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No Off-Ramp for the Growing Trade Dispute with China


The trade dispute which now might be characterized as a “war” has escalated to the point that the stability of the international economy is at risk.  We have endured a mutually destructive series of tariffs on trade between the U.S and China extending from May 2017 to the present.  Each successive imposition of a tariff on goods from China has been matched with a retaliatory response impacting U.S agricultural commodities representing the largest single category of exports to China.  In past weeks both EGG-NEWS and CHICK-NEWS have documented the impact on farmers and on commodity prices.  Under normal conditions, a reduction in acreage planted as result of late 2019 spring rains and flooding should have resulted in an escalation in the price of soybeans, corn and other ingredients. This has not been forthcoming in 2019 especially with respect to soybeans.


At the beginning of the confrontation, the administration was justified in calling out China for gross violations of WTO rules and a string of self-serving policies including deliberate disregard of intellectual property, coercive trade practices and subsidies to state-owned companies unfairly competing with the U.S. and the E.U.  We expected breakthroughs as a result of bilateral discussions between the President and the Premier of China.  The last meeting at the end of June at the G-20 gathering in Osaka, Japan could have resulted in agreements to tone down rhetoric and rescind some tariffs.  Subjects of concern to China both with respect to their economy and also image (“face”) could also have been resolved including the status of Huawei and other issues. 


The unilateral decision to impose a 10 percent duty on the remaining $3 billion of annual imports from China within weeks of the G-20 meeting was regarded by our trading partner as a “serious violation of the consensus reached by the two countries”.  It is now understood that Presidential advisors including the Secretary of the Treasury, Steven Mnuchin and U.S. Trade Representative Robert Lighthizer and others within the inner-White House circle were against the new tariff. Trusting his instincts and taking advice from avowed Sinophobe, Dr. Peter Narvarro, the President played the tariff card in an attempt to coerce China to make concessions.  This may well be a misreading of both the Premier of that Nation and the resolve of his Government.  It is fairly obvious that no concessions will be made in the immediate future especially not before the celebrations to mark the 70th celebration of the founding of the Communist Party of the Peoples Republic of China to be celebrated beginning October 1st.


Trade wars are not easy to win and they are not quick, despite assertions in 2017, especially when confronting the world’s second largest economy.  The leaders of China do not have to stand for re-election in the foreseeable future and their philosophy is to remain resolute in the face of demands for structural change as their current policies are integral to future growth.  To effective comply with American demands would reduce the growth rate in the Nation and conflict with the “Made in China 2025” initiative.


The 3.0 percent drop in the Standard and Poor’s Index on August 5th and a corresponding 3.5 percent decline in the NASDAQ albeit with recovery later in the week confirm concern by investors over current insecurity which encompasses the agricultural sector and now involves all aspects of the U.S. economy.


Despite disbursement of $12 billion to farmers in 2018 and a proposed allocation of $16 billion in 2019, delinquencies on agricultural loans have tripled since mid-2015 to a level last recorded in 2011. The U.S. Chamber of Commerce warned that the proposed tariffs scheduled to take effect on September 1st will inflict considerable pain on American businesses, farmers, workers and consumers and undermine an otherwise strong U.S. economy.


The trade dispute has now metastasized into a currency dispute with the U.S. declaring China to be a “currency manipulator”.  The events since the June G-20 meeting have only served to inflame opinion in China and have detracted from attaining a series of amicable agreements based on mutual concessions.


Leakage from the White House, whether valid or not, that the U.S. Trade Negotiator and the Secretary of the Treasury opposed the President, has seriously undercut their image and ability to successfully conduct future negotiations.  China recognizes that there is effectively only one determiner of policy and will accordingly disregard the negotiating endeavors by designated officials representing the Administration.


Economists have suggested that in a worst-case scenario if the U.S. were to apply a 25 percent tariff on all imports from China, disruption in World trade could induce a recession.  With the world’s two largest economies locked in combat, the situation has become more complex with the sideshows of Brexit and the tension between or Asian allies, Japan and South Korea. Restoration of trade relations through resolution of conflicts will be to the benefit of all nations including China and the U.S. 


There will never be a single Grand Bargain.  The best the U.S. and China can hope for is a series of graduated and progressive agreements each building confidence to advance to the next level.  It is hoped that a new attitude of realpolitik and statesmanship will be introduced into the impasse for the benefit of both nations and the international community.