trade imbalance to extract concessions.
In 2017, the value of Chinese goods imported to the US (USD 505bn) exceeded the value of US exports to China (USD 130bn) by USD 375bn. Therefore, declared tariffs of USD 50bn account for roughly 40% of the US exports to China, but only 10% of China’s exports go to the US. If the US increasingly imposes tariffs on Chinese imports, China cannot respond proportionately via trade alone. Further escalation beyond trade could take place in the form of services/tourism boycotts, renminbi devaluation, or even geopolitical tension. RaboResearch has reported on the painful side-effects of such non-trade measures (for details, please see US-China Trade War: Back to the Future).
The impact of Chinese counter tariffs will be particularly harmful for US food & agribusiness, with its outsize reliance on Chinese imports and it being one of the few sectors where the US registers a trade surplus. US soybeans are the biggest victim, accounting for the second-highest US export to China by value (USD 14bn). For more information on the tariff impact to soybeans see our video, The Perfect Soybean Storm.
Figure 1: Share of total US exports to China, 2017
While the trade war will have serious impact on US farmers, F&A tariffs will also hurt China’s consumer goods sector in the short term by raising prices for critical inputs. RaboResearch reiterates the short-term and long-term impact on China’s agriculture sector. (For details, please refer to A Fall Into a Pit, a Gain in Your Wit: Escalation of US-China Trade Dispute Impacts Chinese Agriculture)
The turbulent and unpredictable nature of US-China trade relations is likely to have a constant impact on many industries in both countries. Nevertheless, the US and China are not the only ones affected by the trade war. Escalating trade tensions, which could last for decades, will bring profound changes to the global market (see for instance the RaboResearch analysis of the potential impact on the global soybean industry: Implications of a Potential Additional 25% Duty on US Soybean Imports into China). We will continue to publish client updates with important developments in the US-China trade war – stay tuned.