Beijing buys Brazilian soy and homegrown polysilicon rather than US
By Jeff Ferry, CPA Chief Economist
It is starting to look like China is unlikely to fulfill the terms of the so-called Phase One agreement on purchases of US goods and services.
That deal called for China to buy $200 billion over its 2017 purchase level in the two years 2020 and 2021. Those are solid commitments. It was never certain China would abide by its agreement. But recent data suggests China may not even be trying.
It is not too early in the US-China deal to determine whether Beijing is again finding ways to violate what it commits to. The administration should begin to consider its options if China is not serious about upping its purchases of US exports to anything like the Phase One targets. Government officials should begin planning on seizing the opportunity to decouple further from the Chinese economy.
The desperate shortage of medical supplies and drugs illustrates the danger of being dependent on China. And as we’ve argued elsewhere, the benefits of a Made in America 2030 program could be huge, including the creation of another trillion dollars of US output and up to three million good-paying jobs.
The Phase One agreement, signed by President Trump and Vice Premier Liu He in January, identified more than 500 product categories in four broad sectors, agriculture, energy, manufactured goods, and services, in which China would increase its purchases.
Many of the details of the deal are confidential but the targets for the broad categories are easily calculated. While the coronavirus pandemic is plausibly cited when China does not increase its purchases, that excuse does not hold water if it increases third country purchases or home grown production rather than US purchases.
For example, in agriculture, China agreed to buy about $36 billion worth of US agricultural exports to China this year, a 52 percent increase on last year. Soybean exports are the largest and most important part of our ag trade with China, because China is the world’s largest importer of soybeans and the US is the world’s second largest exporter, after Brazil.
Census data shows that in the first three months of this year, the US exported $1.03 billion worth of soybeans to China. That’s 39 percent down on the same period last year, when the corresponding figure was $1.7 billion. Weak global demand for US soybeans has weakened the price farmers get for their beans, down about $1.50 a bushel to around $8.50 today.
There are a number of plausible excuses for the poor export performance: first, coronavirus has obviously hit China’s demand for imports in the early part of this year, and the ability of the US to export in the March-April timeframe. Next, China is suffering from Asian swine flu, which has killed some 60 percent of their pig herd, denting demand for soybeans.
But the truth is that China is buying millions of tons of soybeans from Brazil instead of the US. In the first four months of this year, Brazil exported 906 million bushels (24.7 million tons) of soybeans to China, more than double the 11.4 million tons sent there by the US. Brazilian exports have benefited from a currency advantage. The coronavirus and related economic crisis have knocked 29 percent off the value of the real this year. This has widened the price advantage of Brazilian soybeans, but it is still only some $30 a ton (about 10%) See page 4 of this USDA report for details.
China could try harder to live up to the terms of the Phase One deal if it sincerely wanted the deal to succeed. That 10 percent price differential on soybeans is not a heavy lift, especially given China’s Phase One promises.
Further evidence of China’s lack of interest in fulfilling the deal comes from the polysilicon market. Polysilicon is the raw material that goes into the making of solar cells. The US is one of the world leaders in manufacturing polysilicon, but over 90 percent of the consumption of polysilicon and conversion into silicon wafers takes place in China. As part of the Phase One deal, China committed to increasing its purchases of US-made polysilicon by an undisclosed amount.
Census figures show that in the first three months of this year, Chinese purchases of US silicon fell by 37 percent, from $12.8 million to $8.1 million. This figure includes silicon used for traditional microchips in addition to solar, but industry sources confirm that they have seen no increase in Chinese buying this year. On the contrary, in March, Chinese polysilicon maker Tongwei announced it would increase its Chinese production of polysilicon by a massive 135,000 metric tons a year. This is more than six times the capacity of the polysilicon plant in the state of Washington that REC Silicon announced in February it planned to reopen to meet the opportunity to sell into the Chinese market presented by the Phase One deal.
The move by Tongwei suggests that with the ink hardly dry on the Phase One deal, China is quietly taking steps to reinforce its chokehold on the upstream segments of the solar cell market. Like most Chinese solar companies, Tongwei is linked to the Chinese government and its growth has benefited from massive multimillion dollar state subsidies. Within the US solar industry, there is grave concern that far from following through on the Phase One commitments to buy more US product, the Chinese government is taking steps to strengthen its long-term hold on this strategic industry. That could have disastrous consequences for the new solar module factories in the US that are still ramping up production.
Census figures show that in aggregate, US exports to China in the first quarter were $22 billion, about 15 percent of the $142 billion expected this year under Phase One. According to Peterson Institute’s Phase One tracker, China is behind expected purchases in each of the major categories, agriculture, manufactured goods, energy, and other (services).
Of course, the coronavirus crisis has played a role in the slow start to the year. But if China were serious about fulfilling the terms of the agreement, we would expect to see more activity in these key sectors—and less purchasing with direct competitors like Brazil. China may yet increase its buying. On the other hand, it may view the Phase One agreement as a stalling tactic. It may be playing a political game, hoping for a change of heart in the Trump administration or political changes in our November election.
The US should begin planning for the possibility of China failing to meet the Phase One target. If China is not sincere about increasing purchases of US goods, the US should seize the opportunity to further decouple from the Chinese economy. In 2019, we reduced imports from China by 16 percent. The result was rising employment, a healthier manufacturing sector, and economic growth in key strategic sectors like steel and computer products. As the coronavirus crisis and the shortage of key medical supplies demonstrates, decoupling from China and building up domestic capabilities in many industries can only benefit the US, economically and strategically.