A New Opportunity

August 6, 2018 - Agriculture, Food & Beverage, Policy, Trade - Tagged: multilateral agreements, tariffs, trade war, United States - no comments

Why the US-China trade war could benefit European food industries

The United States (US) has engaged in a worrying trend that includes the pulling out or renegotiation of major international agreements alongside aggressive actions on trade. Recently, China has been in the current US administration’s crosshairs and this has affected the importing and exporting of different goods across the board. While this recent change in trade relations is unfortunate, it does provide a new opportunity for European countries to engage China. In this article, Daniel Pedraza from Eibens, outlines how Europe can best fill the gap created by the US on trade.

Since the beginning of the US’ presidential campaign in 2016, President Trump has repeated multiple times how important it was for him to reduce the trade deficit. He intends to do so by either renegotiating or pulling out of multilateral agreements, such as the North American Free Trade Agreement or the now extinct Trans-pacific Partnership, and applying import tariffs to a number of products coming from countries that have a large trade surplus with the US.

The US trade deficit with China hit a record high in 2017, standing at United States dollar (USD) 375 billion.[1] This prompted the Trump administration to present a list of demands to the Chinese Government that included reducing the trade deficit by at least USD 200 billion by 2020.[2]

On 22^nd March,[3] President Trump announced the measures his administration was planning on taking in response to China’s ‘unfair trade practices’. These actions included raising tariffs to USD 50 billion worth of Chinese imports. A couple of weeks later, the US released a list of 1,333 products from China that would be hit with an additional 25 per cent tariff, targeting information communications technology, robotics, machinery and aerospace industries.

China responded by announcing one day later[4] that retaliatory measures would be applied to 106 American products—worth an equal amount of imports—if the US would follow through on their trade actions. China proposed retaliatory measures that target agricultural products, automobiles, chemicals and airplanes.

In mid-May it looked like the trade dispute would be put on hold, however, after a disappointing joint statement[5] by both countries, which failed to provide any concrete changes to their trade policy, a trade war seemed unavoidable.

After reviewing the proposed tariffs, the US altered the list of products that would be affected and sorted them into two categories: the first contained 818 products worth USD 34 billion and the second contained 284 products worth USD 16 billion. The former came into force on 6^th July, while the latter still has no proposed date for its implementation.

China’s response did not take long.[6] Just one day after the US measures were implemented, it also published two lists of products that targeted imports for a similar amount. The first list included 545 products,[7] which consisted almost exclusively of animal feed and food and beverages. Since 6^th July, China applied an additional 25 per cent tariff on US imports, including meat products (beef, pork, poultry and offal), fish, dairy, vegetables, fruits, grains, fodder, whiskies, tobacco, cotton and cars.[8] The second list includes 112 harmonised system (HS) codes[9] worth USD 16 billion and will come into force if the US implements its new batch of products that are currently under review.

It is not only about tariffs

Raising tariffs on commodities and ‘commodity-like’ products such as meat, dairy or fish has an enormous impact, not only in China and the US, but worldwide. However, China cannot continue to raise tariffs, since it only imports approximately USD 130 billion worth of goods from the US, a modest amount in comparison with the USD 505 billion in goods that are exported to the same country. Regarding the trade dispute, China has more tools in their arsenal dispute besides raising tariffs.

Non-tariff measures – It has been reported[10] that Chinese authorities are slowing down customs clearance for US products. For some products, such as fruits, this presents two main issues: it shortens the shelf life of products after clearing customs and increases storage (refrigerated) costs for the importer.
The possibility of boycotting American products is very real – It would not be the first time that a dispute with another country ends up in an unofficial boycott.[11]^{,[12],[13]&[14]} It happened in 2017 with South Korea after the US installed the Terminal High Altitude Area Defence anti-missile system on Korean soil. Automakers reported a 64 per cent year-on-year slump in sales, the number of Chinese tourists was slashed in half[15] and the distribution giant Lotte was forced to close down 87 of their 99 malls[16] due to several alleged “fire hazard and safety inspections”. The Philippines,[17] Japan and Norway[18] also suffered a Chinese boycott in recent years with varying degrees of intensity.
Favouring other countries over the US – As a result of increased tariffs and the above-mentioned measures, Chinese imports of US products will certainly decline. However, China still needs these products, so it needs to find other countries to fill the gap in imported goods. In response, China will sign export protocols that grant quicker market access to new countries, will lower tariffs on select products for others,[19] or will actively encourage and promote the use of other countries’ products in Chinese companies.

In summary, Chinese importers pay a lot more, wait longer for products to clear customs and face a potential boycott of US products. They are clearly motivated to change suppliers, and for many of them European producers will be the best alternative.

How could European companies benefit?

Taking swine meat as an example—the European Union’s (EU’s) largest export to China that will be affected by the new US tariffs—this can be viewed as an economic opportunity for European food manufacturers. In 2017, China reported pork meat imports from the US totalled USD 286 million and pork offal totalled USD 874 million. If we exclude the US, 80 per cent of China’s pork products come from EU Member States. Since US swine will no longer be competitive, European pork manufacturers have a USD 1 billion gap to fill.

However, that might not be the greatest opportunity for EU meat producers. China is the largest pork producer in the world by far (about 48 million tonnes in 2016), importing less than five per cent of the total amount it consumes. Since the price for animal feed in China is rising due to increased tariffs on soybean, sorghum and alfalfa feed, the cost of domestically produced pork may increase as well. When this happens, China will import at a higher price and the volume of imports will grow significantly.

Is the trade dispute already affecting imports?

Since March 2018, China does not publish trade data, making it difficult to check the impact current trade tensions are having. Instead those following the trade dispute are having to rely on data being reported by the exporting country and do a comparison. This results in a lack of consistency in the trade data and the reporting methods not being as accurate as they need to be.

As of late July 2018, both the US and the EU have published provisional trade data through May 2018. This is before the new tariffs on US products came into force, but after the retaliatory measures were announced (at the end of March). Continuing with the swine meat example, pork meat exports, (HS code 0203) for the first five months of 2018, were analysed from both the US and the EU to China.

During the first quarter, US exports grew by 24.6 per cent in value and 13.1 per cent in weight, while EU exports shrank by 13.3 per cent and 13.2 per cent respectively. In the following two months, US exports decreased 21.1 per cent in value and 23.3 per cent in weight, while EU exports expanded by 0.5 per cent and 11.3 per cent respectively. This signalled a clear turning point in China’s imports, even before the new tariffs kick in. One can only expect this trend to intensify throughout 2018.

Where are the opportunities for European exporters?

There are opportunities across the board, since the US is a major food supplier. As already explained, meat producers will benefit the most because of the compound effect of removing a major supplier from the market and the increased cost of China’s domestic production.

Fruit is another category where EU exporters can benefit. The US is practically the only alternative to European growers, since seasonality reduces the number of competitors. On the other hand, to be able to export, each exporting country must have in place an export protocol with China for each fruit, which reduces the potential impact the dispute may have. Currently, the US is a leading exporter of apples, oranges and plums, fruits that one or more EU Member States are allowed to export. The US also exports cherries in great quantities, indicating that new export protocols may be signed since many countries in the EU can produce it in large quantities.

Each year, the US supplies more than USD 1 billion worth of aquatic products. While European countries lag behind in this category, opportunities will arise. Cheese is another export for which both regions compete. In 2017, China imported USD 60 million from the US and USD 87 million from the EU. Processed cheese will offer the most opportunities.

Conclusion

European food industries now have a unique opportunity to gain market share quickly and inexpensively. It is uncertain how long the trade dispute will last, but if markets are reshaped, it will be a long time, if ever, before US exporters re-gain their equivalent market position.

Daniel Pedraza is the China director of Eibens, a Beijing-based consulting firm specialising in China’s agriculture and food and beverages sectors. They provide trade compliance, business intelligence, marketing and business development services to European trade promotion organisations, industry associations and private companies.

[1] https://www.census.gov/foreign-trade/balance/c5700.html

[2] https://www.washingtonpost.com/news/wonk/wp/2018/05/04/trump-is-asking-china-to-redo-just-about-everything-with-its-economy/?noredirect=on&utm_term=.1334b8f4a998

[3] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/march/president-trump-announces-strong

[4] http://english.mofcom.gov.cn/article/newsrelease/significantnews/201804/20180402731963.shtml

[5] https://www.whitehouse.gov/briefings-statements/joint-statement-united-states-china-regarding-trade-consultations/

[6] http://english.mofcom.gov.cn/article/newsrelease/significantnews/201806/20180602757681.shtml

[7] http://images.mofcom.gov.cn/www/201806/20180616015345014.pdf

[8] Full list (545 HS codes): http://images.mofcom.gov.cn/www/201806/20180616015345014.pdf

[9] Full list (112 HS codes): http://images.mofcom.gov.cn/www/201806/20180616015405568.pdf

[10] https://www.scmp.com/news/china/diplomacy-defence/article/2154123/china-us-trade-dispute-turned-sour-cherry-traders-weeks

[11] https://www.ft.com/content/18ced918-89c7-11e8-bf9e-8771d5404543

[12] https://www.cnbc.com/2018/06/20/chinas-boycott-of-us-goods-remains-a-real-threat.html

[13] https://www.politico.com/story/2018/06/20/china-trade-tariff-trump-635413

[14] https://www.straitstimes.com/asia/east-asia/chinese-urged-to-boycott-us-firms-amid-trade-tensions