On Wednesday this week in Washington, as planned, the US and China signed a phase one trade deal bringing to an end mutually escalating tit-for-tat tariffs.* This agreement covers trade and services with China making various pledges to increase its purchases of US agricultural goods and energy products that are aimed at reducing the US trade deficit with China. The deal was signed by President Donald Trump and China’s chief trade negotiator Liu He. President Xi Jinping did not attend as this is only an interim deal and a prelude to more contentious phase two discussions about China’s alleged theft and forced transfer of intellectual property and its routine use of state subsidies to gain a competitive edge. The US side played up this deal as a successful conclusion to almost 2 years of global trade disruption, largely of its own making.^ The Chinese side was more subdued, promising best endeavours to raise purchases of US goods, but the targets fall well short of being hard and fast obligations. Over the next two years, to end 2021, China will buy and import from the US manufactured goods, agricultural goods, energy products and services that exceed the 2017 baseline by no less than $200bn. China will buy, subject to “market conditions”, an average of $40-45bn of US agricultural products both this year and next, compared to only $24bn of such purchases in 2017. It will also buy at least $52bn extra over 2 years of US energy products. These ambitious, or maybe unrealistic, plans have implications for Chinese purchases of US soybeans, pork, crude oil, LNG, coal, etc. They will lead to another forced change in seaborne trade flows.

It is noteworthy that China imported a total of almost 89mt of soybeans in 2019, up 1% on 2018, despite African Swine Fever reducing the size of its hog herd by more than 40% over the 18-month most active period of the US-China trade wars. China imported less soybeans from the US and more soybeans and by-products from Brazil and Argentina, the same countries upon which the US recently reinstated steel and aluminium import tariffs for alleged currency devaluation. In reality, it was an act of revenge for the success of these South American nations in exploiting the loss of the China export market for US farmers. Farmers are being compensated for their losses by federal government subsidies paid out of tariffs imposed on imported Chinese goods, ultimately funded by hapless US consumers who are caught in the crossfire. Now the South Americans, who increased their soybean plantings, will face less demand from Chinese buyers while US farmers, who reduced soybean plantings in favour of corn and wheat, face more demand for stuff that they do not have. American farmers may have been wrongfooted while the Ukraine and Canada, Trump’s occasional friends, may find an opportunity to sell their soybeans to China. As regards crude oil, Japan and South Korea kowtowed to the US and slashed their imports of Iranian crude, replacing them with long-haul US crude imports. Now these supplies are likely to be diverted to China so that it can try to meet its phase one ‘targets’. This week the UK, France and Germany put Tehran on notice for breaching the 2015 Iran nuclear deal,^^ caving into persistent US pressure to back its sanctions on Iran or risk suffering 25% tariffs on their car exports to the US. Trump’s dealmaking involves an offer wrapped in a threat, reminiscent of the Sicilian approach to dispute resolution.

Under this president the US is no longer a champion of free trade, if it ever was. Over the past two years the US has caused trade tariff barriers to be erected across the globe, increasing costs to consumers and slowing growth. Consumption has been the only engine in a world economy that sees industry, manufacturing, exports and investment powering down and under-performing. China’s pledges under phase one will be another twist of the trade kaleidoscope and lead to further disruption to seaborne trade flows. Shipping has coped well enough during two years of US-initiated trade wars and will no doubt adapt again, as trade is fungible. If one source of supply is blocked then another takes its place. The difficulty for forecasters, who try to assess the Holy Grail of supply- demand balance, is that it is hard to predict from where such displaced commodities will be replaced, as so much depends upon a mixture of availability and price. Last year, Latin American soybeans replaced US beans into China while lost iron ore supplies from Brazil and Australia gave India and South Africa a chance. Opec and Russian oil production cuts, aimed at rescuing low oil prices, gifted the US, Brazil and Norway the chance to sell their incremental light crude to Asian refiners. The switch from short-haul to long-haul crude imports gave supertanker owners a rare chance to make money. The US-China truce will shorten and lengthen voyages, favouring some and not others, but who knows how?


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