The Seeds of the US-China Trade War Go Way Back

I am often asked why I blog and one of the reasons I always give is that I learn so much from it. One of my favorite blog learning devices is asking super-smart people to guest blog on here, especially when their expertise is different from that of the blogging lawyers at my law firm.

Way back in 2014, we had Lucas Blaustein write about US-China agricultural relations. Lucas is now in a high level agricultural position with the US Foreign Agricultural Service, but back then he was the Container/Feed Ingredient Manager for a global transportation company focused on food with extensive China experience, fluency in spoken and written Mandarin and a Masters in Agribusiness.

His post, China’s Ban on U.S. Agricultural Products Grows, focused on how China was improperly banning US corn products so as to favor its own corn producers:

Since China’s admittance to the World Trade Organization (WTO), China and the United States have increasingly traded their comparative advantages. Daily, Chinese made iPads, Lenovo computers, Nike sneakers, and other material trappings of American consumerism arrive in U.S. ports, where they are unloaded and then returned filled with U.S. grain products like soybeans and corn. But in November 2013 the system began to break down, as corn exports to China came to a halt.

What caused this halt was the discovery by China’s Inspection and Quarantine Services (CIQS) of an unapproved genetically modified corn varietal called MIR-162 in imported shipments. Import permits began to be denied, and US corn exports to China gradually decreased to nothing. Grain merchandisers and U.S. farmers were horrified, as the fastest growing market for U.S. corn closed its doors.

Agribusiness companies and Chinese importers were quick to react, replacing corn grain as the number one U.S. export to China with a corn based ethanol byproduct called distiller dried grain with solubles (DDGs). For a time it seemed that American grain merchandisers had found a solution to China’s ban on U.S. corn with DDGs, but this “solution” was short-lived. In the spring of this year China stopped returning import permits for DDGs.  After months of confusion, the U.S. Embassy in Beijing on July 24 received a short message stating that “U.S. DDGs imports must now be tested at origination for the unapproved gene MIR-162.” In the space of a day, traded corn prices dropped by more than half.

Shortly thereafter the USDA issued a statement asserting that there is no reliable, affordable method of testing for MIR-162 in DDGs, nor is there even a regulatory body in the United States with the manpower or funding to conduct such a test, even if one existed. In other words, what China did on July 24 was to ban importation of all U.S. corn based products.

Why did China do this?

Sino-U.S. relations are at one of their lowest points since before China’s period of great opening up. In light of recent events involving Apple, Microsoft, GSK, Cisco, KFC, Starbucks and many other American businesses in China, it would not be out of bounds to view China’s ban on U.S. corn imports as punishment for worsening relations. The National Grain and Feed Association (NGFA) estimates that China’s ban has cost U.S. farmers and agribusiness firms nearly three billion dollars. U.S. farmers could be hit especially hard during the upcoming year, with larger than average corn yields anticipated, and more new unapproved GMO varietals in the ground.

But what is often lost from the punitive argument is the Chinese side of this story.

*      *      *      *

China knows GMO technology is critical to increasing crop yields, so investment in GMO technology has surged, despite public fears over negative health effects. Chinese officials are wary of becoming overly reliant on genetically modified seeds from the Western world. Within the last six months eight Chinese Americans and nationals have been arrested on accusations of corporate espionage and theft of American seeds. MIR-162 grain imports may not be allowed into China, but China desperately wants access to the technology that produced the MIR-162 strain.

With lower input costs and better technology, world corn prices have been lower than China’s domestic corn prices for years. For this reason, Chinese companies have imported significant amounts of corn. The easiest way for China to protect local farmers is to force the purchasing of Chinese corn by limiting the amount of foreign corn that enters the Chinese market.

Protection for local farmers, fear of reliance on foreign GMOs, and investments in agriculture are all part of China’s broader food security strategy. Banning U.S. corn for food security reasons is probably as strong an argument for why China banned U.S. corn as punishment for worsening relations.

With Sino-U.S. relations still very poor, another record corn crop this year in China, as well as Ukrainian, Brazilian, and Argentinian corn imports approved, no matter which reason you favor for the ban on American corn products, there is little reason to believe China will lift that import ban any time soon. Every day it becomes more likely that only a significant and public response from the United States government, or litigation in the World Trade Organization, will open China back up to US corn product imports.

But if all Lucas had done was to write about China blocking foreign products to secure its own competitive advantages, I would not be re-running his post today. Sure, that is relevant in that a huge part of the US-China trade dispute stems from actions just like these, but China has done enough things during the last five years that there is no need to focus on how ruthlessly it treated America’s corn farmers back then.

No, what has caused me to re-run Lucas’s post is a comment he left in response to a comment left by another of our readers. In that comment, Lucas essentially lays out what has given rise to the US-China trade war we have today:

If the United States desired, it would be much easier for us to cripple the Chinese economy than for the Chinese to cripple ours. While you commonly hear, “everything is made in China,” few of the staple items the U.S. consumes are actually made in China, and most items that are actually necessary to our society can be manufactured elsewhere. Think food, fuel, transportation, weapons… (all are of these are domestic or ally nation industries).

China is still an export driven economy, with no other major export markets for its goods besides the EU and North America. Were the United States to put in place a ban on any number of China sourced items it would cause immediate harm, and potential civil instability in the People’s Republic. The easiest way for the United States to inflict harm on the Chinese economy, would be to ban Chinese companies and individuals from listing on the stock market.

Few in the United States see economic punishment as a constructive step. Engagement is usually the best way to solve these kinds of difficult problems. However, engagement has been so far unsuccessful between the current U.S. and Chinese administration.

What the United States must be careful of economically, is providing China with too much access to our market sectors in the hope that China will reciprocate. Two excellent and very recent agricultural examples of the United States opening up or approving a business opportunity to Chinese companies are: 1) the Smithfield acquisition by Shuanghui; and 2) the approval of Chinese chicken processing plants. Both were approved in the hopes of China relieving some of its restrictions on U.S. agricultural products. Sadly, neither the Smithfield or chicken import approval has resulted in similar market openings. Now American chicken companies have been exposed to Chinese competition, with major protein imports to China like beef and pork still mostly banned.

Telling was what one of the congressmen had to say about the Chinese acquisition of Shuanghui, “we are allowing a Chinese company to do in America, what an America company would not be allowed to do in China.”

Plus ça changeplus c’est la même chose.

Brief sidenote: Some of the international litigators at my law firm had a case a few years ago against Smithfield Farms, involving millions of dollars of pork bound for Russia that became subject to US trade sanctions against Russia. What so struck our lawyers was how Smithfield Farms, which had once been a bulwark of an American food/farm company, acted in so many ways like a Chinese company in China. Not necessarily a negative thing, but definitely unusual.

Read More

China Business