Growing Trade War Right Out of 1985 "Negotiating with China" Playbook

U.S. Farm Report RT1 05/11/19
Arlan Suderman said the recent twist in trade talks with China goes back to a 1985 document where the U.S. government commissioned a study on how to negotiate with China. The study concluded China would try to renegotiate at the last-minute. ( MGN )

The escalating trade war between the U.S. and China continues to gain steam. The U.S. announced, and implemented, additional tariffs on Chinese goods last week. China retaliated Monday by imposing additional tariffs on $60 billion worth of U.S. goods.

The sharp turn in trade talks came after U.S. officials said China retracted on certain promises it had already made in previous trade talk sessions.

While the feud between the U.S. and China is making headlines around the world, Arlan Suderman of INTL FCStone thinks it’s important to remember the talks don’t happen in a vacuum, and both sides have studied each other with great scrutiny.

“This really goes back to a playbook, a 1985 document where the U.S. government commissioned a study on how to negotiate with China, and it outlined what to expect out of China,” Suderman said on U.S. Farm Report. “It says it’s very difficult to nail down a deal, because at the end China will try to move the goal post- try to renegotiate some points of it, and if you look at the details of that study, they’re [China] doing exactly what it says.”

China’s last-minute attempt to go back on promises it already made was China’s effort to move the goal post, with the U.S. responding by adding more pressure with additional tariffs, according to Suderman

“What it [the study] says is you have to have a counter tactic of quote, unquote, ‘throwing them off balance,’ and that’s exactly what he did,” he said. “So, now the ball is in their court.”

Despite escalating tensions, China’s Vice Premier traveled to the U.S. as planned last week. The trade talks were brief – only lasting two days – but talks progressed. Now the ball is in China’s court, Suderman said, adding the issue probably won’t be cleared up in a quick manner, which is continuing to pressure commodities.

“They’re certainly throwing traders and the word markets off balance, for sure,” said Chip Nellinger, Blue Reef Agri-Marketing, as front-month soybean contracts are now trading in the $7 range.

While commodity prices seem to be in a free-fall, the President suggested in a series of tweets he would help offset agricultural losses by using the money made from tariffs to buy commodities from farmers. Suderman thinks this is more than just a way to appease Trump’s strong voting base; it’s also a negotiating tool.

“There are a couple messages there from President Trump to President Xi, one is ‘I’m willing to walk off this car lot without buying this car,’” Suderman said.

The President donating commodities to developing nations to boost prices one thing. However, buying crops to put into a reserve program is a different scenario, and one that will throw confusion into the market,” he explained.

“If you stick it in a reserve, that grain is still there,” said Suderman. “The cash market will strengthen the basis to keep the processors supplied, but the futures market will be limited on rallies because it always knows those bushels are there.”

As the two sides ready more tariffs, signals point to a trade battle that could brew for an extended period of time, and a situation that could add even more pressure to agricultural commodity markets.

“The funds are already record short, you’re going to add to that,” Nellinger said. “But at the heart of it, we still have to raise a crop, and the weather has not been very cooperative for getting the crop in the ground in a timely manner, and so it’s going to come down to production.

The production piece is an unknown that will play out for months, Nellinger said adding USDA set the bar pretty high in its latest Crop Production report on Friday.

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