US and China sign phase one trade deal

Thursday, 6 February 2020

On 15 January, the US and China signed their ‘phase one’ trade deal. A key aspect of the agreement China has agreed to purchase an additional USD $200 billion of US products over a two-year period, relative to 2017 levels. This includes an additional $32 billion of agricultural products. It will also loosen many of the non-tariff barriers related to health standards, which limit agricultural and food trade.

Grains and oilseeds are expected to fill between 50-60% of the purchase targets, according to Rabobank.  However, US exports of dairy and red meat products will also benefit from the deal.

China already imports relatively large quantities of US dairy products, despite high retaliatory tariffs in place. In 2019, China imported 176,000 tonnes of US dairy products, making it the fourth largest source nation. Nevertheless, this is a near 50% reduction in volume terms when compared to 2017 levels, before the tariffs were implemented.

With the first phase agreed, it likely that US dairy imports will increase. However, this will vary by product as the agreement specifies that that purchases “will be made at market prices based on commercial considerations”.

For SMP, there is opportunity for the US to gain back market share as US wholesale prices have tracked below both Oceania and EU prices since the start of last year. Meanwhile, US butter, WMP and Cheddar prices are currently higher than the other exporting regions, which could limit interest from Chinese importers.

 

A lack of detail about China’s agricultural pledge means it is unclear how much the US dairy industry will benefit from the phase one trade agreement. Additionally, the trade agreement is subject to the Chinese authorities enforcing purchasing from the US, leaving potential for continued tensions between the nations.

Felicity Rusk

Analyst - Dairy & Livestock

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