With Phase One Signing, is Trade War With China Officially Over?

AgDay China Trade React
The Phase One trade agreement with China comes with a big promise to purchase close to $40 billion worth of U.S. agricultural products over the next two years. ( MGN )

As the U.S. and China signed the Phase One trade agreement at the White House Wednesday, there was hope the cloud of uncertainty surrounding trade would be lifted. Instead, the markets didn’t seem impressed, with soybeans closing down double digits.

University of Missouri’s Seth Meyer says some of that skepticism from the market could stem from continued uncertainty surrounding what China will buy. On Wednesday, Chinese leaders made it clear that while the country plans to buy around $80 billion worth of agricultural goods over the next two years, the decision will be based on market conditions and price.  

“I think the market was a bit surprised about the emphasis put on the market condition purchases, and then the backloading of those, which really means this has to go smoothly for the first 12 months before things get really rolling,” said Meyer. “But on the back end, it's quite a lot [of ag purchases].”

Meyer pointed out currently, the price isn’t right for China to buy certain U.S. agricultural goods.

“Right now we're not all that price competitive,” he said. “So, I think the market, as we saw some statements on price competitiveness, that put folks off a bit,” he said.

Purdue University economist Holly Wang focused on China. She said China’s promise to buy close to $40 billion worth of agricultural goods each year is a huge step forward.

“Compared to the current export, it creates a new market of about one-third the size of the entire U.S. agriculture exports; that's very significant,” said Wang.

While the deal didn’t specify how much China is promising to buy of each product, Meyer said it did come with a long list of what China considers agricultural goods.

“We did get - as we expected - kind of a list of what counts, but it's a big list,” he said. “It's a big, broad list. So, you can't really narrow it down, and it certainly doesn't say how many soybeans they'll buy this year or next.”

Wang said even though it didn’t specify an exact amount, and the trade didn’t have a bullish reaction, she said the market had some of the deal already priced in.

“We’ve already seen that the soybean price on Chicago Board of Trade rose in the middle of December,” said Wang. “That was when the news was released about the signing of this trade deal. So, I think the market has already responded.”

Wang said as China ramps up its buys, she thinks traditional U.S. commodities will benefit first.

“It also opens doors for newer commodities, and especially processed, higher value-added commodities,” she pointed out. “The industry needs to really grasp that these next two years, it will have its feet set in Chinese market, because after the two years, they will have to compete with everyone else.”

To that point, Meyer pointed out the Phase One agreement is a two-year deal. He thinks the market will be on edge watching exactly what China buys, which means uncertainty around trade isn’t going away.

“Anybody who thought this was going to be resolved with the signing of this and the true beginning of the trade deal was mistaken,” he said. “I think we’ll have another 12 months of just probably lingering uncertainty.” Meyer said

“Everybody will be watching every month to see if the Chinese do or don't make purchases,” he added. “From a Chinese standpoint, that's probably a good thing, right? You don't want everybody to you know how many beans they were going to buy, because then they're at a disadvantage in the marketplace. This also kind of is probably another reason the Chinese like this uncertainty.”

As the Phase One deal gets implemented, and the market adjusts to what China is buying and what the country isn’t buying, Wang said it’s key to remember that the Phase One deal is a positive step for trade relations.

“This one is a good indicator -  and a good initial success - for the stage making a peace instead of a war,” she said. “But of course, there's a long way to go, there are many issues that remain to be resolved.”

President Trump also making clear tariffs will remain in place, as he needs bargaining chips as the two countries enter into Phase Two discussions. So, is the trade war officially over? While signs may be turning more positive, Meyer thinks it’s hard to declare the trade war completely behind the U.S. and China, as this is only a two-year deal.

“I think the optimistic view of this would be, ‘hey, this settles it a little bit for agriculture,’ but we still have a lot of other big issues outside of agriculture that will take time to resolve,” said Meyer.

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