China
May 13, 2019

China Ramps Up Efforts to Diversify Trading Partners

Top Story  |   |  By: Fran Howard

Once one of the United States’ largest markets for dairy products, China has ramped up its efforts to become more self-sufficient in dairy, amid ongoing and worsening trade talks between the United States and China. If the trade relationship worsens between the world’s two largest economies, both countries could see deteriorating economic conditions and overall global dairy demand could soften, according to a recent report from the Chicago Mercantile Exchange (CME) Group.

On May 10, President Donald Trump raised tariffs from 10% to 25% on $200 billion worth of Chinese imports and indicated that higher tariffs could be extended to an additional $325 billion worth of Chinese imports. The increased tariffs were applied to goods headed for the United States that left Chinese ports on May 10. Several days later, China retaliated, announcing it would raise tariffs on $60 billion in goods entering China from the United States.

The CME Group estimates that if a 25% tariff were applied to all $500-plus billion in Chinese goods imported into the United States, U.S. consumer prices could rise by 0.3 percentage points or more, corporate profits could fall by 3 percentage points or more, and China’s GDP growth could drop by 1 percentage point. 

According to the CME group, the bottom line is that “an escalation in the U.S.-China trade dispute could have profound consequences for currencies, commodities. and other asset classes. China could try to offset negative impacts through easier monetary and fiscal policy but only at the risk of running up more debt.” Back home, the report concludes it would be difficult for the United States to use monetary or fiscal policy to offset any negative impact, and not surprisingly, the U.S. farm sector is particularly at risk.

“U.S.-China trade had cooled even before last week’s announcement due to the trade dispute that began last July,” says dairy economist Bob Yonkers, analyst for the Daily Dairy Report. Since China’s first round of retaliatory tariffs went into effect in July 2018, U.S. dairy exports through March by volume to China have fallen 37.6%, according to USDA’s Global Agricultural Trade System (GATS). 

“China continues to recognize it needs commodity imports, but the country is making a push to avoid over-reliance on one supplier,” Yonkers says. "China wants to increase the number of suppliers providing key commodities and is looking to expand trade relationships with countries participating in the Belt and Road Initiative.”

China’s Belt and Road Initiative (BRI), once referred to as One Belt One Road or Silk Road, is an ongoing program with regional and political partner countries designed to improve cultural and market integration that includes infrastructure investments in roads, rail, airports, ports, pipelines, and communications. To date, more than 150 countries have signed onto the BRI, including New Zealand and countries in Europe, South America, Africa, and Asia.

“A longer-term challenge to U.S. dairy exports could lie in China’s new agricultural and food policy initiatives for 2019,” Yonkers says. The initiatives, announced recently by the Central Committee of the Communist Party of China, were in response to “profound changes in the external environment,” according to a recent USDA GAIN report. 

However, China has not been successful in decreasing its dependence on dairy imports, Yonkers says. According to USDA, increasing dairy demand in China and strong competition from overseas suppliers has pushed China’s dairy self-sufficiency rate from 94% in 2008 to 75% in 2016. “While in the past China’s dairy initiatives focused on reducing production costs for large dairy farms, such operations face increasing challenges in mitigating non-point source pollution from animal waste,” Yonkers says. “This coming year and likely into the future, more investment will be directed at upgrading and renovating small and medium-sized dairy farms, based on the Chinese government’s view that family farms and farm cooperatives are a more suitable model for dairy industry development.”

China also has plans to upgrade its infant formula industry. Currently China imports about 50% of its infant formula needs, in part because some Chinese consumers view foreign-made infant formula as safer for their children. This follows the country’s 2008 milk scandal, when infant formula products were found to be adulterated with melamine, a compound used to produce plastics.  

“Over time, the sum of China’s efforts, if successful, could well reduce U.S. agricultural and food exports to this critically important trade market,” Yonkers says, particularly if the U.S.-China trade war does not end soon.
 

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