America Has a Long Lever in Trade War With China

Reuters reports that China will exempt some American agricultural products from its latest round of tariffs. This is welcome news—particularly for our pork and soybean producers who’ve been on the front lines of the trade war.

But what does the news really mean? Did China blink? Are they throwing us a bone? Or is just part of Xi Jinping’s 200 IQ 4D underwater chess gambit to win the trade war? The answer begins and ends with the economic data.

One Little Piggy Went to Market

First up: pigs. China is by far the largest pork consumer on earth, and is expected to consume more than 50 million metric tons this year alone. This is more than twice what the European Union uses (around 21 million metric tons) and five times what Americans eat (just over 10 million metric tons). In fact, China eats more pork than the rest of the world combined. It’s a huge market—one that cannot be sustained without imports. Why?

Chinese pork production has been ravaged by an epidemic of swine fever. Estimates suggest that anywhere from 300-350 million pigs will perish by the end of 2019—one-quarter of the world’s total pork supply. As a result, the price of pork has more than doubled in China since the start of the year. Chinese consumers are hungry. They are angry. They want cheap pork.

Given that America is one of the few nations with enough pigs to satisfy China’s hunger, Xi Jinping has little choice but to buy American. China needs America’s pigs. This gives us leverage.

As Archimedes wrote: “give me a lever long enough . . . and I shall move the world.” It’s time we used ours.

This is why China blinked.

And, in reality, American pork producers weren’t suffering terribly from China’s tariffs. Pork, like oil, is a fungible commodity—whether it comes from Australia, Brazil, or Canada, pork is pork is pork. This means that although China has been buying less American pork since the start of the trade war, it has bought more from Canada and Brazil. Meanwhile, American producers have been filling-in the supply gaps in those other nations.

In essence, we’ve benefited from China’s growing demand without needing to export directly to China. And to be clear, I wrote about this exact phenomena in April 2018, in response to Heather Long’s grim predictions in the Washington Post. Looks like I was right—just like I was right about Harley-Davidson and Boeing.

A Lever Long Enough

Regarding soybeans: America’s soybean farmers have been on the front lines of the trade war since day one. They have taken significant damage because China has deliberately targeted them. Why?

To begin with, America’s soybean farmers form a large, publicly sympathetic voting bloc—a bloc whose support President Trump needs if he is to win the 2020 election. China knows this, and has softened the farmers with an iron fist. Now they are coaxing our farmers with the velvet glove. The hope is that Trump will respond to this political pressure by surrendering in the trade war. And if not, don’t be surprised if China ratchets up the economic pressure to alienate Trump from his rural base.

Either way, China’s goal is to eliminate Trump and his pesky tariffs.

Sadly, the fools at the Washington Post and the New York Times are all too happy to play harmony to China’s melody. China targets farmers to put political pressure on Trump. The media then amplifies the message. Shamefully, those very same newspapers who spent the last three years claiming that Russia interfered in the 2016 election are literally meddling in the 2020 election on China’s behalf. Ironic.

Now, you may be wondering why China is having success against America’s soybean farmers and not our pork producers. Again, it all comes down to leverage.

Americans consume most of the pork we produce. We export our relatively small surplus for a healthy profit. Conversely, Americans produce far more soybean products than we consume. In fact, about 40 percent of our soybean oilseed and 30 percent of our soybean meal production is destined for export—mostly to China. America’s soybean farmers need China.

To some degree, America’s soybean farmers have been able to fill in the supply gaps by exporting their product elsewhere. The surpluses, however, are simply too vast to be absorbed. Further, China does not need American soybeans because Brazil and Argentina also produce massive surpluses for export—China can get its soybeans with or without America.

But if Trump maintains course, then America will win the trade war with China. Why? We have leverage.

America runs a massive trade deficit with China, meaning that we buy more Chinese products than we sell. Likewise, many of the goods that China manufactures could not be sold anywhere but America. This is because most other developed markets (Europe, Canada, Japan) have higher product quality standards that make Chinese goods unsaleable, and undeveloped markets (Africa, India, South America) lack sufficient consumer demand.

Thus, China needs America. This gives us leverage. And as Archimedes wrote: “give me a lever long enough . . . and I shall move the world.” It’s time we used ours.

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