On Wednesday, January 15, 2020, representatives of the United States and China signed a phase one trade agreement that represents a positive step towards ending the nearly two-year-long trade war. Western Growers Board Chairman Ryan Talley of Talley Farms attended the White House signing ceremony on behalf of our membership. WG’s official press release on the event can be viewed here.
WHAT IS IN THE DEAL FOR AGRICULTURE?
Farm Product Purchases
Chapter 6 (‘Expanding Trade’) lays out a commitment from China to purchase nearly $80 billion in U.S. ag imports over the next two years. If achieved, it would amount to essentially a doubling of annual U.S. ag sales to China, which notably peaked at $24 billion in 2017. More specifically, the annual breakdown would start with the $24 billion number as a baseline with an additional $12.5 billion in 2020, and an additional $19.5 billion in 2021. It is important to note that, per the text, purchases will be made at market prices based on commercial considerations, and market conditions may dictate the timing of purchases within any given year.
There are two major unknowns as to how this could come to fruition. The first is a question of which commodities China will focus on importing more of (over historical levels), and by how much. We expect that such numbers will never be publicly released, since U.S. officials want to avoid publicizing information that could artificially influence markets, and China wants to allow itself the flexibility to adjust such import targets as needed. As such, while the agreement lists the types of commodities that will be included in the overall purchase commitment, the exact target import goal for each subcategory will likely remain unknown or unpublished. It is also worth highlighting that some commodities are grouped into a general category with no further varietal breakdowns; in the case of major U.S. tree nut varieties, for example, they are grouped under a single ‘nuts, nesoi, fresh or dried’ description.
The second unknown is by what method (or methods) China will employ to reach its commitment. There are several options China could choose to reach the $80 billion goal, at least on paper. By the Administration’s own admission, this agreement does not require China to eliminate its retaliatory tariffs, nor has China made any commitments to do so for phase one. Obviously, for the sake of market certainty and our own members’ needs, the removal of the retaliatory tariffs is the most desirable option. However, China could grant tariff waivers or exemptions, partially or fully negating the added cost from the product price. The government could encourage or ‘incentivize’ private Chinese companies to source U.S. products more, make direct buys through its state-owned enterprises, or some combination of the two. Additionally, it has long been an unspoken trade practice to transship certain ag products through neighboring countries first before reaching the final destination of China. It is not unrealistic to think such shipments could be sent into China directly moving forward, thus counting as import ‘increases’.
Sanitary-Phytosanitary (SPS) Measures
Chapter 3 (‘Trade in Food & Agricultural Products’) lays out commitments to improve bilateral work on SPS pest-and-disease barriers and resolve specific non-tariff export issues. Regarding the latter, the agreement states that China will approve specific import protocols to open its markets to California Hass avocadoes, California nectarines, U.S. blueberries, and U.S. potatoes (for processing) – all sectors that have essentially been kept out of China in the recent past. That said, there continue to be other outstanding product-specific obstacles into China that aren’t resolved in the phase one agreement; strawberries is one commodity that is still unable to enter China due to alleged SPS issues.
The diverse array of crops that are just now achieving market access after years of work is a small testament to China’s incredibly complicated and subjective import approval process. While it has been noted that the agreement includes general language to cover other additional SPS disputes and cooperation moving forward, it remains to be seen if the language will be strong enough to compel China to implement significant process reforms, or at the very least, to address remaining specific market access issues.
Chapter 7 (‘Bilateral Evaluation & Dispute Resolution’) details the process for resolving implementation issues and complaints. The most notable piece to highlight is that, if the issue at hand ultimately cannot be mutually resolved, the aggrieved country may resort to taking action, including suspending an obligation under this deal or adopting a remedial measure in a proportionate way (e.g. retaliatory tariffs). In turn, if the other party considers that the response was taken in good faith, they may not adopt a counter-response, or otherwise challenge such action; if they consider the response was taken in bad faith, the remedy is to withdraw from the agreement. The Administration has framed this direct, country-to-country dispute settlement mechanism as the key difference from past agreements to ensuring China’s compliance. Indeed, the historical norm has been to take complaints before an international trade panel, like with the World Trade Organization (WTO). As with many other provisions in this agreement, time will tell how binding and effective this approach is, especially with a well-known trade transgressor and evader like the Chinese government.
WHAT COMES NEXT?
Phase one is officially in force 30 days after signing, although the actual roll out could take months or years. Implementation will involve U.S. officials confirming China’s compliance with the agreement’s specific legal obligations. More importantly, it will also involve close export tracking and sales data collecting to ensure China is meeting its purchase goals and not employing unfair practices to do so. For this, the Administration is strongly urging close communication with industry groups and exporters that are best positioned to detect positive or negative changes. Additionally, USDA is expected to increase efforts to promote U.S. products and regain market shares that have been lost in China.
Regarding a phase two deal, the President and other Administration officials have reaffirmed verbal commitments to reach one with China to address remaining matters; this could most notably include China’s vast scheme of generous business subsidies and state-owned enterprises. The extent to which additional agriculture issues are included – beyond the obvious goal of complete retaliatory tariff removal – is unknown at this point. In any case, the working assumption is that a phase two agreement won’t be reached any time soon, as it will hinge (in part) on the progress of phase one implementation and the upcoming 2020 election.
Western Growers will actively monitor the rollout of these phase one provisions and reiterate our industry’s needs to USTR, USDA, and Congress. We seek retaliatory tariff relief for our impacted commodities, many of which have lost, and still lose, millions since the start of this trade conflict. Most urgently, the Administration is set to travel to China on February 1 to continue tackling SPS issues. WG has been asked for stories and examples of SPS and other non-tariff problems that have impacted our members, either in the past or currently. As such, if you have an access problem into China in this space, we strongly encourage you to reach out to us so we can document and elevate the problem to U.S. trade negotiators.
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