This past week, the US and China signed a 'phase one' trade agreement, following months of tensions, negotiations and uncertainty. There are many questions about the future of US-China trade relations that remain unanswered by this agreement, but it has certainly brought a sense of relief.
In this article, I've taken a look - in Q&A form - at the possible implications for agricultural activity.
What does the agreement mean for agriculture?
From an agricultural perspective, the agreement states that during the two-year period from January 1, 2020, through December 31, 2021, China shall ensure agricultural goods of “no less than US$12.5 billion above the corresponding 2017 baseline amount is purchased and imported into China from the United States in the calendar year 2020, and no less than US$19.5 billion above the corresponding 2017 baseline amount is purchased and imported into China from the United States in the calendar year 2021.”
The value of US agricultural exports to China in 2017 was US$24.0 billion.
The phase one agreement, then, means that China has pledged to buy $36.5 billion worth of US agricultural goods (including ethanol) in 2020, rising to $43.5 billion by 2021.
This, however, will be done under commercial considerations and market conditions.
Which products will be a key focus?
The agricultural products that the US intends to export to China as part of this agreement include oilseeds (mainly soybeans), cereal (wheat, barley, maize, sorghum, rice, etc.), meat (beef, pork, poultry, sheep, goats, etc.), cotton and other agricultural commodities (milk, cheese, horse meat, honey, etc.).
It is unclear, however, at this stage how much of each product will China buy.
Also worth noting is that the commodity prices, such as maize, wheat and soybeans, surprisingly showed limited reaction following this announcement.
What does this mean for global agricultural value chains?
The US-China trade friction caused trade diversion from 2018 to 2019. One of the countries that benefited the most from this was Brazil, which saw its agricultural exports to China growing by 35% from 2017 to 2018 to US$31 billion.
The question in mind now is whether the supply chains will re-adjust back to pre-2017 stages in the wake of the commitments made in phase one trade agreement?
We doubt this will be the case as the ever-increasing Brazil soybean production, combined with the weaker domestic currency, makes its agricultural products attractive and affordable from the international buyers (including China). Moreover, the caveat included in the agreement which states that China will purchase the agricultural products on “commercial considerations” and dictated by “market conditions” is another factor that introduces uncertainty.
What does this mean for South Africa?
This means very little for South Africa’s agricultural value chains as the country has minimal exposure to the Chinese agricultural market. South Africa remains a small player in China’s agricultural market, although its share of exports has grown over the past 18 years.
The value of South Africa’s agricultural exports increased 26-fold between 2001 and 2018 to US$676 million. But this is only a 0.5% share of the value of China’s agricultural imports in 2018, which were worth US$129 billion. From a product perspective, wool, citrus, nuts, sugar, wine, beef and grapes were among the top-ten agricultural products that South Africa exported to China.
The recently signed phase one agreement between the US and China is a good development in terms of bringing stability to global agricultural markets. But it remains to be seen if the supply chains will be recalibrated to pre-2017 (pre-trade friction time), as China had begun increasing its agricultural imports from South America.
From a South African perspective, China remains an attractive market, which the country should continue pursuing to earn trade agreements for various products. What has constrained South Africa’s agricultural exports growth in the Chinese market over the past few years is not only the fact that the products in demand there are not produced in South Africa, but rather trade barriers. In part, this is because of the way China facilitates agricultural trade agreements – mainly focusing on one product line at a time – which ultimately slows trade.
If China is to be an area of focus for South Africa’s export-led growth in agriculture, then a new way of engagement will be essential to softening the current barriers to trade. Most importantly, both South Africa and China are members of BRICS – a platform which should help improve economic activity across its member countries.
South Africa should also encourage foreign direct investment in agriculture, specifically for potentially new production areas such as Eastern Cape, KwaZulu-Natal and Limpopo, who still have large tracts of underutilised land. Having Chinese nationals as partners to agricultural development might be one of the ways of easing trade and a way of doing business amongst these countries. A number of instruments can be devised, but one thing for certain is that China should be key to South Africa’s agricultural sector as a place for export-led growth. The growing population and income provide a good base for the demand of higher value agricultural products which South Africa intends to focus on as part of its development agenda.
Wandile Sihlobo is a South African agricultural economist.