Global Perspective | Chinese tariff on US soybeans a step closer

Chinese tariff on US soybeans a step closer


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Soybean trade is crucial for China, which imports 90 per cent of its requirements and has been on a demand growth trajectory.

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AT THE end of last week, the Trump administration unveiled the much-anticipated list of 1102 imported Chinese goods, worth $US50 billion of trade value, to be subject to a 25 per cent punitive tariff for alleged violations of intellectual property.  

The goods mostly fall under the “Made in China 2025” state policy, which encourages Chinese production of goods such as aerospace, robotics, industrial machinery, new materials, and automobiles. 

The tariffs on $US34 billion worth of Chinese goods will take effect on July 6, while another $US16 billion will undergo further review and public hearings. 

Predictably, the announcement sparked an immediate retaliation from Beijing. 

The Chinese Ministry responded with its own set of 25 per cent tariffs, which will be levied on some $US50 billion of US goods.  

Tariffs on the first tranche of about $US34 billion of US goods will also take effect on July 6, covering cars but also agricultural products including soybeans, corn, wheat, cotton, rice, sorghum, beef, pork, poultry, fish, dairy products, nuts and vegetables.

Easily the biggest single line item affected is soybeans, and this would have severe implications in global oilseeds trade and flow-on effects for grains more broadly.  

Soybean trade is crucial for China, which imports 90 per cent of its requirements (including 34 per cent from the US), and has been on a demand growth trajectory.   

Filling the gap with soybeans from countries other than the US will not be easy and certainly not possible in the short term.  

In 2018, Brazil has limited room to increase soybean exports significantly, while Argentina’s crop is drought reduced and Argentina typically exports soymeal rather than soybeans in any case.  

For China, the additional 25 per cent duty on US soybeans will increase domestic soybean prices and therefore also the prices of soy oil and soymeal.  

Chinese crushers would not be able to fully pass on the inflated costs, so, unless the Chinese government provides some assistance, their margins will fall.  

In this case we can expect Chinese soybean imports to decline year-on-year and imports of substitutes like canola to rise.  

Livestock margins would also be squeezed, providing incentive to change to feed formulas with lower soymeal use.   

This would prompt support for additional feed grain imports, possibly barley.  

Sorghum and wheat are also on China’s tariff list.  

The US supplies 90 per cent of China’s sorghum, with Australia typically the supplier of the balance.  

The US supplies 26 per cent of China’s wheat imports, putting Australia (which supplies 40 per cent) and Canada (which supplies 26 per cent) in the box seat to fill the gap.  

Russian-origin wheat could also be expected to get a boost on this front.    

Although much smaller trades than soybeans, support for sorghum, wheat, canola and barley will all result as Chinese grain and oilseed users look for alternatives to preserve their margins.  

Australia is placed well here, except that this comes at a time when Australian domestic prices are already elevated. 

With prices expected to remain elevated, east coast supply is likely to be too expensive to move, but will stay higher with the threat of additional export possibilities. While July 6 has now become a crucial date in the “tariff war”, there is still room for negotiation.  

And even on that date, President Trump will still have the authority to delay the tariff implementations for 180 days, if the US Trade Representative’s office (USTR) feels additional trade talks with Beijing are making concrete progress.  

So there is no fait accompli about the trade war, but it has come a step more likely over the past week.

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