U.S. and Chinese government leaders have just completed their third annual Strategic and Economic Dialogue. The first two focused on financial and trade issues and this one was expanded to include defense and security issues. Agricultural trade was not part of the formal discussions, but any financial and trade policy discussions with the government of the largest U.S. agricultural export market has implications for the U.S. industry.

 

No major policy changes were announced, but none were expected. Chinese political leaders are already preparing for new leadership to take over in the fall of 2012. The last transition in government occurred in 2002. The current leaders are preoccupied with domestic monetary inflation with prices increasing at an overall rate of over 5 percent annually in April with food prices up 10 percent. The U.S. Presidential election process will also increasingly dominate U.S. policy decision making next year. Except for unavoidable issues, changes in agricultural trade policy are likely to be minimal over the next two years.

The most important economic policy changes for U.S. agriculture are those that strengthen internal food demand in China. One of the key points pushed by Treasury Secretary Geithner was financial regulatory controls on bank deposits and loan rates. China’s financial policies channel low-cost loans to government-owned enterprises by lowering returns to Chinese bank depositors. That gives those firms an advantage over private Chinese and U.S. firms and leads to trade tensions and protectionist policies by the U.S. and other countries. The low interest rates on deposits also reduce incomes from most families’ largest asset and retards growth in demand for consumer goods, including food.

The value of the Chinese Yuan continues to be an issue, but not to the extent it was a few years ago. Since the Yuan was de-pegged last June, it has appreciated about 5 percent annually in nominal terms versus the dollar. With China’s inflation rate, the real change is about 8 percent. Because the dollar has declined more rapidly against some other currencies than the Yuan has increased against the dollar, the Yuan has actually declined in value versus those currencies. A stronger Yuan would make agricultural imports from the U.S. more competitive in the Chinese market.

In February USDA projected Chinese imports of U.S. agricultural products for fiscal year (FY) 2011 (October-September) at $20 billion, up from $15.1 billion a year earlier and $1.5 billion ahead of Canada, the previous number one importer of U.S. products. Through the first five months of the marketing year, total exports were $14.1 billion compared to $10.0 billion a year earlier. Chinese imports are larger in the first half of the year due to less competition from Southern American soybeans during the fall harvest season for the U.S. Soybeans accounted for 70 percent of Chinese agricultural imports from the U.S. in the first five months of FY2011. The number two import item was cotton at $1.5 billion, followed by hides and skins at $373 million and feeds and fodders (not including corn) at $278 million. Those four products account for 85 percent of imports from the U.S. Chinese imports of U.S. products continue to increase, but remain concentrated in a few products.

Stronger consumer demand from China’s growing middle class should be pulling into China greater volumes of the many other agricultural products that the U.S. exports. China’s public policies appear to discourage imports of most consumer oriented products unless shortages occur, like in 2008 when red meat imports increased from $92 million in 2007 to $314 million and then fell to $55 million in 2009. China is far from an open market for most agricultural products.

China came to the dialogue with a list of items for increasing trade. These included relaxing controls on the export of high-tech products, recognition of China as a market economy to allow the country more power under international trade rules, fair access for Chinese companies investing in the U.S. and not politicizing economic and trade issues. The last two items appear to be general categories for a wide range of issues, but certainly include Chinese investments in U.S. firms with strong research and development efforts and technology that would strengthen Chinese industries. Some investments have been blocked for national security reasons. A broad bilateral investment treaty is not likely in the near term.

Despite the growth in two-way trade for agricultural and non-agricultural products, trade policy is much more politically charged for China and the U.S. than for more traditional partners like the EU or Australia. That will continue as China goes through its leadership transition. When its serves China’s interest, they can be pragmatic in trade, such as corn imports. These policy dialogues provide an opportunity for government officials to raise issues that can be resolved at lower levels. Short of an immediate supply crisis, trade in a broad range of agricultural products will only increase as overall trade and political tensions are addressed.

The final documents from the meetings did not include a direct reference to agriculture or food. Financial issues from currency values to greater access to China for U.S. financial companies and regulatory reforms in the U.S. were dominant. Three themes came through of interest to U.S. agriculture. First, market access in a broad context was mentioned repeatedly, particularly for purchases by Chinese governments. Second, China committed to increasing workers incomes consistent with greater labor productivity and increasing workers’ comes as a percent of GDP. That means more spendable consumer income.

Third, both countries committed to following-up from previous dialogues on achieving greater transparency in trade and economic related regulations. This is known in the WTO as trade facilitation – government procedures and controls that influence the speed and costs of movement of goods across national borders. The World Bank’s “Doing Business” indicators from June of 2010 found that procedural requirements for exporting and importing a standardized cargo of goods for the U.S. took six days and five days, respectively, at costs of $1,050 and $1,350. China needs 21 and 24 days at costs of just over $500 each.