John Phipps: How is China Going to Keep Its Trade Promises?
This week Customer Support is a follow-on to last week when I talked about how the USDA tracks our ag exports. This week we will try to make some sense of trade headlines like “China promises to buy X billion dollars of US ag products.” There is considerable uncertainty how these promises would be fulfilled and one of the best examples is soybeans.
To predict how such deals would work, first we have to understand state owned enterprises or SOEs. An SOE is a legal company funded and owned by a government to engage in commerce. Here in the US, examples would be the Commodity Credit Corporation, the Corporation for Public Broadcasting and the Postal Service. There are many more, however.
SOEs are a big trade issue, as government subsidies and little pressure to be profitable can give them unfair advantages against private businesses. This is true in both countries, by the way, but China has many more industrial and manufacturing SOEs – including steel, tobacco, coal, and electricity. Ours are mostly financial entities.
China has two major SOEs that trade commodities: COFCO and Sinograin. As you can see, they make up about 23% of their soybean crushing capacity. When it comes to making good on trade promises, the Chinese government can simply order these two entities to buy US soybeans, but they don’t have enough capacity to handle the kind of numbers being batted around in the media. More importantly, how the Chinese government would force the remaining private crushers to buy US beans is far from clear. The headlines gloss over the fact that while the Chinese government has considerable control in many industries, their private sector is still much larger and does not necessarily take marching orders from Beijing.
So as new rumors or announcements are made about possible trade deals with China, the question farmers need to ask is not how big the numbers are, but how are the Chinese going to make good on those numbers. Like all trade negotiations, the fine print is important.