China shows how it will fight a Trade War

U.S. agriculture will be in China’s crosshairs if a trade war erupts

President Donald Trump has promised to revitalize the U.S. rust-belt—in part by going after big steel and machinery exporters like China—and also to boost the fortunes of American farmers. If a real trade war erupts, China’s strategy will be to show that these two goals are incompatible.

China is the world’s largest goods exporter, but also a huge and fast-growing market for American agricultural exports. Its decision to investigate U.S. farmers’ alleged below-cost “dumping” of cereal crop sorghum into Chinese markets, just weeks after Washington announced big new solar-panel tariffs aimed at China, is a clear message of what will happen if the Trump administration pushes too hard.

A real trade war is still avoidable. But if tensions rise further from here, investors in U.S. agricultural heavyweights such as Bunge and Monsanto should think about trimming their holdings.

Sorghum isn’t a big U.S. export, but it bears some obvious similarities to a bigger crop that would probably be China’s first real target if tensions escalate: soy. Both crops benefit from U.S. agricultural subsidies, which cost taxpayers around USD 20 billion in all every year, giving some credibility to China’s claim that they are produced below cost. China is also the U.S.’s biggest foreign customer for both—more than half of U.S. soy and close to 80 % of sorghum. The hit to U.S. firms and communities from falling sorghum exports would be relatively minor, although the pain would be concentrated in Trump-friendly states such as Texas and Kansas. But soybeans are a major export ticket: USD 24 billion in 2016, or nearly 2 % of total U.S. exports.

Sorghum isn’t a big U.S. export, but it bears similarities to a bigger crop that would probably be China’s first real target if tensions escalate: soy.

 

Soybeans and other agricultural products are also a soft target because of the global price environment. Industrial commodities have rebounded strongly from the 2015 price crash. Copper is up 50 % from its early 2016 nadir and oil has doubled. But soy prices are up just 14 % due to years of overinvestment in the U.S. and Brazil, supported by subsidies. Chinese buyers will have plenty of options even if tariffs push the price of U.S. soy up substantially.

A true trade war is in no one’s interest and the decision by both sides to target minor items so far—solar panels and sorghum—shows that the path to some sort of accommodation hasn’t yet closed. But if trade relations deteriorate further, U.S. investors should be prepared for a kick in the breadbasket.

www.wsj.com