Deep dive into China phase one deal for agDeep dive into China phase one deal for ag
China deal calls for at least $40 billion in ag purchases yearly, with additional SPS and non-tariff barriers addressed, too.
January 15, 2020
The U.S. and China signed a phase one trade agreement Wednesday that both countries say will lead to increased purchases of U.S. agricultural products by China, to the tune of at least $40 billion per year. The deal will go into effect on Feb. 3, 2020.
In a fact sheet on the deal, the U.S. Trade Representative stated: “China will purchase and import, on average, at least $40 billion of U.S. food, agricultural and seafood products annually for a total of at least $80 billion over the next two years. Products will cover the full range of U.S. food, agricultural and seafood products. On top of that, China will strive to import an additional $5 billion per year over the next two years.”
Although China has confirmed that it will increase its agricultural purchases, it has not indicated which products it plans to buy. The agreement said China and the U.S. realize that purchases are to be made at market prices based on commercial considerations and that market conditions may dictate the time of year that agricultural purchases are made within any given year.
A multitude of non-tariff barriers to U.S. agriculture and seafood products are addressed, including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food and products of agricultural biotechnology.
According to Trump Administration trade officials, the deal is expected to hold China accountable with a “strong enforcement mechanism,” allowing the USTR to resolve any trade disputes within 90 days and take a “proportionate response” if China is not honoring its commitments.
Under terms of the agreement, the U.S. will maintain the current 25% tariffs on $250 billion of imports from China and reduce tariffs on a separate $120 billion of imports from 15.0% to 7.5%. The U.S. also did not impose import tariffs on $160 billion of Chinese goods that had been scheduled to go in effect Dec. 15, 2019.
“We are encouraged by the phase one deal with China, which eliminates non-tariff barriers to trade with our fastest growing market for meat and poultry products. We will continue to work with the Trump Administration to negotiate greater access to Chinese markets,” North American Meat Institute president and chief executive officer Julie Anna Potts said. “It remains vital to address retaliatory tariff issues, which have made it difficult to export to China.”
House Agriculture Committee chairman Collin Peterson (D., Minn.) was cautiously optimistic about the deal. "My district produces everything from dairy, meat and poultry to feed and pet food to alfalfa and ethanol. This agreement appears to include positive structural changes and commitments that could increase access to the Chinese market for those and other products produced in districts across the country. The question now is whether China will play by the rules it has agreed to here,” Peterson said.
“I’m also concerned that, long term, certain crops may not regain the foothold they lost in the trade war,” Peterson warned. “If those purchases don’t materialize, I worry what effects that will have on the markets for crops like soybeans and sorghum.”
Here’s a look at what the deal means for specific industries:
Pork. U.S. exports of pork products were $700 million in 2017 and are expected to reach $1.7 billion annually in the next two to three years, USTR said. China agreed to broaden the list of pork products that are eligible for importation to include processed products such as ham and certain types of offal that are certified by the U.S. Department of Agriculture’s Food Safety & Inspection Service (FSIS) for human consumption.
“While China's phase one commitments are welcomed, U.S. pork exports continue to be suppressed because of the country's 60% punitive tariffs. In order to fully capture the benefits of this deal, we need China to eliminate all tariffs on U.S. pork for at least five years,” said National Pork Producers Council (NPPC) president David Herring, who was in attendance at the signing ceremony. “If the U.S. continues to face 60% punitive tariffs (and a cumulative tariff of 68%) while our competitor nations are assessed an 8% tariff, U.S. pork sales will be suppressed as China imports more pork from other nations."
Herring added, "Pork is a litmus test for the phase one deal with China. The worst-kept secret in the world is China's serious shortage of pork and rampant food price inflation. If China is unwilling to drop its tariffs on U.S. pork, it's difficult to envision the country meeting the $40 billion per year agriculture purchase commitment."
Beef and live cattle for breeding. USTR said the deal calls for China to expand the scope of beef products allowed to be imported, eliminate age restrictions on cattle slaughtered for export to China and recognize the U.S. beef and beef product traceability system. China will establish maximum residue levels (MRLs) for three synthetic hormones legally used for decades in the U.S., consistent with Codex Alimentarius Commission (Codex) standards and guidelines. Where Codex standards do not exist, China will use MRLs established by other countries that have performed science-based risk assessments. USDA estimates that U.S. beef and beef product exports to China could reach $1 billion annually.
The National Cattlemen’s Beef Assn. (NCBA) said the deal is a “game changer” and noted that the removal of the “massive trade barriers gives Chinese consumers access to the U.S. beef they desire.”
American beef producers scored an initial victory in June 2017 when the Chinese market was reopened for the first time since 2003. NCBA joined U.S. Agriculture Secretary Sonny Perdue and U.S. Ambassador to China Terry Branstad in Beijing, China, to celebrate and mark the official reopening of this market.
However, many non-science-based, non-tariff trade barriers remained in place, which limited the amount of American-produced beef that qualified for China. NCBA said this phase one agreement will begin knocking down those trade barriers and significantly improve access to what is potentially a top export market for U.S. beef producers.
China banned the import of live cattle from the U.S. following the detection of bovine spongiform encephalopathy (BSE) in 2003. Through this agreement, USTR stated that China will immediately engage in technical discussions with the U.S. to lead to a final market access agreement. The U.S. exported $4.5 million in live breeding cattle to China in 2003. With the conclusion of a commercially viable protocol, U.S. exports of live breeding cattle to China could reach $25-50 million annually, USTR said.
Processed meat. China effectively banned processed meat and poultry products in 2012 when it instituted an onerous registration process for exporting to China. Through this agreement, China immediately recognizes oversight of U.S. meat, poultry meat and processed meat and poultry meat facilities by USDA’s FSIS, thereby eliminating any unique registration requirements. It is estimated that these provisions could result in $10-25 million annually of processed meat and poultry exports to China.
China also agreed to conduct a risk assessment for ractopamine, which is sometimes used in the production of U.S. beef and pork, in a manner consistent with international risk assessment guidance. The risk assessment is to be based on verifiable data and the approved conditions of ractopamine use in the U.S., USTR stated.
Dairy. China has committed to streamline the timelines and procedures for registering U.S. facilities and products and to provide regulatory certainty and market stability for products like fluid milk and dairy permeate powder. The U.S. estimates that the dairy and infant formula commitments could result in an additional $250-300 million in annual dairy and infant formula exports to China above current levels.
“Over the next decade, China represents a $23 billion market opportunity for U.S. dairy, and it is essential to our producers and companies that we have a trade relationship with China that further levels the playing field for American dairy and provides expanded market access for our growing industry. In addition to purchases of U.S. agriculture products, including dairy, the deal includes commitments by the Chinese to reduce non-tariff barriers affecting infant formula and extended shelf-life milk — an important concession achieved by the U.S. Administration,” Dr. Michael Dykes, president and CEO of the International Dairy Foods Assn. (IDFA), said.
IDFA reported that U.S. dairy export value to China peaked in 2017 at $576 million, fell 13% to just over $499 million in 2018 and stood $343 million through November 2019 — a 26% drop from 2018. Until 2019, China had become the leading market for U.S. whey and was a growing customer for U.S. cheese. Retaliatory tariffs, however, derailed that potential and cost the U.S. dairy industry millions in sales, market share and jobs.
“America’s dairy farmers have been disproportionally harmed by China’s retaliatory tariffs, and we cannot ask our farmers to continue operating under this financial uncertainty,” said National Milk Producers Federation chairman Randy Mooney, a dairy farmer from Rogersville, Mo., who joined President Donald Trump and Administration officials at the White House signing ceremony on Wednesday. “We appreciate the hard work invested by both the U.S. and Chinese governments, but we urge China to swiftly lift all retaliatory tariffs against U.S. dairy products and work with U.S. suppliers to fulfill their purchasing commitment.”
In another closely watched issue, USTR reported that China has agreed not to undermine market access for U.S. exports to China using trademarks and generic terms through any geographical indicator (GI) measures taken in connection with an international agreement, to use certain relevant factors when making determinations for generic-ness and to not provide GI protection to individual components of multi-component terms if the individual component is generic.
Poultry. U.S. exports of poultry meat products to China were valued at more than $500 million in 2013 and have the potential to reach or exceed $1 billion annually. On Nov. 14, 2019, China reopened its market to U.S. poultry meat, partially eliminating the ban it had imposed in late 2014.
Feed products and DDGS. China has agreed to immediately update its list of traditionally traded feed additive products with 23 U.S. products and to streamline the registration process for feed additives, premixes and compound feed. With regard to dried distillers grains with solubles (DDGS), China has also agreed to speed up license renewals for DDGS manufacturers.
China has agreed to immediately resume imports of pet food containing poultry ingredients and to lift the ban on ruminant ingredients. China has also committed to streamline the timelines and procedures for registering U.S. facilities.
The U.S. animal food manufacturing industry faces a number of challenges in this market, including those that have restricted any new U.S. feed additive and premix products to be exported to China since 2011 and those that restrict U.S. feed products with ruminant-origin ingredients and a number of poultry-derived ingredients, the American Feed Industry Assn. (AFIA) said. This agreement directly addresses these constraints by streamlining and facilitating a facility registration process for feed additives, premixes and compound feed as well as lifting the poultry and ruminant ban for animal food products. AFIA said it looks forward to working with industry and the appropriate U.S. government agencies to facilitate implementation.
AFIA chairman Tim Belstra said, “This is indeed a landmark opportunity not only for the U.S. animal food industry but also for the livestock and poultry industries in China to further expand their feed ingredient inputs and technology.”
Corn, ethanol and DDGS. Growth Energy CEO Emily Skor said the group hopes for restored markets for U.S. producers. “Breaking down trade barriers between our nations will provide a valuable opportunity to restore demand for American biofuel, and we hope to soon see biofuels and DDG exports back on the Chinese market.”
In 2016, China was the third-largest export market for U.S. biofuels, but exports were nearly eliminated due to retaliatory tariffs and trade negotiations.
National Corn Growers Assn. (NCGA) president Kevin Ross also attended the signing Wednesday and said the deal is a step in the right direction to restoring the trading relationship between the two countries. “China holds tremendous opportunity for American corn, ethanol and DDGs, and NCGA looks forward to learning further details of what phase one will mean for these products.”
Biotech approvals. China has agreed to implement a transparent, predictable, efficient, science- and risk-based regulatory process for the evaluation and authorization of products of agricultural biotechnology. China’s time frame for review and authorization for products for feed or further processing will be an average of 24 months. China has also agreed to certain administrative improvements in the application process, to take certain steps to address situations of low-level presence and to develop safety assessment procedures for approval of food ingredients that are derived from genetically modified microorganisms, USTR said.
U.S. Grains Council chairman and North Carolina farmer Darren Armstrong said, "The structural reforms, particularly those affecting feed grains, agricultural biotechnology and sanitary and phytosanitary measures – once fully committed and implemented – will hopefully offer lasting impacts beyond short-term commitments to make accelerated, market-driven purchases."
Domestic support and TRQs. China has agreed to respect its current World Trade Organization obligations on the transparency of its domestic support measures. Separate from this agreement, as part of a WTO dispute brought and won by the U.S., China previously agreed to comply with its WTO obligations on its domestic support for rice and wheat by March 31, 2020. The U.S. maintains the right to take actions related to that dispute.
China has agreed to comply with its WTO obligations and to make specific improvements to its administration of wheat, corn and rice tariff-rate quotas (TRQs), including the allocation methodology, treatment of non-state trading quota applicants and increased transparency. Separate from this agreement, as part of a WTO dispute brought and won by the U.S., China agreed to comply with its WTO obligations for the administration of TRQs for wheat, corn and rice by Dec. 31, 2019.
In a joint statement, the U.S. Wheat Associates and the National Association of Wheat Growers said China’s separate agreement to work toward filling its 9.6 million metric ton reduced TRQ for wheat imports adds optimism to the trade deal. “If the changes are, in fact, implemented and Chinese millers can respond to market signals, most of the TRQ should be used. For U.S. wheat farmers, the phase one deal and TRQ compliance would create a very welcome opportunity for Chinese miller customers to once again apply the technical expertise and assistance [U.S. Wheat Associates] provides to use wheat with specialized end-use applications that distinguishes U.S. wheat from domestic Chinese supplies,” the two wheat groups said.
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