From Agricultural Economic Insights Insights, January 27:
Before the ink dried on the newly signed Phase 1 trade agreement,
dozens of articles and Twitter threads emerged with clever insights into
the nuances and subtleties of agreement. Most debates focused on the
base level China agree to buy up from, and the relevant commodities and
products. Stepping back from the details, this week’s post considers the
potential impacts and implications of trade and the farm economy with
two charts.
U.S. Ag Exports to China
The question on everyone’s mind is how China’s purchases of U.S. ag
products expands over the next few years. Figure 1 shows U.S. exports of
agricultural and related products to China[1]. Again, the goal here is not digging into the Phase 1 trade deal specifics, but rather looking at historic trends.
China’s purchases peaked at nearly $29 billion in 2012 and 2013.
Exports to China, measured in dollars, peaked when commodity prices
peaked. This isn’t a coincidence. Measuring trade activity in dollars is
beneficial because one can aggregate across commodities and products,
but is limiting as year-to-year changes could be driven by changes in 1)
volume and/or 2) prices.
During the Trade War, trade activity with China contracted sharply.
China’s purchases in 2018 were 45% less than 2017 levels. Forecasted
2019 levels were 37% less than 2017 levels.
Without a doubt, the best outcome from Phase 1 is the possibility of U.S. exports to China returning to pre-Trade War levels.
Figure 1. U.S Export to China – Ag and Related Products, 2000 to 2019F. Data Source: USDA’s FAS & aei.ag calculation.
Total U.S. Ag Exports
The second – and perhaps most important- chart to consider is total
U.S. ag exports. In recent years, total U.S. exports of ag and related
products have ranged between $150 – $160 billion. Trade activity has
contracted from the highs of $169 billion (2014) but has remained strong
in recent years.
Often overlooked in the discussion about the future of trade with
China are the implications for total exports. If there is a surge in
China’s purchase activity – say ag exports (as reported in figure 1)
surge to more than $30 or $35 billion in 2020- would that, in turn, move
the needle on total U.S. ag exports?
Consider the scale of China’s purchases. In 2017, China accounted for
15% of total U.S. ag exports. While China is a significant, important
trade partner, the U.S. ag export markets are, overall, diversified. The three largest buyers of U.S. ag exports– China, Mexico, Canada – accounted for 54% of total activity in 2017.
As a result of the previous point, the relationship between China’s
buying activity and total U.S. ag exports is tricky. In 2018, when
China’s purchases fell 45% (or $10.8 billion), total ag exports
increased by 1% ($1.7 billion). Most recently, China’s purchases in 2019
are forecasted to be $8.8 billion below 2017 levels, while total
exports are forecasted at $4.8 billion below 2017 levels. This is to say
the global trade economy adjusts. In 2020, if China steps-up and buys
more U.S. soybeans, the U.S. will probably lose sales to non-Chinese
soybean markets. Taken one step further: if China’s purchases of ag and
related products exceeded $35 billion in 2020 (figure 1), how does the
$20 billion increase translate into total U.S. ag exports (figure 2)? It
is unlikely to have a dollar-for-dollar impact....
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