COLUMN-US ag sector should be on alert after last deal with China fell short: Braun

By Karen Braun

NAPERVILLE, Illinois, May 21 (Reuters) - Last week’s U.S.-China trade truce has sparked speculation as to what a potential trade deal between the two rivals might look like.

For the U.S. agriculture sector, the result would ideally be very different from the deal signed in January 2020 during Donald Trump’s first U.S. presidency.

That agreement, known as Phase 1, required China to significantly boost purchases of U.S. agricultural products. China ultimately came up short, but the structure of the deal itself was probably doomed from the start.

It didn’t help that enforcement and extension of the deal were practically nonexistent, especially as the U.S. presidency changed hands in 2021.

U.S. officials recently suggested that China’s failure to make good on Phase 1 purchase commitments be revisited.

So let’s re-examine the flaws of Phase 1 from an agricultural perspective, just in case a similar deal is proposed this time around.

SUSPICIOUS MATH

China’s purchase commitments laid out by Phase 1 were based on dollar value, which immediately raised flags. The agreement suggested China would buy a record $36.5 billion in U.S. farm goods in 2020, some 50% above the pre-trade war average.

A simple exercise can bring perspective. Soybeans, the top U.S. export of any kind to China, accounted for roughly half the value of all annual U.S. farm exports to China at the time.

Given the average cost of exporting U.S. beans to China in 2019, when Phase 1 was formulated, the 2020 volume of shipments needed to jump 43% above the 2016 record.

Where was this sudden, massive surge in Chinese soybean demand supposed to come from?

Apparently, it never had to exist. China said from day one that it would purchase American goods per the deal based on market conditions, and that it had no intent to buy in excess.

This clause basically deemed Phase 1 dead on arrival, but otherwise, a steep rise in global prices was the only possible way for the targets to be fulfilled. That eventually happened as global grain and oilseed prices neared or bested records in 2022.

U.S. soybean shipments to China in 2022 were valued at a record $17.9 billion, up from $14.1 billion in 2020. But the 2022 volume was 12% lower than in 2020, meaning the high prices were masking a reduction in Chinese bookings.

Phase 1 stated that China’s increasing U.S. purchase trajectory was to continue from 2022 through 2025. China would have still fallen short of targets in 2022 despite the price levels, but the binding part of the deal seemingly expired after 2021.

The Biden administration throughout its tenure was notoriously quiet on U.S.-China trade and enforcement of the Trump-era agreement, and Phase 1 essentially went dark after 2021.

OTHER OBVIOUS PROBLEMS

The concept of requiring China to purchase extreme volumes of U.S. farm goods conflicts with Trump’s “America First” agenda, as it overlooks domestic supply needs in favor of China.

Another issue is that aside from being unrealistic, the Phase 1 purchasing targets seemed arbitrary. No explanation of the $36.5 billion goal was ever offered, but in hindsight, Trump’s disdain for trade deficits could be a potential origin.

The current state of U.S. agricultural trade with China is ugly. By value, U.S. farm exports to China in the first three months of 2025 were down 49% on the year, reaching some of the lowest levels within the last two decades.

If China does agree to something that seems far-fetched, close attention is immediately warranted as Beijing seems to negotiate with back-pocket knowledge.

No one thought China was smart to slap steep tariffs on U.S. soybeans in 2018, but Beijing likely knew something the rest of the world did not. Sweeping losses from disease across China’s hog herd reduced feed demand and allowed Chinese buyers to avoid U.S. beans for a while, against sound calculations that they would not be able to do so.

China may have also sensed that 2020 was going to be a wild ride. The World Health Organization one day before the signing of Phase 1 was already ringing alarm bells worldwide about a dangerous virus originating in China.

This level of strategy that China has employed in recent trade conflicts should certainly raise the stakes for the U.S. side, which could perhaps benefit from a more sensible, sustainable approach to future negotiations.

Karen Braun is a market analyst for Reuters. Views expressed above are her own.