Looming election, slowing economy prompts trade deal

Just an hour before U.S. President Donald Trump announced a trade deal with China on Oct. 11, I had sent a column to my editor with the following lead sentence.

“The negative effects on agriculture of the United States-China trade war are temporarily moderating but I expect the game-changing deal that the Trump administration originally sought is still out of reach.”

With The Western Producer deadline looming, news agencies were just starting to report that Trump announced a “Phase 1” trade deal that included huge agricultural purchases, and agreements on financial services and intellectual property but nothing on fundamental reform of the Chinese economic model, which was the administration’s most aggressive goal .

It would take five weeks to get the deal written, according to early reports.

This came a bit faster than I expected and it required me to rewrite this column. But it had appeared during the week that something like this was brewing.

As we moved closer to the U.S. presidential election year, the question was whether Trump would stick to his stated aggressive goal or improve his re-election chances by agreeing to a modest deal that comforts markets and removes a burden from the slowing economy.

In the first year of the trade war, American farmers shouldered most of the burden of the tit-for-tat tariffs. Restricted U.S. soybean exports to China hammered down oilseed prices, causing the pain to radiate out to envelop Canadian canola producers as well.

In recent months Trump raised the ante with proposed increased tariffs but China has been trying to dial back the tension by increasing its agricultural purchases, including four waves of soybean buying since the start of September.

Just last week, in advance of a new round of high-level trade talks in Washington, China bought soybeans and the largest ever one-week purchase of pork.

China’s U.S. soybean purchases this crop year now total almost five million tonnes under special tariff waivers from Beijing. Last year at the same point, China had agreed to buy only a little more than one million tonnes.

China bought only 13 million tonnes of U.S. soybeans in 2018-19, down from about 30 million tonnes in recent years.

In pork, Asian swine fever has slashed China’s hog herd. Government statistics say pork prices in August were up 47 percent from the same month last year and have been rising rapidly since then, last week matching the all-time high previously set in June 2016, according to the South China Morning Post.

China has been importing pork from Europe and Brazil but little American product because of the 72 percent tariff. But American prices are low enough now to look attractive even with the tariff.

China is blocking Canadian pork because of its anger over the detention of Huawei executive Meng Wanzhou while she awaits a court ruling on a U.S. extradition request.

It appears that China was successful in using agricultural purchases as a lure to get the Americans to concede on its more aggressive goals of getting the Chinese to abandon subsidies for state firms and Beijing’s deep involvement in championing the country’s high technology sector.

Chinese President Xi Jinping believes China’s future does not lie in being the world’s workshop. The rising wages of its skilled workforce are already causing manufacturers of cheap goods to build plants in lower wage countries such as Vietnam. Pollution from heavy industry is a major problem.

And to really join the ranks of the first world, China’s economy must advance in what some call “the knowledge economy,” where the production of goods and resources is less important than the production and use of knowledge, information and data — the kinds of things that have propelled Amazon, Google, Apple, Huawai and Alibaba to the leading ranked businesses of our time.

China won’t make concessions on that, but I think it was willing to make enough concessions to get Trump, whose own negotiating position was fading, to bite.

The trade war has costs for both countries, in terms of direct costs to consumers, who must pay the tariffs, and for economic growth.

The drag on the two protagonists spreads beyond their borders, directly in slowing trade and indirectly in increased business anxiety and fading investor confidence.

The recovery from the 2008 recession has already lasted longer than most recoveries and a growing number of economists warn the trade war could cause the current economic slowdown to slide into recession.

When looking at Trump’s performance in office, he usually gets his highest marks for the strength of the economy under his administration. If that fails, what are his re-election chances?

There is precedent for Trump accepting a modest trade deal and calling it a major victory. The U.S. and Japan recently reached a mini deal that Trump hailed as a “game changer for our farmers and our ranchers,” but it only partially catches up with what other countries, including Canada, got in the Trans Pacific Partnership, a deal Trump pulled out of in 2017.

He also says the new North American free trade agreement is the best deal ever even though it is arguably a modest updating of the original pact.

Mr Trump, as he appears at his big rallies before adoring fans, will now be able to brag about how he forced China to kowtow before him and concede to the “best trade deal ever.”

And China will buy the American soybeans and pork that they wanted to buy anyway.

Meanwhile, Huawei, Alibaba and China’s other high tech champions will continue to expand with the strong support of the state.

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