Political Calculations, a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
We're going to tie something that we learned during 2009's Thanksgiving to China's trade war strategy with the U.S. in this article, but we first need to set the stage for that lesson by examining an alleged mistake that China's leaders have made.
China's leaders are facing unexpected and very rare criticism from the nation's former top trade negotiator over their trade war strategy with the United States.
China’s former chief trade negotiator openly criticised Beijing’s trade war tactics on Sunday, singling out the decision to impose tariffs on soybeans as ill-thought out.
The comments by Long Yongtu, a former vice-minister with China’s foreign trade ministry who headed the talks that led to China’s entry to the World Trade Organisation, offered a rare glimpse into the country’s internal divisions about how to handle the dispute with the United States....
In particular, Long said it was unwise to impose import duties on soybeans in retaliation for US President Donald Trump’s decision to slap additional levies on Chinese imports.
“Agricultural products are very sensitive [in trade], and soybeans are very sensitive as well … We should have avoided targeting agricultural products because targeting agricultural products should be the last resort,” Long said. “But we have targeted agricultural products, or soybeans, right from the start.”
The agricultural states that produce the bulk of America’s soybeans make up Trump’s political heartland, but Long pointed out: “China is in dire need of soybean imports, so why did we pick out soybeans from the beginning? Is this deep thinking?”
The short answer is that it wasn't. The political angle is the explanation, where China's leaders hoped to influence the outcome of the 2018 mid-term elections in the U.S.' farm states, with the Chinese regime counting on its sympathizers to make hay out of the economic harm they purposefully sought to inflict upon U.S. soybean growers. They employed a similar strategy to inflict economic harm on the U.S.' crude oil producing states, although that effort failed to produce any damage.
As part of its soybean tariff strategy, China's leaders have chosen to substitute other nations' soybeans for U.S.-grown soybeans, which is primarily used as animal feed in the country. In practice, that has meant buying up large quantities of soybeans grown in other regions of the world like Brazil, the world's leading producer of the crop, but in recent months, that has also meant substituting other crops for soybeans, because all these other nations are not capable at this time of filling the void left behind by China's avoidance of U.S.-grown soybeans.
At the same time, China has also acted to relax its quality standards for the soybeans that it will accept. By doing this, China will import more soybeans than it otherwise would, but the combination of diminished quality and the substitution of different crops to use as animal feed will likely have unintended consequences.
And this is where we can apply what we learned from 2009's Thanksgiving! In that year, we observed that while turkeys raised by U.S. farmers were growing in size, they weren't leading to meatier birds for sale at U.S. grocery stores. At the time, we theorized that a policy implemented by the U.S. government was responsible for this result. That poor policy involved boosting government-provided incentives aimed at increasing in the amount of ethanol produced from corn in the U.S. for use in the nation's fuel supplies, which caused the supply of corn that had previously been directed toward feeding the U.S.' domestic animal production to instead be diverted toward ethanol production.
That change forced U.S. meat producers to substitute other crops for their preferred higher quality animal feed to fill the void created by the shift in demand, which in the case of farm-raised turkeys, ultimately led to lower quality birds on the nation's Thanksgiving tables, while also making them more costly.
In China, soybeans are largely used to feed hogs rather than cattle or turkeys, where Chinese pork producers and consumers may see a similar unintended outcome, driving home Long Yongtu's point regarding the wisdom of China's trade war strategy.
Meanwhile, in the U.S., President Trump has recently acted to boost the nation's commitment to using corn-based ethanol, which is considered to be both bad science and bad policy, but in the context of China's trade war strategy against U.S.-grown soybeans, should perhaps be viewed as a political response aimed at offsetting the economic damage caused by it.
Would it really be too much to ask the world's political leaders to stop doing so many stupid things?