Covid-19 Will Slow Progress on Phase One US-China Trade Deal

THE COVID-19 PANDEMIC raises questions over the implementation of the Phase One US-China trade agreement that came into effect on February 14. Officials are acknowledging that. For example, China says it is streamlining the process for registering new US feed products that can be imported, in response to delays caused by the infection.

Agricultural trade was a centrepiece of the Phase One deal. The headliner was China’s commitment to buy $80 billion worth of US farm exports this year and next over and above sales levels in 2017, the last full year before the two countries started slapping tariffs and counter-tariffs on each other’s exports. Yet, as politically useful as a single, big number is for US President Trump to parade before US farmers, a core electoral constituency of his, it is the mundane work of opening access to the Chinese market by dismantling regulatory, sanitary and phytosanitary barriers that will make the long-term difference.

US officials and farm industry leaders speak of future billion-dollar markets for US beef, pork and poultry products in China. Those will only come after trade negotiators have spent long hours immersed in the minutiae of rules and regulations and the HS six-digit product codes used to classify international trade.

Most countries protect their farmers with non-tariff barriers. China is no exception, only more so. The Phase One agreement contains much that is aspirational in dismantling such barriers but also specifies a lot of processes for doing so being started within the first three months. Despite the disruption to physical trade Covid-19 has caused, officials from the two countries have held at least three sets of meetings to advance implementation of the technical aspects of the agreement. Some low-hanging fruit has been plucked. China has:

• Fully lifted the ban on US poultry and poultry products exports (imposed after an outbreak of avian ‘flu in 2015 and raised for US chicken meat in November);
• Agreed not to impose a national ban on poultry in the event of regional US outbreaks of disease;
• Proposed levels of some hormones in beef it would accept;
  Expanded its list of beef, pork and poultry products that may be imported;
• Lifted age restrictions on the beef cattle from which beef or meat products are made;
• Updated its list of US facilities, such as slaughterhouses, processing plants and cold storage, allowed to export beef, pork and poultry to China;
• Updated its list of US facilities approved to export dairy, infant formula, seafood, fish oil and meal, animal protein, pet food and industrial tallow;
• Expanded its list of US facilities that can export distiller’s dried grains with solubles (DDGS – a by-product of ethanol made from corn used as fodder for livestock and a billion-dollar export market for US producers before China enforced anti-dumping duties on US DDGS in January 2017;
• Updated its list of feed additives that can be exported and streamlined the process for registering new feed products for export;
• Eased restrictions on pet food imports;
• Agreed a protocol for the import of fresh chipping potatoes and Californian nectarines;
• Put in place a process for US exporters to apply for exclusions from retaliatory tariffs; and
• Announced new tariff exclusions n hardwood products.

That list only scratches the surface of the rules and regulations that will have to be changed for US agri industry to realise its starry-eyed, long-term goals for sales to China. These are predicated on a growing appetite of an increasingly wealthy middle class to consume higher-value foods and of an expanding Chinese agricultural sector that is transitioning from a base of rural small farms to large-scale and international agri-businsesses.

Both sets are suitable markets for the foods and feedstocks that the United States produces. Equally, China will not abandon its long-term strategy of diversifying its sources of agricultural imports nor neglect the way it can use agriculture to extend its economic diplomacy push around the world.

Nor can a billion dollars’ worth of US poultry or ethanol dregs, let alone ten-billion-dollars’ worth of US beef turn up in China overnight, but market access is the necessary prelude to sales. Establishing it will be a long and unglamorous slog for a large number of unheralded trade negotiators. That work will inevitably be slowed for now by the attention both governments are having to pay to more pressing matters — and, for as long as the Trump administration is in office, at risk of an unpredictable policy intervention by the US president.

With the trade agreement barely a month old and the lag in gathering trade data, it is too early for any progress to show up in the bilateral trade figures. The current success story for US farm exports to China — pork — has nothing to do with the Phase One deal. Sales in January (the latest available month) were up more than sevenfold by volume year-on-year, because of the devastating impact of African swine fever on domestic herds.

However, as this Bystander has noted, achieving the additional $80 billion of farm imports over the next two years is going to be a stretch, absent Beijing ensuring large, politically driven purchases. That was true even before the domestic and International disruption to supply chains and distribution networks caused by the global pandemic.

It will take several months at least for domestic demand to get back on an even keel, and US farmers will be preoccupied immediately with supplying their home market, too.

However, forecasts from Virginia Tech’s Centre for Agricultural Trade presented in mid-February, suggested that across six main categories of US farm exports (soybeans, corn, wheat, beef, pork and poultry, which collectively account for more than half the total) would rise by $5.5 billion this year and $9.5 billion next, 40% and 70% increases, respectively, over the 2017 baseline, but still far from dragging US farm exports as a whole over the line of the two-year $80 billion increase.