The Current Situation

Regardless of how you see China, China is the second-largest economy in the world, and around 20% of the population of the planet (New Zealand Foreign Affairs and Trade, 2018a).

China is a net importer of calories, between 10-24.9% of calories being imported from abroad (Ziehan, 2019). China imports 65% of the world’s soy beans (Oliveira, 2018). China is expected to become the world’s largest agricultural importer by 2020 (CAFTA, 2019).

China has now stopped all imports from the United States. China was the largest importer of U.S. soybeans, and within the top-3 of pork-importers (Nosowitz, 2019). China imports around 7 million tonnes of soy per month (Freitas, 2019).

It is interesting in the differences between Mexico and China in how they reacted to a Trump tariff threat. A back-down would have similar effects; China would be seen to lose face to back down; some have criticised the Mexican President for backing down so quickly. Both countries have economies tied to the U.S. economy. But in terms of relative size, China is closer to the U.S. than Mexico, and so the government believes that they can outlast the Trump administrations aversion to them.

There is also another long-term effect of this; as the U.S. tries to strangle China on food, as China moves to find new food sources, it reduces China’s long-term reliance on the U.S.; the U.S. may not be able to get as large a market share in China in the future, and this will force China to become less reliant on foreign sources. As such, the U.S. can only use this attack once; if Trump does not succeed in breaking China this time, it is unlikely that China will allow the U.S. the means of trying a second time. Like an illness, once you’ve had it, the anti-bodies remain to protect the host. However, some experts believe that there simply isn’t enough protein on the planet to sate Chinese demand without the U.S. (Warner, 2019).

However, with 1.3 billion people, China’s reliance on importing food means that a capital collapse may lead to wide-spread famine due to a potential price inflationary spiral removing a quarter of calories from the Chinese market. This is where other economic issues may come into play, and thus this policy must be considered further, but we shall discuss that in other articles.

Expanding the Food Network

China is now looking to find new countries to fill the void caused by refusing to import U.S. exports, as well as reduce the potential national security issue of the U.S. cutting off China’s food supply (Ziehan, 2019). This is not the first time China has done so; in 2014, China moved 90% of U.S. corn for Ukrainian (Smith, 2019). It may also be able to do so for its potential rapeseed shortage—rapeseed makes a good alternative feed for livestock (Sinclair, 2018).

Above is a graph that shows all of the countries that are food exporters, but here is a written list of the six non-U.S. food exporters that we shall be looking at in this article:

Brazil (the largest)

Myanmar (One Belt, One Road)

Australia (One Belt, One Road pressure)

New Zealand (Beef and dairy; One Belt, One Road Pressure)

France

Argentina

Other food exporters that have China reaching for an order include Thailand, Russia, Canada, Germany, Spain, and Netherlands. The One Belt One Road project is integral to Chinese long-term economic survival with foreign countries, especially South America where China has also focused (Oliveira, 2018). We shall see how China has begun to reach out as aggressively as possible to compensate for the trade war, and to decouple their food supply from a nation they see as an aggressor.

Argentina

Argentina is the sixth non-U.S. food exporter in the world (Ziehan, 2019). Xi also visited Argentina in 2018 to sign 30 agricultural and investment agreements, and China is the biggest investor into Argentina and, besides the IMF, owns the most Argentine debt (Henao, 2018). Future Chinese investment focuses on two main areas; nuclear power (One Belt, One Road) and soybean agriculture, which is something China needs (Garrison and Bronstein, 2019).

However, due to an upcoming election, Argentinian farmers are hoarding soy beans, and may be unwilling to sell at the moment as soy retains its value regardless of who wins the election. not only that, but the longer they hold onto their supply, the more Chinese demand will force up the price of soy in South America, leading to further profits (Freitas, 2019).

However, recent trade discussions have specifically targeted both soy and beef from Argentina (Garrison and Bronstein, 2019). Argentina’s soy product is so important that the Chinese company CCCC is preparing to win a contract to dredge the Parana river (which carries 80% of agricultural products from Argentina), to allow massive imports of soy (Bronstein, 2019).

China and Argentina have good relations, and Chinese investment into Argentina is likely to pay China back in agricultural products.



Australia

Historically, China and Australia had a strong relationship, including a free trade agreement; recently, due to political issues such as political influence, the Nine-Dash Territory policy, and arrest of Australian citizens in China, Australian relations with China seem to be deteriorating (Lowy Institute, 2019; CAFTA, 2019). Australia has also felt that China has encroached on its’ relationship with Pacific island nations, while China feels that Australia is spreading the idea of a ‘China threat’ (Doherty, 2019).

China is pursuing a lot of political pressure on Australia to join One Belt One Road, due to its position between Latin America and Asia, as well as being a ‘Western’ country that can put another feather in OBORs hat (Chen and Promyamyai, 2019).

Brazil

Brazil is the largest competitor to U.S. agriculture as a food exporter (Ziehan, 2019). As China looked away from the U.S., Brazil has just enjoyed a wonderful crop and managed to meet China’s massive domestic demand. However, it now seems that Brazil cannot meet Chinese needs alone due to a bad harvest (Freitas, 2019). Not only that, but when it is February to May, the Brazilian harvest, but not for the rest of the year (Oliveira, 2018). The rest of the year? You need to find Northern Hemisphere countries for that (like the E.U., for example).

Brazilian soy stockpile has fallen 80% since last year, exports are down 8% in July alone, and cargo to China has dropped 11%. Domestic pricing for soy has increased 32% this month (Freitas, 2019).

There is also a binding issue with soy; as the price of pork increases in China, farmers are left to decide whether to export soy, or use that soy domestically to feed livestock, and then sell pork to China, which reduces the soy export supply (Freitas, 2019).

There is also a potential infrastructural and political issue for Brazil; the majority of Brazilian exports are done through a single road, and they have a leader facing domestic and foreign pressure. A single blockade or sabotage of that road will destroy Brazilian exports for that period of time; if rebels were to seize that road, all exports of soy from Brazil would stop cold (Ziehan, 2019). Read more about this here. Do you think it is unlikely? Because it has happened in Myanmar this week (23rd August, for readers later) (Ye Lynn, 2019).

As China has done with Venezuela, it is likely to back President Bolsonaro in this extreme case, not only due to food imports, but also due to massive Chinese investment into Brazil (Oliveira, 2018). This relationship is likely to tighten over time, but Brazil alone cannot fulfil China’s needs.

Canada

China was once Canada’s second-largest export market (CAFTA, 2019). The relationship between China and Canada has become frosty since the arrest of Huawei CFO Meng Wanzhou, daughter of Huawei CEO (Llunggren, 2019).

Canada was once one of the largest exporters of pork to China (Zhou, 2019). Canada was also one of the largest exporters of rapeseed to China (Sinclair, 2018). China has stopped all imports of both since the arrest of Meng (Llungren, 2019). Not only that, but also beef and soybeans have been banned by China, but wheat exports to China in the same period of time has grown by 60% (Blatchford, 2019). PM Trudeau’s government has given loans to farmers in Canada to weather the Chinese response at public taxpayer’s cost (Kirkup, 2019).

Canadian Prime Minister Trudeau has said that Canada won’t back down (Llungren, 2019). This is unlikely to change, as two-thirds of Canadians agree with how Trudeau has handled this, making it politically unpopular to oppose it (as well as unconstitutional in Canada) (Young, 2019). Combine this with the potential execution of two Canadians in China, and relations are not likely to improve (Dangerfield, 2019).

Expect little to change here until more news about Meng comes out. Also, should China and the U.S. make a trade deal that will likely require Chinese purchases of U.S. agriculture, that will crowd out any Canadian exports to China (Blatchford, 2019).

The European Union

China is the second-biggest trading partner with the European Union, and the E.U. is China’s largest trading partner (European Commission, 2019).

Germany, the Netherlands, and Spain are one of the largest exporters of pork to China (Zhou, 2019). China plans to increase imports from Europe to counter the U.S. issue (Smith, 2019). Currently, agriculture is not a large export sector to China from the E.U. (European Commission, 2019). The European Union is also one of the largest suppliers of rapeseed in the world (Sinclair, 2018).

The fifth largest non-U.S. food exporter is France, similar to the United States, but smaller scale (Zeihan, 2019). President Xi visited France in May 2019, and even ordered 300 jets from France for no apparent reason (Pennetier, 2019). China has also ordered a large amount of off-shore wind farms in China to be made by a French company (Albert, 2019).

However, trade between the E.U. and China may not be flourishing; a recent report regarding the railways of One Belt One Road found that there are not enough goods to fill train carriages, and some trains run as few as one full carriage in a train of 41. Certainly not trade over land, despite Chinese subsidies of up to 50% (Leng, 2019). Not only that, but One Belt One Road faces rising opposition from France, Belgium, and Germany (Albert, 2019).

Not only that, but there is rising tension between the two markets, with E.U. policy documents specifically saying that the E.U. must call on fair play, fair trade, or the ability to hit back against China. The E.U. also engages in anti-dumping practises against China (European Commission, 2019).

French President Macron has called out for an end for European naivety with China, and in dealing with China in many aspects, including human rights (Albert, 2019). Germany has also used economic pressure and relationships to try and enforce human rights in China (Federal Foreign Office, 2019).

While human right and dumping practises create friction in the relationship, there is little sign that the E.U. or China are willing to put their massive trading relationship at risk in the near future, and promoting agricultural goods into China has always been a focus of the E.U.

Myanmar and Thailand (ASEAN)

Thailand signed up to a free trade agreement with China in 2003, primarily focusing on agricultural products, and shared private food safety standards agreements (Thai-China GAP) (BiLaterals, 2012). ASEAN trades 17% of it’s total with China now, with a projected 22% in 2035 (Lee, 2018).

There is great political pressure to sign a deal between the ASEAN countries (including Myanmar) onto One Belt, One Road (Chen and Promyamyai, 2019). President Xi has been leading trade deals with Thailand and ASEAN and aims to finish improving existing, or creating new trade deals this year (AFP, 2019). In 2018, China increased investment with Thailand, doubling it from $73 billion to $140 billion through 6 agreements; they then intend to expand this trade agreements and infrastructure investments (via One Belt, One Road) to another 10 south-east Asian countries (Bilateral, 2018).

Thailand has benefited from the trade war, as businesses are moving from China to Thailand. They are also likely to want to compete with China’s Made in China 2025 project in several future technologies (Sophonpanich, 2019).

Myanmar also has issues with exporting goods; political difficulties have led to rebels destroying infrastructure leading to the absolutely blocking of goods between the two countries (Ye Lynn, 2019). Due to issues domestically, we cannot imagine that China will be willing to help keep the peace abroad. However the situation resolves, it seems that China cannot rely on Myanmar for long-term trade. If you’re interested in a deeper dive into Myanmar, we recommend reading this article.

Thailand, however, remains a good, safe bet, with strengthening relations both politically and in trade.

New Zealand

New Zealand and China signed a free trade agreement with China in 2008 with no tariffs on 97% of goods from New Zealand. China is currently New Zealand’s largest trading partner (New Zealand Foreign Affairs and Trade, 2018a).

China has been pressuring New Zealand to join the One Belt One Road project (Chen and Promyamyai, 2019). Meetings with New Zealand’s trade minister and Chinese officials have had serious discussions on the possibility of New Zealand joining One Belt One Road, with New Zealand Prime Minister Ardern saying “that Belt and Road has really evolved”; however, an existing already written agreement was never signed (Greenfield, 2019).

There is a potential backlash from the U.S. should New Zealand join One Belt One Road (Greenfield, 2019). New Zealand is even trying to update a new free trade agreement with similar regulations and protections as the U.S. is seeking (albeit less aggressively), handwaving sanitation issues and trying access to the Chinese service market (New Zealand Foreign Affairs and Trade, 2018b). However, trade relations between these two countries seem optimistic in the long-run.

Russia

Russia already exports poultry to China; it is now preparing to send both soy and pork to China. One producer and exporter from Russia believe that his personal exports will increase by 2000%, to 40,000 tonnes of poultry from this producer alone, and 200,000 tonnes of poultry from Russia in total.

Trade of food between the two countries has been increasing over the past few years by 30%, but still less than 5% of total trade between the two countries. Russia believe that long-term, the vast land and water reserves of Russia places it in a prime long-term trade relationship position (Zhou, 2019).

China and Russia have begun construction on a large road between the two countries via Kazakhstan, joining the Russian and Chinese road networks, and inviting Russia into One Belt One Road’s infrastructure. Xi and Putin have signed about 30 agreements, including Russian use of Huawei to build the 5G network. Russian nationalists have criticised this policy as increasing Russian dependence on the Chinese economy, but with the E.U. and the West remaining frosty to Russia, what choice do they have? (Sakai, 2019).

Russia alone cannot fill the hole in Chinese stomachs, but the relationship will likely tighten and remain stable, with China emerging as the alpha in the partnership.



The United States

Chinese imports of soy used to be 10% of U.S. total exports to China (Oliveira, 2018). Recently, President Trump has placed further tariffs across the remaining $300 billion exports to the U.S. from China (McKeef, 2019). China has completely stopped all imports of U.S. agricultural products in the wake of the trade war expanding (Nosowitz, 2019). There is a tactic that by attacking these exports, China may be able to turn farmers in red states against Trump in the 2020 election, possibly installing a less anti-Chinese Democratic president and ending the trade war without concessions.

China’s complete stopping of imports affect mostly pork and soy (Nosowitz, 2019). Poultry has also been specifically targeted (Zhou, 2019). The U.S. government is playing to pay around $16 billion in aid to farmers harmed by the trade war (Pamuk, 2019). President Trump has also signed a trade deal with Japan to try and ship the agricultural products elsewhere (The White House, 2019).

While the U.S. scrambles to find consumers for U.S. agriculture, and fund the losses from it’s own red state farmers, there is no end in sight for the U.S.-China trade war for a multitude of reasons.

Effects on Chinese Consumers

We have already discussed before the effects of inflation upon the Chinese consumers. We have seen rising inflation in essential spending such as food greatly affects consumers in China. Pork prices have risen by 27% specifically, fresh fruit has risen by 39.1%, and general food inflation is 9.1% over this year from July (Smith, 2019). There are estimates that domestic Chinese pork prices may have risen by as much as 40% (Warner, 2019).

China does have price control mechanisms to prevent the price from spiralling, and could even loosen their import restrictions to reduce the prices from inflating too far. An alternative price control mechanism includes the government subsidising the cost of food to prevent an increase in food prices (Smith, 2019). It has yet to do so, however.

Due to the depreciation of the Chinese yuan against the dollar, all purchases from imports will increase in price, thus further fuelling food price inflation and decreasing the purchasing power of the Chinese consumer (McKeef, 2019). This will make domestic food production more competitive and may drive long-term domestic growth in farming in China; however, it is also worth noting that the agriculture industry in China is largely private, with around 1% of employment and 3% of output done by S.O.E.’s (Lardy, 2016).

Domestic farming also has other issues; firstly, African swine flu frequently devastates Chinese pork production as millions of pigs are burnt to prevent another epidemic; output is estimated to drop by 30% (Zhou, 2019). It is estimated that 40% of pigs in China are already gone, with 50% gone by the end of 2019; for the purposes of understanding, that’s more pigs than born in the U.S. and E.U. combined (Warner, 2019).

The advantage of swine flue decimating the pig population is that demand for soy drops as well; soy is a crop used for feeding pigs, and the less pigs, the less needed. This is helpful at a time when Brazil cannot, and U.S. is not allowed to, meet Chinese demand (Freitas, 2019).

Conclusion

So, we have seen that One Belt One Road continues to be Xi’s short-term most important project as it expands and twists to meet Chinese needs; providing employment and economic relationships, yes, but in this case, providing the means to shop for more food to meet the demand of its domestic population.

With the massively rising prices of the Chinese consumers, we can see that the demand is certainly not met yet, and this will lead to problems with Chinese consumption in the long-term (as food is certainly a non-elastic good), which drives down consumption at a time when consumption is required to maintain the engine of the Chinese economy.

There are two directions China is moving towards; the first being self-sufficiency. As the rural population is overwhelmingly poor and uneducated, we cannot expect any real innovation in the Chinese domestic agricultural sector, nor any real investment. The Chinese state will have to either allow foreign companies to enter this market in larger numbers (at a time large numbers of companies are leaving), or do the investment itself into rural areas that are poor and are not often the focus of the relatively urban Communist Party.

The second is finding enough foreign countries to compensate for the loss of the U.S. market; it is questionable that the world actually has enough spare food to feed the ever-growing Chinese market, and with a currency that is depreciating, it will become harder to do so. Not only that, but removing both the Canadians and Americans from the Chinese diet will lead to rising food prices as the two largest competitors and exporters to China are removed from the market directly, which in turn will fuel inflation.

We can see that the Chinese administration is making moves to solve these problems, and we’ve outlined them here. We’ve also considered the conditions of each country; some are unable to provide much (Russia), some have potential national security issues (Brazil, Myanmar), some may oppose China ideologically (E.U., Australia), but some seem healthy and happy to do so (Argentina, Thailand, New Zealand).

Chinese investment into poorer countries may pay off with long-term dividends and good trade deals, but we may find the Chinese government considering to soften towards Canada and the U.S. in the hopes of securing cheap food; if Trump wins 2020, I believe it is almost a certainty, as China will face another 4 years of Trump.