US-China trade war costs billions of dollars for both sides

Big US automakers have said higher tariffs will result in a hit to profits of about $1 billion this year. (Reuters)
Updated 29 December 2018
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US-China trade war costs billions of dollars for both sides

CHICAGO: The US-China trade war resulted in billions of dollars of losses for both sides in 2018, hitting industries including autos, technology — and above all, agriculture.
Broad pain from trade tariffs outlined by several economists shows that, while specialized industries, such as US soybean crushing, benefited from the dispute, it had an overall detrimental impact on both of the world’s two largest economies.

The losses may give US President Donald Trump and his Chinese counterpart, Xi Jinping, motivation to resolve their trade differences before a March 2 deadline.

The US and Chinese economies each lose about $2.9 billion annually due to Beijing’s tariffs on soybeans, corn, wheat and sorghum alone, said Purdue University agricultural economist Wally Tyner.

Disrupted agricultural trade hurt both sides particularly hard because China is the world’s biggest soybean importer and last year relied on the US for $12 billion worth of the oilseed.

China has mostly been buying soy from Brazil since imposing a 25 percent tariff on American soybeans in July in retaliation for US tariffs on Chinese goods. The surge in demand pushed Brazilian soy premiums to a record over US soy futures in Chicago, in an example of the trade war reducing sales for US exporters and raising costs for Chinese importers.

“It’s something that’s crying for a resolution,” Tyner said. “It’s a lose-lose for both the United States and China.”

Total US agricultural export shipments to China for the first 10 months of 2018 fell by 42 percent from a year earlier to about $8.3 billion, according to the US Department of Agriculture.

The most actively traded soybean futures contract averaged $8.75 per bushel from July to December 2018, down from an average of $9.76 during the same period a year earlier. As of Dec. 28, futures in the last month of the year were averaging $8.95-1/2 a bushel. That was down from $9.61-3/4 for all of December last year.

To compensate suffering farmers, the US government has allocated about $11 billion to direct payments and buying agricultural goods for government food programs.

In North Dakota, which exports crops to China through ports in the Pacific Northwest, soy farmers face at least $280 million in losses because of Beijing’s tariffs, said Mark Watne, president of the North Dakota Farmers Union.

It’s something that is crying our for a resolution. It’s a lose-lose for both the United States and China.

“You could almost put another $100 million on top of this because all commodity prices are down and that affects North Dakota farmers indirectly,” Watne said.

China’s tariffs improved margins for US soy crushers such as Archer Daniels Midland Co. by leaving plentiful supplies of cheap soybeans on the domestic market.

Chinese soybean mills, on the other hand, front-loaded soy purchases ahead of the tariffs. This led to an oversupply that reduced Chinese processing margins and led factories this summer to make the biggest cuts in years to the production of soymeal used to feed livestock.

China resumed purchases of US soybeans in early December following a trade truce agreed to by leaders from the two countries during G20 summit in Argentina. But Beijing kept its 25 percent tariffs on the oilseed from America, which effectively curbed commercial Chinese buying.

“With the tariffs, the beans can’t go into the commercial system,” said a manager at a Chinese feed producer, speaking on condition of anonymity. “The buying will have a very limited impact on the market.”

China also suffered as products such as phone batteries were hit by US tariffs, and customers began looking to buy elsewhere.

A study commissioned by the Consumer Technology Association showed US tariffs on imported Chinese products cost the technology industry an additional $1 billion per month.

The conflict also squeezed US retail, manufacturing and construction companies that had to pay more for metal and other goods.

The Big Three Detroit automakers — General Motors Co, Ford Motor Co. and Fiat Chrysler Automobiles — have each said higher tariff costs will result in a hit to profits of about $1 billion this year. Ford and Fiat expect a similar hit in 2019. 


Energy Recap: The oil market wavers

Updated 10 min 59 sec ago
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Energy Recap: The oil market wavers

RIYADH: Oil prices went in different directions at the end of the week. Brent deteriorated to $67.03 per barrel and WTI rose to $59.04 per barrel, but both remain at four-month highs. 
Still, poor economic signals that added to the generally bearish mood did not manage to drive oil prices down because of the tightening global supplies that led the surprise drawdown in US inventories.
The 10 million barrels fall in US crude stocks was the largest drop since July 2018, due to a combination of strong exports and higher refining utilization. 
The reduced number of US oil rigs for a fourth week running sent drilling activity to its lowest in nearly a year.
The current level of oil prices does not reflect the market’s relatively strong fundamentals and supply tightness.
The Arabian Gulf sour crude grades have seen extensive buying activity with refiners securing spot cargoes in addition to their term cargoes.
Such high demand for the sour medium and heavy crude grades had Dubai crude in high demand.
Asian refiners are becoming increasingly concerned about the tightening supplies for the medium and heavy crude grade.
That is because many of them lack the flexibility to swiftly switch their refining systems to handle alternative light sweet crude grades that have low sulfur content. 
The market remains preoccupied with Iranian sanction waivers, which may be extended for another round of six months.
Given the tight oil market that has been further exacerbated by the sanctions on Venezuela, the second half of this year might experience further tightening.
The US is widely expected to continue extending the waivers for the key importing countries which are China, India, Korea and Japan. 
The a potential second round of waivers may not impact the market as much as last time in November 2018 when the price dropped by as much as $30 per barrel.
Helped by OPEC output cuts, the market has been stabilizing gradually even if not entirely recovering those early losses.
The current market appears too tight to be moved significantly by further waivers and should be able to absorb additional barrels — be they from Iran, Venezuela, Libya or the US.
Even with the last round of waivers, Iranian oil exports did not exceed 1.25 million barrels per day in February.

  • Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza