So despite assurances from Wilbur Ross that China’s response to the Trump administration’s Section 301 tariffs are “proportionate” and thus nothing to be alarmed about, markets were most assuredly alarmed.
And the reason is simple. Here’s how we described the flaw in Wilbur’s “logic” earlier on Wednesday morning:
But beyond that, Wilbur’s contention that China’s response “shouldn’t really surprise anybody” because it’s proportionate completely misses the point. This isn’t about proportionality, it’s about the fact that it’s escalating. Wilbur’s “reassurances” amount to telling people not to worry about a war because each side is being careful to only inflict as many casualties as they suffered.
Speaking of shooting wars, Wilbur had a rather uncomfortable analogy for you on Wednesday. Here’s what he says in that clip:
Even shooting wars end with negotiation.
Right. But again, Wilbur seems to be missing the point. It’s not about proportionality or whether everyone eventually decides to stop killing each other (figuratively or literally), it’s about the body count that accumulates in the meantime. That’s what people are worried about here.
Well, stocks of course got off to a rough start after futures plunged and the administration looks like it’s getting ready to run a full court press to try and contain things, starting with Trump on Twitter. That’s laughable because if there’s anything that’s guaranteed to make the situation worse, it’s Trump tweeting about it.
Anyway, the market is going to be focused pretty intently on the soybean tariffs for a number of reasons, not the least of which is that the move is a pretty blatant attempt to hit Trump in the balls (and not in that good kind of way when Stormy Daniels gently swats at them with a magazine).
“Soybeans are considered one of the most powerful weapons in Beijing’s trade arsenal because a drop in exports to China would hurt Iowa and other farm states that backed Trump,” Reuters notes before reminding you that “soybeans were the biggest U.S. agricultural export to China last year at a value of $12 billion.”
“China’s response carries both economic and political weight as agricultural states are major supporting regions for Trump,” Monica Tu, an analyst at Shanghai JC Intelligence Co. told Bloomberg, underscoring the political ramifications.
“We view the inclusion of soybeans in today’s announcement as political in nature and reflective of the escalation of the trade dispute with the US. Soybean tariffs impact US Midwest political swing states and come at a cost that China appears willing to pay,” Goldman’s Damien Courvalin and Jeffrey Currie write, in a note out this morning.
Soybeans plunged on the news:
Where China is going to get all their goddamn soybeans now is an open question. Here are some additional excerpts from Reuters:
China gobbles up about 60 percent of globally traded soybeans to feed the world’s largest livestock industry. Factories crush the oilseed to make meal – a key ingredient in animal feed.
“There simply aren’t enough soybeans in the world outside of the U.S. to meet China’s needs,” said Mark Williams, chief Asia economist at Capital Economics.
“As for reducing dependence on imports, there are a few options, but none is a magic bullet that could hurt U.S. farmers without generating costs at home.”
Brazil supplied half of China’s imports last year while the United States shipped around 33 million tonnes, about a third of the total. Replacing those U.S. tonnes will be no easy feat.
Right. Argentina is a possibility but there’s a drought down there, which complicates this issue apparently. Here are some visuals from the USDA and Goldman:
And here are some bullet points from Goldman’s note:
- As we have argued before, it was not an initial target for Chinese tariffs as China would ultimately be the one paying for these soybean tariffs. In 2017/18, China will import 34.5 million metric tons (mt) from the US with all other soybean exporters only shipping 17.5 mt to countries other than China. So China still needs supply from US farmers and their planting incentive price must therefore remain unchanged, with the landed price in China rising instead.
- A tariff on US soybeans would therefore increase Chinese domestic soybean prices, at a time when the drought in Argentina has already supported global prices. The pass-through of such higher soybean prices could however initially be mitigated by high Chinese inventories. Further, declining domestic pork prices on increased capacity and efficiencies would initially mute the impact on Chinese consumer prices.
So the ultimate effect on Chinese consumers is impossible to know in advance as there are a variety of factors at play here, but in case any of the above isn’t clear enough, the worry is that it could drive up pork prices.
As for who comes out ahead, Latin American producers are the most obvious beneficiary. “This will benefit Brazilian exporters,” ING’s Warren Patterson told Bloomberg, for the same piece linked above. “They will be licking their lips right now.”
Maybe. But it’s not quite that simple. The tariffs “would incentivize [Latin American producers] to increase acreage at the expense of US farmers [but] this will take time and investment,” Goldman writes, in the note mentioned above. They go on to say that while “Chinese imports have grown on average 6 mt per year over the past decade,” combined production from Brazil, Argentina, Paraguay, and Uruguay “has only managed to keep up over that time period.”
You can make of that what you will, but do note that it seems to indicate China is more than willing to bring out the big guns if they feel it’s necessary and that could portend resorting to yuan depreciation by the time this is over.
For reference, here’s a possibly useful timeline of events from Barclays.