Political Analysis Serie - US-China Trade War: Temporary opportunities to Brazilian Agribusiness Sector

Photo: France Presse Agency

The Overview

Last 6th July, US President Donald Trump announced tariffs of US$ 34 billion on Chinese imports. It was the harshest measure in a global trade dispute between big nations recorded in recent years. On that occasion, China said it would be forced to retaliate imposing higher levies on goods that would ranging from American soybeans to pork. And the promise was fulfilled.

“The United States has violated World Trade Organization rules and ignited the largest trade war in Economic History,” China's Commerce Ministry said in a statement. “Such tariffs are typical trade bullying, and this action threatens global supply chains and value chains, stalls the global economic recovery, triggers global market turmoil, and will hurt more innocent multinational companies, enterprises and consumers”, said that Chinese official.

Thus, over the past week, US tariffs on $34 billion in Chinese products effectively went into effect. China responded by slapping 25% duties on the same amount in US goods. The trade war between the two nations had begun. As a new response, Trump's administration released last Tuesday its list of $200 billion worth of Chinese goods that it said it aims to subject to 10% tariffs following a review process. In counterpart, China threatened retaliatory action and pledged that it would lodge a complaint with the World Trade Organization.

The riskiest economic gamble of Trump's Presidency could spread as it enters a new phase by imposing direct costs on companies and consumers globally.

Beijing noticed that the US side had threatened to impose additional tariffs forward gradually should China take retaliatory measures. However, Chinese authorities want to demonstrate that this logic of trade intimidation will not make them flinch. For this purpose, in a tactical logic of time, China will have no choice but to consolidate other markets for its products and expand relations to alternative input providers during the “conflict”.

The Quorum’s View: during the conflict – and only during that time -, opportunities for the Brazilian Agribusiness Sector

In the Agricultural Raw Materials sector - if Beijing really wants to demonstrate its resistance to the trade war from Washington -, China will have to increase soybean imports from other countries to reduce reliance on buying from the United States.

Soybeans, crushed to make cooking oil and the protein-rich animal feed ingredient soymeal, were the biggest US agriculture export to China last year at a value of US$ 12,3 billion, according to the US Department of Agriculture (USDA). China, which imports 60% of the soybeans traded worldwide, bought 32,9 million tons from the United States in 2017, accounting for 34% of the total purchases.

For this reason, showing concern on the trade war with the United States, the President of Chinese State Grains Trader (COFCO) Yu Xubo already said in an interview with the Communist Party’s official People’s Daily Paper last Wednesday that hefty import tariffs applied by Beijing on American goods, including soybeans, will inflate costs for Chinese farmers and potentially increase internal retail prices of foods, like pork, the nation’s favorite meat.

Thus, China could increase soybean imports from South American countries amid an escalating trade dispute with the United States. Beijing can also buy more rapeseed, sunflower seeds, and bring in more soybean meal, rapeseed meal, sunflower meal and fishmeal to fill any supply gaps. Increasing meat imports would be also an option.

In this regard, the trade conflict between Beijing and Washington is already boosting grain and oilseed exports from the Black Sea region, where major sellers including Russia, Ukraine and Kazakhstan are looking to sell more corn, wheat and soybean to the huge Chinese market. However, the isolated capacity of global offer of these regions is limited. For example, a Rabobank report said last week it reckoned China will have to buy 15 million tons of US beans with the new tariff this year because there aren’t enough alternative sources of beans from other major exporters.

That’s why Brazil could indirectly benefit from the intensifying US-China trade war. The South American country finds itself in a strategic position to increase its market share of soybean exports to China. The other major producer, Argentina, is not in much of a position to offer competition this year. Soybean production there has been hammered by poor weather conditions that mean its crop is expected to be the lowest in a decade.

This leaves the field open to Brazil as the main supplier of soybeans and at more competitive prices than the other options available on the market. Meanwhile, the weakness of the Brazilian currency enhances farmers’ margins when compared with the more expensive US grains that, despite the drop in prices caused by the US-China trade dispute, are still not as attractive.

However, there are doubts over how quickly Brazil will be able to react to the new trading situation in the aftermath of a Truckers Strike protesting high fuel costs that halted transport of cargoes to ports for more than two weeks. In fact, regular loadings of cargoes at most ports weren’t impacted in the short term as the grains being sold were old crops stored in silos located near the port facilities. But it’s also true that Brazil still has structural problems in the logistics field and its freight costs are higher than the US and more sensitive to price shocks derived from increased demand.

All this involved, its possible to affirm that Brazil will have comparative advantages in its capacity to offer agricultural raw materials to China in this trade war environment against US. However - sooner or later -, once re-established the regular trade relations between Washington and Beijing, Brazil will lose these advantages and should be ready to readjust its volume of offers on the raw materials global markets. The evaluation of the correct moment to initiate this readjustment will depend on help of a good staff of analysts with focus on the changes of geopolitical scenarios to the global commodities sector.

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Sources: The Wall Street Journal, BBC, Mercopress Agency

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US suspended aluminum and steel tariffs for Brazil and other allies

US Trade Representative Robert Lighthizer this Thursday at the Senate Finance Committee (Kevin Lamarque - Reuters)

Some of the United States’ closest trading partners will receive a temporary reprieve from tariffs on aluminum and steel imports, the top US trade official said Thursday, a day before the measures were set to begin. The curbs were expected to be imposed on Friday (23rd March), two weeks after Trump’s signature.

The decision was sure to relieve anxious U.S. partners, even as it raised questions about whether the tariffs would be able to protect US metal industries. Brazil, Argentina, the European Union, South Korea and Australia are on the list US Trade Representative Robert Lighthizer announced at a Senate hearing. Canada and Mexico already had been exempted.

World leaders had subjected Washington to a furious lobbying effort to remove the tariff, announced by President Trump earlier this month, warning of a trade war and saying that they did not see why long-standing military allies should face the import taxes on national security grounds, the professed basis for Trump’s action.

“The idea that the president has, is that based on a certain set of criteria, that some countries should get out,” Lighthizer told the Senate hearing. “What he has decided to do is to pause the imposition of the tariffs with respect to those countries.”

Lighthizer said Wednesday that he expected that negotiations about permanent exemptions to the tariffs would be resolved by the end of April, creating pressure on the countries to reach a deal with Washington on measures that would satisfy Trump’s desire to improve their trade relationships with the United States.

Following the exemptions, the countries that will be hit hardest when the steel tariffs take effect Friday will be Russia, Taiwan and Turkey.

Temer: US will start “negotiations” with Brazil

In an announcement made Wednesday (21st March), Brazilian President Michel Temer said the US would start negotiations with Brazil over the new import tariffs on steel and aluminum. While talking about the measure, unveiled in a note by the US government just at that moment, Temer said the new tariff will not be introduced before negotiations are brought to an end.

“I’m looking at a declaration by the White House saying that Brazil is one of the countries with which negotiations are to begin with a view to waiving import tariffs on steel and aluminum. The new tariffs, the message from the White House says, will not apply until conversations are held on the topic. Good news,” the Brazilian President said, during a meeting with the Economic and Social Development Council (CDES).

On Tuesday, Temer talked to a representative from Brazil’s steel-producing industry. In the conversation, the President availed himself of arguments to convince US President Donald Trump to exempt Brazil from the new tariff.

Sources: Agência Brasil, Reuters, The Washington Post

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Brazil plans to negotiate US steel tariffs

Brazilian Finance Minister Henrique Meirelles said that the country is to consider talks with the US on the 25% tariffs on imported steel, a measure signed Thursday (Mar. 8) by President Donald Trump.

“The Government signed that; it should be in effect in 15 days, but they’re saying they’re open to negotiation. We just have to know what sort of negotiation this is; what they’re willing to negotiate. The issue will be considered bearing in mind what Brazil has to win or lose,” Meirelles said in New York, where he is taking part in an event aimed at drawing foreign investment to Brazil.

In his view, the decision made by the US Government is detrimental to all parties involved. “It benefits steel production and protects the employment of a group of workers in steel-producing companies. But it’s harmful, it takes the jobs of industrial companies using steel or aluminum; companies that lower their international competitiveness for having more expensive supplies.”

The Brazilian Government released a note last Thursday (8) stating that the decision by the US Government should cause “significant losses” in Brazil, and make an impact on “trade and investment ties between the two nations.”

Altogether, 32% of the steel exported by Brazil is bound for the US, which makes Brazil second only to Canada in steel exports to the US. In 2017 alone, 4.7 million tons of Brazilian steel were shipped to the US, which totaled $2.6 billion in revenues.

Trump's tariffs could ricochet on US coal country

Metallurgical coal — or “met coal” — is low-ash, low-sulfur coal that’s used to produce coke, an essential fuel for steel-making.

 Demand for met coal is tied to the demand for steel. It’s also an American export and a symbol President Donald Trump used often on the campaign trail.

Last week, Brazil reminded US officials that it’s the biggest buyer of American met coal – about $1 billion worth last year – in a statement expressing concerns over the tariffs.

Latin America’s largest economy imported nearly 5.2 million tons of US met coal through September of last year – about 1.3 million more than the next highest consumer, Japan, according to the U.S. Energy Information Administration.

The Brazilian statement also pointed out that US and Brazilian steel industries are not competitors, but are integrated and complement each other. “Approximately 80% of Brazilian steel exports are semi-finished products that are used as inputs in the US steel industry. Moreover, Brazil is the largest buyer of metallurgical coal from the United States, chiefly for the manufacture of Brazilian steel for export to the United States” said the note.

Brazil also said it would not rule out retaliating against proposed tariffs. Similarly, a European Union trade leader has threatened to impose tariffs on US made products like steel, cars, orange juice and Kentucky bourbon.

Sources: Agência Brasil, Ministry of Foreign Affairs of Brazil.

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