China newswire Xinhua revealed something interest in an article after market hours in Hong Kong today, saying that Beijing “will allow Chinese businesses to purchase a certain amount of soybeans and pork from the United States.” Until now, China has been drastically increasing its purchase of Brazilian soybeans. Last year they imported somewhere between 10 million and 13 million tons more soy from Brazil than the previous year.
The word “allow” is key. It suggests what many U.S. soy exporters have quietly expected all along, that Beijing does not want Chinese companies to buy American soy even though their 25% tariff does not make U.S. soy any more expensive than Brazilian soy.
China has been sanctioning American farmers in an effort to convince traditional Republican voting counties and states to vote against the party. They successfully managed to turn numerous red counties blue during the November midterm elections, which saw the promised “blue wave” in the House of Representatives.
“In Tennessee, we have seen Chinese ag buyers come in and say they want to buy, but the trade war is prohibitive,” says John Scannapieco, a shareholder in the Nashville office of Baker Donelson and chair of their global business team.
Two things are worth noting here. First, American farmers must diversify away from China. Too much of their product line is directed towards the Chinese market with no alternatives. It was a lousy business model from the get-go.
Second, China has a busy October. Their 70th Anniversary of the Communist Party celebration, known as Nation Day, takes place on October 1. Hong Kong activists have already planned another million-strong rally against Beijing on that day.
Hong Kong remains a key variable in the trade war.
Investors will spend the next few weeks weighing whether or not President Trump caves to the likes of Treasury Secretary Steve Mnuchin, who is warning that tariffs across the entire Made in China landscape could bring about a recession. Mnuchin is the good cop on Trump’s trade negotiating team. A recession would kill Trump’s chance at reelection, so some on Wall Street think the president may call it quits and punt on the December tariffs, too.
Fed Chairman Jerome Powell said there is no recession in sight. But Mnuchin thinks otherwise.
BNP Paribas’s chief U.S. economist, Daniel Ahn, agrees with Powell that the U.S. economy would trough, “but not enough to cause a recession,” he says.
On the China side, they have to get through the first week of October and the promised escalation of protests in Hong Kong. Xi Jinping has too much on his plate to deal with changes in the trade relationship. Once the Hong Kong picture is clearer, they either return to negotiations at some point next month or try to make Trump look bad by convincing American companies that without them, they are doomed.
China needs to get Trump out of the White House in 2020 in hopes for a return to status quo.
“I think it is in the short-term interest of both sides to have a cooling-off period,” says Brian McCarthy, chief strategist for Macrolens in Stamford, Connecticut. “Trump is being told by his advisors that new tariffs can be problematic and China has problems with its pork markets and with Hong Kong. If the only political hit they’ve given Trump is in the agriculture states and that gets resolved by this ceasefire, then I doubt that is a sustainable set-up from China’s perspective, assuming they prefer someone else as U.S. president,” he says.
Tariffs Hurt the Heartland, a coalition backed by the National Retail Federation, said this week that American businesses paid $6.8 billion in tariffs in July, the highest tariffs in U.S. history and an increase of 62% from the same month in 2018. That’s just one month. Total tariff taxes to the government are over $70 billion.
Meanwhile, U.S. exports to China marked a 13th straight month of decline, based on data compiled by the U.S. China Business Council.
“These tariff increases are what’s causing significant uncertainty for American employers, leading to less investment, higher prices and fewer job opportunities,” says Tariffs Hurt the Heartland spokesman Jonathan Gold. “You can’t budget for a double-digit tariff increase, and you can’t plan a business when you’re living tweet-by-tweet. The administration needs to use upcoming negotiations to end a trade war.”
Moody’s Analytics recently estimated that Trump’s trade war with China has already reduced U.S. employment by 300,000 jobs, compared with likely employment levels without a trade war. Mark Zandi, Moody’s chief economist, told Yahoo! Finance that the job toll from the trade war will hit about 450,000 by the end of the year. He estimates the trade war will have killed 900,000 jobs by the end of 2020.
While U.S. farmers are in trouble, the overall American job market is still going strong.
Total nonfarm payroll employment rose by 130,000 in August, and the unemployment rate was unchanged at 3.7%, the U.S. Bureau of Labor Statistics reported on September 6.
However, job growth averaged 158,000 per month this year, below the average monthly gain of 223,000 last year.
Meanwhile, the recent ceasefire has Huawei’s name all over it for the second time.
As part of the discussions, China has offered to buy soybeans in exchange for a delay in a series of non-tariff barriers against Huawei, particularly those that hurt its smartphone business.
The reason for the latest soybean-saving ceasefire stems from inflationary and political stress in Beijing, and ramped up fears of a recession in some circles in Washington.
Most investment banks do not see a recession coming next year.
In China, the swine flu epidemic at numerous pig farms is hurting inflation and that gives the central bank less room to ease monetary policy in a slowing economy. Hong Kong risk is also going up. China can use a time out.
In a worst-case scenario, should Beijing feel it has to force Hong Kong into enforcing a curfew and curb large public gatherings after the scheduled October 1 anti-China protest, throwing Trump-voting farm states a meaty bone might help them ward off retaliation from Washington.
By making a short-term deal that has some political value, Xi may think he can dampen or forestall a U.S. response to a crackdown on citizens rights in Hong Kong. Looked at that way, investors should assume the Hong Kong crisis deteriorates and Xi is holding an Ace.
China is also hoping to forestall a Huawei “death penalty,” which Trump alluded to earlier this month according to a Reuters article. Harsher treatment of Huawei would mean they are banned from using U.S. computer hardware in their telecom devices, large and small.
“Both sides have tied this issue to the U.S. relaxing its position on Huawei. This suggests that Chinese negotiators expect to see some movement on that as part of a quid pro quo,” says Nick Marro, global trade lead at The Economist Intelligence Unit. “Easing up on Huawei could be considered a U.S. national security issue, and that might be politically risky,” he says. “We’re still not optimistic about the prospects of a trade deal.”
Soy farmers should take the money that is supposedly coming their way and pay down debts, invest the rest in new products, and reduce acreage. Less may mean more here. Counting on a China purchase bonanza wouldn’t be prudent.
Nor would counting on a long-lasting cease fire. This thing has at least 15 months left.