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Bridging the US China Trade Gap

24 March 2012, at 12:00am

The growing US trade imbalance with China has been a major cause of concern for US policy makers, according to a study by Xiuzhi Wang, Edward A. Evans, and Fredy H. Ballen for the University of Florida.

From a mere $6 billion (USD) deficit in 1985, the gap has grown to over $270 billion in 2010 (US Census Bureau 2011) the Overview of US Agricultural Trade with China report says, highlighting the main factors driving the widening of the agricultural trade surplus.

One bright spot in the US–China trade deficit is the trade of agricultural products, which continues to reflect a trade surplus that has grown considerably within the last decade.

The Chinese economy has undergone considerable changes since accession to the World Trade Organization (WTO) in December 2001. Such changes include reductions in tariffs and monopoly power of State Trading Enterprises (STEs), and elimination of some export subsidies.

In addition, there has been considerable effort to modernise China's agricultural sector, since more than half of the country's population now resides in urban areas and there is more demand for food (Lohmar et al. 2009).

Trends in Bilateral Agricultural Trade between the United States and China

Historically, the United States has been a major exporter of agricultural commodities to China, particularly soybeans, cotton, and wheat.

Between 2000 and 2010, the value of US agricultural exports to China rose tenfold, from $1.7 billion in 2000 to roughly $17.5 billion in 2010.

In comparison, US agricultural imports from China increased from $0.8 billion in 2000 to approximately $3.4 billion in 2010. Consequently, the agricultural trade surplus increased from $904 million to $14.1 billion between 2000 and 2010, representing an average annual growth rate of about 31.7 per cent.


US agricultural trade balance with China, 2000–2010 (US thousand dollars)

[Source: US Department of Commerce, US Census Bureau, Foreign Trade Statistics, 2011]

The United States now ranks as China's top supplier of agricultural products, a marked improvement over its seventh-place ranking in 2000.

From a relative point of view, the United States has become much more important as an export market for agricultural products from China, improving its standing from twelfth position in 2000 to fourth in 2010.

Several factors are responsible for these observed trends, including changes in China's trade policy; its population growth, especially in urban areas; efforts to modernise its agricultural sector; an increased and sustainable economy; and increased wealth and income in China (Lohmar et al. 2009).

US Agricultural Exports

With respect to exports, the aggregated values of US agricultural exports to China show a long-term upward trend.


US agricultural exports to China, 2000–2010 (US billion dollars)

[Source: USDA, Foreign Agricultural Service, 2011]

The top US agricultural exports to China include oilseeds and products, cotton, animal products, grains and feeds, fruits and preparations, and vegetables and preparations.

The export value of US oilseeds and products to China increased eleven-fold between 2000 and 2010, from $1.03 billion to $11.37 billion; the biggest jump in export value for this product group was in 2008, when export value increased by 72 per cent, or $3.10 billion, compared to 2007. Part of this rise in the export value for oilseeds and products was due to the agricultural commodities shortage in 2008, which led to the food global crisis that same year.

US cotton exports grew from $46 million in 2000 to more than $2 billion in 2010, equivalent to an annual rate of 46.2 per cent; the export value of cotton grew $1.2 billion in 2010, an increase of 150 per cent, compared to the value in 2009.

US exports of animals and products rose between 2000 and 2008, from $396 million to $2.2 billion, before dropping to $1.7 billion in 2010, or 31 per cent less, compared to 2008. US exports of grains and feeds rose between 2006 and 2010, from $86 million to $1.1 billion.

Exports of US grains and feeds to China surged in 2010, as an additional $704 million of these products reached the Chinese market, compared to 2009. US exports of fruits and preparations doubled between 2007 and 2010, from $81 million to $161 million.

US exports of vegetables and preparations followed an upward trend overall, from $26 million in 2000 to $104 million in 2010, growing at an annual rate of 14 per cent. US exports of other agricultural products (e.g., nuts, fruit juices, and essential oils) increased from $135 million in 2000 to over $ 911 billion in 2010, growing at an annual rate of 21 per cent.

Soybeans were by far the largest single item exported, with fairly steady growth over the period, increasing from $1.0 billion in 2000 to over $10 billion in 2010.

Cotton was the second largest US agricultural export to China during the period, with quantities varying widely from year to year. China's demand for meat is expected to continue to expand markedly, and it is uncertain whether the demand for meat will be met primarily through domestic production or through a combination of domestic production and imports of meat.

For China to meet the bulk of its future demand for meat from domestic production, it will need to export less corn and import more soybeans and other sources of protein and roughage for feed supplies.

So, although there are uncertainties about the future balance between more imports of feed grains and other feeds on the one hand, and direct imports of meat and dairy products on the other hand, China's increasing demand for meat and dairy products will generate greater imports of agricultural products in one form or another (Roberts and Andrews 2005).

This should bode well for US agricultural exports to China. Overall, US exports of red meats and live animals and exports of grains and feeds to China increased between 2000 and 2010, despite China's antidumping-countervailing lawsuit against the United States (Office of the United States Trade Representative 2011).

With rising income in China, the demand for food and the composition of the Chinese diet have changed due to greater demand for fresh fruits and vegetables. Although China produces and exports large quantities of fruits and vegetables, it still imports significant quantities of both fresh and processed fruits and vegetables from the United States.

US Agricultural Imports from China

Between 2000 and 2010, the ASI value of US imports of agricultural products from China steadily increased, from $810 million to $3.3 billion.

In terms of value, the main agricultural imports in 2010 were vegetables and preparations, fruits and preparations, grains and feeds, animals and products, fruit juices, and other agricultural products, respectively.

US imports of vegetables and preparations from China grew from $100 million in 2000 to $561 million in 2010, equivalent to an annual growth rate of 18 per cent; the biggest increase in imports occurred in 2006, when the value of imports increased by $87 million, or 30 per cent, compared to the previous year.

US imports of fruits and preparations also rose from $66 million in 2000 to $447 million in 2010, growing at an annual rate of 21 per cent; the biggest increase in the value of imports occurred in 2003, when imports increased by 50 per cent ($58 million). US imports of grains and feeds from China grew from $48 million in 2000 to $338 million in 2008, at an annual rate of 27.6 per cent.

The import value of grains and feeds then decreased by $6 million in 2009, before increasing 30 per cent ($96 million) in 2010. Animal and products imported by the United States trended upward for most of the 2000–2010 period, with imports reaching a value of $403 million in 2010. US imports of fruit juices increased at an annual rate of 42 per cent, from $39 million in 2000 to $667 million in 2008.

Fruit juice imports then decreased by $315 million during 2009 before rebounding to $379 million in 2010. US imports of other agricultural products (e.g., snack foods, spices, tree nuts, tea, planting seeds, and essential oils) grew from $348 million in 2000 to over $1.1 billion in 2010, representing an annual growth rate of 12.6 per cent.


US agricultural imports from China, 2000–2010 (US billion dollars)

[Source: USDA, Foreign Agricultural Service, 2011]

Conclusions

The United States and China are important agricultural products trade partners. Strengthening bilateral trade cooperation would be a win-win situation for both countries. As part of its effort to modernise its agriculture and increase production efficiencies (given resource constraints), China has shown great flexibly in adjusting its agricultural production patterns away from land-intensive crops (e.g., grains, soybeans, and cotton) and more toward labor-intensive products (e.g., fruits, vegetables, and meat) for greater comparative advantage.

As such, China is more likely to become a larger importer of feed grains in the future (Lohmar et al. 2009).

China is also likely to increase its imports of wheat and oilseeds. Since milk production is unable to keep pace with demand, milk imports (mainly in the form of powdered milk) should increase considerably in the near future.

With continued adjustment of its agriculture toward labor-intensive farming activities, China could become an increasingly important global competitor for horticultural and processed agricultural products.

China has already overtaken the United States as the largest processed apple juice exporter, accounting for more than 80 per cent of the global trade (FAS/USDA 2011).

With its comparatively abundant low-cost labor force, China has a natural advantage in labor-intensive crops, with price being the principal driver behind its increase in exports.

While rising labor costs and concerns about commodity price inflation may constrain China's agricultural product export growth, its relatively low production costs and the push by exporters into the western regions of China may enable the country to maintain its status as a low-cost supplier for many products in the global market.

Spikes in fuel prices may limit the future growth of Chinese exports of both fresh and processed fruits and vegetables to the United States because of the long transit time, thus making these products less competitive, compared to other suppliers from the Americas region.

As a result, Chinese exports of fruits and vegetables will likely be re-directed as necessary within the Asian region, as the transit times are considerably shorter.

Further development of Chinese agriculture is restricted by a limited land base and environmental concerns.

As a result, China will have to import large amounts of agricultural products over the long term. Land-intensive crops in the United States will therefore have the greatest opportunities in the Chinese market.


Further Reading

- You can view the full report by clicking here.

March 2012