Trade war could lead to more trade deals

Published on
July 17, 2018

The trade war of China and the United States finally exploded on 6 July, when the United States imposed a 25 percent tariff on USD 34 billion (EUR 29 billion) of Chinese exports and China retaliated back with the same tariff rate on the same amount of U.S. imports. 

The stakes were amplified on 11 July when the administration of U.S. President Donald Trump announced tariffs of 10 percent on USD 200 billion (EUR 170 billion) of food products and consumer goods.

If those tariffs are allowed to go into effect as expected in September, Chinese seafood will get pricier in the United States. But seafood sales in China may not be as impacted due to China’s quick move to further open its markets through trade deals with other nations, including a speedy delivery of the free trade deal it has been negotiating with Norway. 

According to Alicia Garcia Herrero, chief economist for the Asia Pacific at French investment bank Natixis in Hong Kong, Beijing is now looking for alternative markets and sources to reduce its reliance on the United States. 

“China will continue in this direction and also pushing for market access by negotiating bilateral trade agreements with as many countries as possible,” Garcia Herrero said.

China is now pushing hard for the signing of free trade agreements and bilateral investment treaties with the European Union and Japan. It is also pushing for the signing of the Regional Comprehensive Economic Partnership encompassing ASEAN’s 10 members plus China, Japan, South Korea, India, Australia, and New Zealand. 

An opening of its markets has been on the cards since U.S. President Donald Trump came to power promising more protectionism, Herrero said.

“These initiatives are aimed to offset the shock from the trade war,” she said.

Along this vein, other recent moves made by China include efforts to better trade relations with the European Union and with other Asian countries. China’s Commerce Ministry just launched the 18th round of investment treaty negotiation with the European Union, reviving a process that had stalled on E.U. unwillingness to recognize China’s market economy status. China also reopened its beef market to France and the United Kingdom in recent weeks. Likewise, earlier this month, China cut the tariffs on salmon and other fish for domestic consumption from 15.7 to 6.9 percent (as part of a cut to tariffs on consumer goods) in an apparent bid to encourage imports from a diverse range of suppliers, thus keeping prices and supply stable.  

In addition, last month, China opened the door to seafood imports from five Asian by cutting tariffs from 12 to 9 percent on a range of seafood imports. China’s Finance Ministry has announced the cuts – to be applied from 1 July – on a range of mostly fresh seafood species (which are largely in demand for domestic customers) from Bangladesh, India, Laos, South Korea, and Sri Lanka – all parties to the little-known Asia-Pacific Trade Agreement (APTA) trade deal originally signed in 1975.

New access may be the only way out for China, given it won’t be able to implement a similar retaliatory tariff measure against the United States since China’s total exports to the western nation only amounted to USD 150 billion (EUR 128.1 billion) in 2017. 

Last year, the United States imported USD 500 billion (EUR 427.1 billion) worth of Chinese goods, while exporting USD 155 billion (EUR 132.4 billion) in turn to China. China ships 21 percent of the United States' total imports, which in turn account for 23 percent of China’s overall exports. But China’s only takes eight percent of U.S. exports, amounting to 7.2 percent of China’s imports. Yet those figures don’t count services, a category in which the United States has a surplus thanks to the massive flow of Chinese students and tourists into America.

China may only buy 8 percent of the United States’ overall exports, but Midwestern and Southern states own a large chunk of the country’s overall trade with China. And 26 percent of Alaskan exports worth USD 1.4 billion (EUR 1.2 billion) go to China, of which a large part is seafood. Coastal states are affected to varying degrees: Maine’s exports to China amounted to USD 238 million (EUR 203 million), or 8 percent of the state’s overall exports, in 2017; Louisiana shipped 13.6 percent of its exports to China in 2017 worth USD 7.8 billion (EUR 6.7 billion). 

Besides lacking a sizeable target to shoot at, China is also increasingly dependent on the United States to feed its own growing market. America is China’s second-biggest supplier of seafood. Perhaps for that reason, some of the weapons China has used in disputes with smaller trading partners haven’t yet been deployed against the United States. Previously, politically motivated spats with Japan, South Korea, and Norway have seen state media encourage popular boycotts and Chinese customs officials effectively block access for goods through the implementation of onerous inspection protocols. 

But increased inspections, licensing delays, and arbitrary penalties could all be on the cards for U.S. firms, which had USD 256 billion (EUR 218.7 billion) invested in China as of 2017. The best hope for U.S. firms is that China agrees to a ramp-down in which, for example, China agrees to end the joint venture system of investment, whereby U.S. firms have been compelled to enter local partnerships in order to enter some industrial sectors.

One of China’s long-time tools in its trading strategy has been its currency, which has fallen sharply against the dollar since the start of June – by more than three percent. But this doesn’t appear to be deliberate manipulation by government, which fought hard in the summer of 2015 to defend the yuan’s value against market speculators. Rather, this appears to be market-driven, a result of the wave of money leaving developing markets to take a bet on rising U.S. interest rates. The move also may be related to China’s central bank easing of liquidity in order to lift the economy.

But if the tariffs are applied and the trade war isn’t wound up, there may be a cost of access for U.S. seafood exporters and costlier product for U.S. consumers as China does deals to open other markets. 

Japan was the top buyer of Chinese seafood exports in 2017, buying 627,000 metric tons (MT) worth USD 3.84 billion (EUR 3.27 billion), up 2.53 percent and up 3.8 percent respectively on the previous year. In second place, the United States bought 554,300 MT worth USD 3.22 billion (EUR 2.6 billion), up by 1.72 percent and 5.8 percent, respectively, on 2016. 

The Association of Southeast Asian Nations (ASEAN) was a bigger buyer in volume terms than the United States, buying 669,300 MT – up 6.56 year-on-year – but in volume terms, it bought USD 2.37 billion (EUR 2.02 billion)  worth, down by 2.7 percent on 2016. 

Russia remains China’s top supplier of seafood, shipping 1.07 million MT worth USD 1.55 billion (EUR 1.32 billion) – an increase of 11.1 percent and 2.78 percent, respectively. This accounts for 13.6 percent of overall supply in value terms. 

However, second-placed U.S. is a higher-value supplier: it shipped USD 1.5 billion (EUR 1.28 billion) worth of seafood to China in 2017, a rise of 21.28 percent year-on-year and up 8.37 percent in volume at 532,900 MT.

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