Economy & Business

Market Analysts Unconvinced by U.S.–China Trade Truce

President Donald Trump meets with China’s President Xi Jinping at the G20 summit in Osaka, Japan, June 29, 2019. (Kevin Lamarque/Reuters)
Economists and commodities traders question whether China will increase agricultural purchases to $50 billion as part of a yet-to-be-finalized deal.

On Friday, after two days of negotiations in Washington, President Trump announced a ceasefire in his trade war with China. According to the agreement, China will increase agricultural purchases to $50 billion and make financial-market and intellectual-property reforms long sought by the U.S. In return, the White House will hold off on a tariff increase that had been scheduled for October 15.

Trump said that the deal would take three or four weeks to draft, and would be signed at next month’s APEC (Asia-Pacific Economic Cooperation) meeting in Chile. But Chinese state media played down the truce over the weekend, emphasizing that no deal had yet been signed, and despite the president’s optimistic tone, many observers have concerns as to whether the agreement can be implemented. According to Bloomberg News, Chinese officials have indicated they will not increase agricultural purchases until the U.S. commensurately rolls back tariffs. Importing $50 billion worth of agricultural products would require Beijing to eliminate retaliatory tariffs it has placed on U.S. goods — a move it’s loath to take absent American concessions.

Moreover, the Wall Street Journal has reported that Chinese negotiators have said agricultural purchases must be based on market demand. The $50 billion figure is double the historic peak of Chinese agricultural purchases, and would require Chinese authorities to make purchases through state-owned enterprises. Mixed signals from the Chinese side have raised doubts as to whether this trade truce will proceed as planned.

Curt Kimmel, the owner of Bates Commodities, an Illinois-based agricultural-commodities broker, tells National Review that grain futures have seesawed over the past year and a half because “President Trump gets real excited about things that are said, then he makes it public, then the Chinese take a step back and say, ‘Wait a minute.’” As a result, farmers and agriculture traders are hesitant to celebrate until a deal is finalized, though Kimmel remains cautiously optimistic that agricultural exports to China will increase.

In the month leading up to the negotiations, China bought American soybeans nearly every day as a gesture of good will, propelling soybean futures to a three-month high. But since Friday, no sizable soybean orders have come from China, contrary to the assertion of Secretary of the Treasury Steve Mnuchin that purchases would happen “immediately.” Jeff French of Top Third Ag Marketing, another Illinois-based agricultural-commodities brokerage, says the halt in purchases raises doubt as to whether $50 billion in purchases is feasible, especially since orders that have already been filled can be rerouted to other countries.

These concerns have tempered enthusiasm among commodity traders, bringing down the price of soybean futures since Friday. Until a broader agreement is reached, China is unlikely to buy significantly more American agricultural products. “This may be the most serious false start of the trade negotiations,” says Todd Hubbs, an assistant professor at the University of Illinois.

As part of the deal, the Chinese are also expected to buy more American pork. Futures markets anticipate a price increase of more than 30 percent by June due to increased demand from China. Since August of last year, Chinese pork producers have been contending with an outbreak of African swine fever. This month, the Chinese Ministry of Agriculture reported a 41.1 percent reduction in the country’s pig population from a year earlier, with Dutch bank Rabobank estimating that China could lose as much as half of its pigs by the end of 2019. As a result, Chinese pork prices have spiked almost 70 percent, while American hog production is at all-time highs. As with soybeans, however, the Chinese have halted large purchases of pork in recent days, and it is unclear that they will fill demand with American pork.

Despite these concerns, the “phase one” deal has given some analysts reason for hope. The Heritage Foundation’s Riley Walters tells National Review that it could help could build trust between the U.S. and China ahead of a more comprehensive agreement. Delaying an escalation of the trade war is good for the global economy, even if it leaves the more complex issues of intellectual-property theft and non-tariff trade barriers unresolved. But the difficulties the deal has run into do not bode well for the prospect of more-significant reforms in the U.S.–China relationship.

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