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Seven things to know about China to understand the trade war

AMES — When the largest trade war in human history exploded in 2018, Iowa’s soybean farmers were pushed to the front lines. As trade disputes between the United States and China escalated to unprecedented levels, it’s important to understand some of the forces driving this battle.

“There are seven economic, cultural and political facts you need to know about China to better understand the trade war,” said Dr. Wendong Zhang, an Iowa State University Extension economist who grew up in China. “This information can help U.S. producers, agricultural professionals and policymakers to better understand the broader context of the trade war, along with the immediate and long-term implications for U.S.–China economic relations.”

The stakes are high. The United States has imposed tariffs on more than $250 billion worth of products from China. In turn, China retaliated with tariffs on more than $110 billion worth of U.S. products, including U.S. soybeans, pork and ethanol.

Here are Zhang’s seven keys to understanding the trade war:

1. Row-crop agriculture is not China’s comparative advantage. Although China and the United States cover roughly the same land area, the amount of land that can be farmed is limited in China.

“China has seven percent of the world’s arable land but needs to feed almost one-fifth of the world’s population,” Zhang said. “The United States boasts more than 15 percent of the global arable land with only four percent of the global population.”

While many U.S. Corn Belt states enjoy ample precipitation, most major agricultural production areas in China rely heavily on irrigation.

“In addition, the soil and land quality are arguably significantly better in the United States than in China,” he said.

Societal constraints further hinder China’s ag production efficiency. China has at least 270 million farmers actively engaged in crop or livestock production, compared to 3.2 million for the United States. This results in less than 2 acres, on average, for a typical Chinese farming household. China also bans the planting of genetically modified corn and soybeans.

“As a result, the most productive provinces in China only produce 50 to 60 percent of Iowa’s statewide average yields,” Zhang said.

China’s long-standing food security policies also shape the nation’s agricultural imports. China regards rice and wheat as critical food crops and focuses on 100 percent self-sufficiency.

“Similarly, China could produce 97 percent of its pork domestically, since half of the pigs in the world are in China,” Zhang said. Contrast this with the feed grain markets. “China could only satisfy 15 percent of its need for soybean consumption via domestic production,” he added.

2. Trade retaliation triggers disproportionally large impacts on ag states like Iowa. China will incur the greater economic loss from the trade war, Zhang said.

“If the United States loses about a quarter percent off its economy due to the tariffs effective as of January 2019, the Chinese economy will suffer a 1.3 percent loss,” he said.

Still, trade wars take an especially heavy toll on agricultural states like Iowa.

“Our previous analysis of China’s trade retaliation strategies suggests that China tends to target agricultural products for economic and political damages, especially when the products are easily substituted by supplies from U.S. competitors or alternative products,” he said.

A recent Center for Agricultural and Rural Development (CARD) analysis on the trade war’s impacts on Iowa translates into a half- to full-percent loss off the Iowa economy. In particular, the average estimated loss to Iowa’s soybean, corn, hog and ethanol industries are $545 million, $333 million, $776 million and $105 million respectively, Zhang noted.

3. Trade disruptions incentivize China to diversify away from the United States. In 2016, China bought more than 60 percent of U.S. soybean exports. Even then, however, China was buying more soybeans from Brazil. Due to strong Chinese demand, Brazilian soybean acreage soared 40 percent for the 2018/19 season.

“The trade disruptions could accelerate China’s diversification away from the United States, potentially benefitting our competitors,” Zhang said.

4. Both China and U.S. misjudged the trade war. The Chinese thought the trade war would be unlikely, or at least limited in scale. American policymakers underestimated not only the resolve and speed of Chinese response, but the challenging nature of resolving issues like intellectual property protection and market access.

“Then there’s the complexity of simultaneously engaging in trade disputes with Mexico, the European Union, Japan and other countries,” Zhang said.

Trade disruptions are often easy to start but have long-term implications, he added.

“The U.S.-China 2010 chicken-versus-tire trade disputes essentially resulted in a loss of a $1 billion U.S. poultry export market to China that’s now supplied by our competitors. Even after a decade, this market has not returned to previous levels,” he said.

5. China is changing rapidly. Knowledge about China that was accurate five years ago may not apply today, Zhang said. China now leads the world in the construction of high-speed rail and has more miles of high-speed rail than all other countries combined. Also, while Chinese students often make the largest group of foreign students in American and European universities, with more than 40 percent of international students currently in Iowa coming from China, a major shift is underway.

“In 2001, when China joined the World Trade Organization, only one in 10 Chinese students returned to China after studying abroad,” Zhang said. “In 2017, eight in 10 of the 600,000 Chinese students who studied abroad returned to China after graduating.”

China’s agricultural sector has also undergone significant changes over the last decade, making China less like the Soviet Union and more like the United States. In 2007, China had no crop or livestock insurance. China now is the second largest agricultural insurance market in the world, Zhang said. Other big changes came in 2017, when China started a new national mandate for all gasoline to be blended with E10 ethanol by 2020. In addition, per-capita beef consumption in China has jumped almost by 20 percent in the last five years. Also, a “Belt and Road Initiative” started in 2013 has significantly reduced the transportation time between Europe and China and may create new trade opportunities, Zhang said.

6. Both the Chinese economy and U.S.–China relations are at critical inflection points. After four decades of phenomenal economic growth, it appears the Chinese economy will only grow at 5 to 6 percent in the next decade.

“More importantly, the trade war reflects potentially deteriorating U.S.-China relations,” Zhang said.

An August 2018 Pew Research Center survey showed 38 percent of Americans have a favorable opinion of China, down from 44 percent in 2017. U.S. business leaders, who are often advocates for expanding economic ties with China, joined policymakers arguing for a tougher stance when dealing with China.

7. Chinese consumers and producers increasingly think and act like their U.S. counterparts, at least economically. Although Chinese agricultural producers do not own land privately, 30-year contract rights essentially give them free reign regarding their crop choice, land rental choice and marketing strategies, Zhang said.

“Chinese consumers prioritize food quality, school quality, air and water quality, and quality of life for themselves and their kids,” he said.

China will continue to be one of the most important trading partners for U.S. agriculture, once the trade disputes are resolved, according to Zhang.

“Trade disruptions suggest we need to better understand China economically, culturally and politically,” he said.