Signal to Noise: Detailed China Update from Chief Ag Negotiator

DC Signal To Noise Podcast ( Farm Journal )

It's lonely being at the U.S. Trade Representative’s office lately, especially the fourth floor where top agriculture negotiator Gregg Doud said he's the only one on that portion of the building. The loneliness is not because he's like the Maytag repairman with nothing to do! Those quiet confines were an ideal setting to catch up with Doud on key trade issues, including an update on Phase 1 of the U.S./China trade agreement signed Jan. 15, 2020 and taking effect Feb. 14.

First some background on China's purchases of U.S. farm products. China imported $5 billion worth of U.S. ag goods in the first quarter of 2020, according to Chinese data, including $3.1 billion of soybeans and $430 million of pork. China’s total U.S. ag purchases increased 110% in the first three months of this year. This week's USDA Weekly Export Sales report showed China continued making some purchases of U.S. ag commodities the week ended April 9, including net purchases of 165,000 tonnes of U.S. wheat (50,000 tonnes for 2019-20; 110,000 tonnes for 2020-21), net purchases of 137,750 tonnes of sorghum, 5,869 tonnes of soybeans, 1,489 tonnes of U.S. beef and 16,402 tonnes of pork (even after cancelling 6,072 tonnes of prior purchases). While China bought cotton this week, cancellations of prior buys meant a net reduction of 81,999 running bales of upland cotton to China. 

The obvious question to ask Doud was whether or not China would live up to its Phase 1 commitment of purchases of U.S. farm products. “You know, the Phase 1 agreement with China and agriculture was just not about purchases, it was also about fixing a very significant number of unwarranted trade barriers,” Doud said, detailing there were “something like 57 different things that we agreed between the U.S. and China to remedy and fix.”

Timeline of ag-related accords. Some of those ag-related agreements took place when the agreement took effect Feb. 14. Some of those were within five days, 10 days, 20 working days, one month, two months. “Here we are now at kind of the two-month point,” Doud said. “And so far, we're doing very, very well. We're in constant contact with China almost every single day... back and forth... making sure we are getting things fixed. And, you know, we're not perfect. There are still a few things that we're trying to sort out. But I will tell you, every single day, despite what's going on in China… we see the difficulty they've been going through for most of this year... despite all of that, they're working very hard. Our folks at USDA, FDA, etc. are working very hard to get all of this implemented.”


 

 


Regarding China's purchases, Doud said, “the trade data will come, and we'll see it, we're seeing some purchases. But the key thing that we're focused on at this point is getting the changes made that we agreed to in this agreement.”

Of the 57 different ag-related provisions, Doud said “we're well over half” in getting things finalized. “There's a few protocols... and so much of this is really, really technical stuff. They have questions; we have questions. At a very technical level, we go back and forth, but the discussions are very, very good.”

How good? Regarding recent Chinese purchases of U.S. farm products, Doud specifically mentioned beef. “You saw in (Thursday’s) Export Sales Report something for the first time: U.S. beef sales to China. We saw 1,489 tonnes of beef. And that is a result of what the situation on beef was when the agreement went into force Feb. 14.” USDA’s Food Safety and Inspection Service (FSIS) about a month ago published a list of 492 U.S. plants that can export beef to China. That was made possible after China agreed in the Phase 1 deal to lift its zero-tolerance policy for growth hormone residues in beef as well as eliminate its ban on beef from cattle over 30 months old at slaughter and accept the U.S. traceability system. Doud said, “China agreed to make the changes one month later, the changes were made by the time we got all of the labeling stuff done and all of the technical things sorted out and we didn't get them exactly done in a month, but a few days after we were up and running. We have a few more wrinkles here that we're working on, but we're there.”

Doud stressed he wanted to make “another really key point: One of the big things that we've always had trouble with... in fact, every country in the world has struggled with China in terms of getting facilities approved and products approved. One of the things that we have now is in terms of facility registration, whether it's in dairy, seafood, meat, poultry, pet food, animal feed, animal products, feed additives, etc. We have 2,000, or over 2,200 facilities approved to ship to China. That is a huge, huge improvement from where we've been for years, and a lot of other countries have taken notice of that. Because everybody has struggled with that. And so that is a big, big step forward that we have now under our belt.”

The two countries are working on a few areas and complicating that is that no trips can be back to or from China. “We're working through that because we can't travel,” Doud said. “We're working on a couple ideas on how to remedy that and deal with that, and we're going to see if those will work.”

But the dialogue and discussion between the two countries continue relative to trade, Doud said. “And I can't emphasize enough here that the folks at USDA, APHIS, the Foreign Ag Service... a huge number of folks have worked night and day here for the last couple of months. Huge kudos to them and [USDA] Undersecretary [Ted] McKinney and the Secretary (Sonny Perdue), folks at FDA, etc. To get all these things done is a lot of work. And then China's worked very hard as well. We've made a huge amount of progress here. And so now the question is will this manifest itself into sales? Well, my answer to that is at these prices: I sure would think so! Jiminy Christmas!”

Asked for a few ag-related agreements yet to be implemented, Doud said “we still have a couple of little wrinkles on dairy. I think whey permeate (cost-efficient dairy replacer for lactose) is one thing coming up in May, with some fruit and vegetable stuff ahead. There's alfalfa hay; we've got some things we're working on here. But the big things were the beef and the poultry, the pet food on the meat side. I think we're in really good shape there.”

Conversations are still ongoing with China about ractopamine in cattle and hog production. Doud said there is “no timetable” on a study of the topic by China. “But we are talking about it back and forth. And we've got some things teed up here to get going with them on that, but the problem is we want to send some folks over and show them some stuff and they want to come over here and we need to be able to do that. But right now, we just can't.” When told that some trade analysts say China will never approve of the use of ractopamine, Doud said “forever is probably too negative. I think there are certainly challenges on that particular topic and a huge chunk of the challenge is the language barrier and what the term refers to in their language... which literally translates into lean meat powder. It's a language nomenclature issue that we've got to figure out how to sort through at some point. I think we will, but it's going to be hard.” Asked whether the U.S. should just change ractopamine to another word, Doud laughed.

Asked if he could step us through the public report that is expected to come from each countryrelative to the quarterly reports on imports and exports, and that U.S. trade analysts want to know if this will be on a CIF or FOB basis, Doud revealed he was “confused by that because there is no really requirement for a quarterly report. What we have is an agreement on a monthly basis at the technical level, and we're going to be meeting and talking about issues. That's been happening. And we're going to continue to do that on a quarterly basis where we will be talking at my level. And we're getting geared up for one of those coming up here at some point. And then twice a year we'll be talking at the principal's level — [U.S. Trade Ambassador Robert] Lighthizer and his China counterpart. So those are the touch points monthly, quarterly, twice a year. But in terms of public reports, I'm not sure that there will be anything of that nature.”

Note: USTR detailed that language from Chapter 5 of the Agreement “deals with currency and exchange rate matters and is more so just an affirmation that both the U.S. and China will continue to publish official trade data as we are currently doing. It is not in reference specifically to the purchase commitments in Chapter 6.”

As for U.S./China trade and the Phase 1 accord, Doud noted “we've accomplished some things and USTR and USDA have listed some of them in recent press releases. We will also be looking at the trade data and everybody can look at the trade data. We'll have Chinese trade data; we'll have U.S. trade data. Trade data is imperfect science trying to accurately depict it all. And when you're talking about the quantities that we're talking about between the U.S. and China, it's never going to completely match up. But we're going to take a look at that. We have the January and February trade data now. We're ahead of where we were last year, but are we on pace for where we need to be for Phase 1? No, we are not. But they've had coronavirus over there. We didn't get the agreement implemented until Feb. 14. So, we'll be looking at the next trade data, plus or minus the second week in May. That March trade data will be interesting to look at. We know from the Export Sales reports, we've got some wheat on the books, we've got some corn on the books, we know soybeans, a lot of pork, and you now have beef. So, it'll be interesting to see what we have on the poultry side or on the dairy side and the fruit and vegetable side as well.”

Told China has been a good buyer of U.S. sorghum, Doud said, “They really have, and we saw two more cargoes of sorghum to China in this week's Export Sales report. You've seen the basis for grain sorghum in Kansas get back to where it was in 2014 when things were really doing well in that regard.”

Time for U.S. soybeans to shine. “So, there are good signs out there, there are areas where we are going to continue to monitor and keep a close eye on. The big one coming up is soybeans. Brazil's had a big crop. China has been importing a lot of soybeans, huge soybean imports. The question and the issue here: in another month or so it'll be our time to shine. And we'll be watching that closely. What are they going to do?”

China has been canceling a lot of prior U.S. cotton purchases. Asked about that, Doud said: “The situation, to the best of my knowledge, is the fact that some of those purchases were on the books all the way back in 2018. And they were purchased at really high prices. I talk to the cotton guys all the time, and they've had a tough time with the trade war and everything else. And then you had huge cotton stocks. Late last year, though, we saw signs of this thing really starting to come around and everybody was like, 'Okay, we got these huge sales on the books.' The textile industry in China was starting to come around. And all of a sudden coronavirus hit. That's a function of global demand for textiles. It's not at all any semblance of where it used to be. If you're not making clothes and whatever products, you don't need the cotton and it's not China's fault. Vietnam, as evidenced in the most recent Export Sales report, also reported net reductions of 138,675 running bales; Pakistan had net reductions of 23,035 running bales. That's just a function of what's going on in the global textile market and it's not pretty.” (While China bought U.S. cotton this week, cancellations of prior buys meant a net sales reduction of 81,999 running bales of upland cotton to China.)

Has China requested consultations under the deal? “They have not,” Doud said. Asked if he was surprised about that, he said. “No. I think there's just tremendous uncertainty. Everybody's trying to figure out the next shoe to drop or whatever analogy you want to use here. I think there will be conversations at the appropriate time. But to answer your question today, the answer's no.”

Is China fulfilling its Tariff Rate Quotas (TRQs)? Background: China’s 2020 low tariff rate quotas (TRQs) for imports of corn, rice, wheat and cotton are unchanged from volumes in previous years, according to an announcement from the National Development and Reform Commission (NDRC). The levels are 9.36 million tonnes for wheat (90% issued to state-owned companies), 7.2 million tonnes for corn (60% to state-owned companies), 5.4 million tonnes for rice and 894,000 tonnes for cotton (30% to state-owned companies). 

Doud's response regarding China's TRQs: “It's a really good question and it's something that we are watching very closely here, and we have folks at USDA and here at USTR that monitor that on a very regular basis. To explain this: We won a WTO case more than a year ago against China on how they were implementing their tariff rate quotas for rice, wheat and corn. When they became a member of the WTO, they were supposed to import 9.36 million tonnes of wheat, 7.2 million tonnes of corn and 5.4 million tonnes for rice every year from somebody in the world. And they've never operated those tariff rate quotas correctly. We filed a WTO case. We won that and as part of our Phase 1 discussion, they said 'alright, on Jan. 1 we will implement and do it correctly.' And what you have seen since then, they have bought some Ukrainian corn, you've seen them by some U.S. corn, you've seen them buy some U.S.  wheat. That's a good sign. They are actually utilizing those tariff rate quotas and we'll continue to keep an eye on that.” In summary, Doud added: “Are we ready to say that they are fully implementing what they need to do? I'm not ready to say that yet.”

Asked about potential U.S. rice sales to China, Doud said: “I don't know exactly what they're doing on rice. We've had great discussions with them on rice. From a technical standpoint, I'm not aware of anything that would restrict rice purchases from the U.S. other than price. Our rice is more expensive than their rice. They're a huge rice producer in the world, but our rice is very different and a special kind of rice."

Regarding the level of China's tariffs still in place on U.S. farm products, Doud responded: “Well, we're talking about two different types of retaliation here. The first one is the 301 tariffs and what China announced and this is very important, China announced on March 2 that they were going to have an exclusion process. And we have encouraged our exporters to encourage their importers in China that people are dealing with requests. These exclusions are on the 301 tariffs and what we are seeing on a pretty regular basis is within sometimes 24 hours, 48 hours upon the request, they're being granted. Where the U.S. pork industry is frustrated, and I get it, is they're being retaliated against because of the 232 steel and aluminum tariffs. And that is a 25% retaliation against our pork, and that puts them at a clear disadvantage against the Europeans, the Brazilians and others.” Asked the outlook on this topic, Doud quickly answered, “You'd have to ask China, they're the ones doing the retaliation.”

Are we going to see a move away from China in terms of supply chains, customer agreements, and as the tendency to become more insular following the Covid-19 pandemic, how might that impact U.S. ag exports with one of our largest trading partners? “Gosh, I don't know the answer to that question,” Doud said. “That's really a company by company, private sector analysis. I don't have any ability to answer that question.”

Before we move to topics other than China, is there anything you want to add? Doud: “We're doing better than we were a year ago. We've got a lot of new opportunities that we've opened up in Phase 1. We've been successful so far in implementing this. But are we on pace for where we need to be to implement the dollar amount on Phase 1 ($36.5 billion for 2020)? No, we are not yet.”

And what about the U.S. ethanol sector? We've seen the collapse of the U.S. industry. Are there any signs China will import a lot of DDGs... any update on that? Doud answered, “The whole energy sector right now... $20 a barrel oil... is just a train wreck. We've talked to countries in South America, China and we know what's going on here in the United States: Nobody's driving cars, anywhere in the world. And so, the question on ethanol trade is the price is certainly right, but where would you put it? It's a real challenge. The difficult thing to wrap your head around is, this is a global phenomenon. The challenge of this virus, this invisible enemy is everywhere in the world.”

Background: U.S. ethanol production plummeted another 102,000 barrels per day (bpd) to an RFS-era low of 570,000 bpd the week ended April 10. That was down 44% from the same week last year. Ethanol production has plunged 45% over the past month and the four-week average is 23% under year-ago. Despite plunging plant production, ethanol stocks rose another 378,000 barrels to a record of nearly 27.5 million barrels.

In the midst of a seismic global recession, how is USTR poised to assist U.S. ag exporters regain a competitive foothold as the world reopens and recovers? “The strategy is what we've been doing,” Doud said. “We have the USMCA [US-Mexico-Canada Agreement], with Canada and Mexico. We're frantically working right now to get that entered into force and to get that deal up and running. One of the great unsung trade deals in the history of U.S. agriculture, in my opinion, is what Ambassador Lighthizer was able to do with Japan... an absolutely phenomenal situation. Now as of January 1, we are even with everybody else into getting our products into Japan — the tariffs have come down here, and this is definitely helping us on that front. And then obviously, the Phase 1 agreement with China. So, when you add those four countries alone up, that's nearly half of U.S. exports.”

What about Phase 2 of the trade agreement with Japan; are there consultations being held? “The answer is that is definitely on the radar,” Doud said, but he quickly added “the virus got us hung up a little bit on that. I think the first thing that we'd like to get up and running is our negotiations with the United Kingdom (U.K.) The expectation was that we would be negotiating with them by now, but this doggone virus. As soon as we can figure it out, when everybody can get back up and running again here, but who knows when that is.”

On the USMCA, why the delays on the implementation? “I don't know that we are delayed,” Doud said. “What's going on right now is Canada is notified, Mexico was notified. We are in the process of doing that. We're talking with Canada and Mexico every day as we speak on this. I don't have any knowledge that we're delayed. The next step is for this administration to notify Congress that it is certified, and that Canada and Mexico are in compliance. It's a process here and what we're working on right now is to dot those i's and cross those t's.”

Relative to the bird flu situation in a South Carolina turkey operation, China confirmed to regionalization language contained in the Phase 1 agreement. Is that correct? “Yeah. That's something that USTR and USDA have worked on for years with all of our major trading partners on the poultry side of the equation... to follow the international guidelines, the OIE [World Organization for Animal Health] in terms of regionalization. So, if we have one situation in a very localized area, you don't shut down the entire United States poultry trade. The is why we have a regionalization agreement with China as part of Phase 1 and that is signed, operational and up and running. We've talked to our other trading partners, and so far, everything seems to be working as it should, per the international guidelines on how to deal with something like this.”

What about the EU? They are not following regionalization relative to the South Carolina situation. “It's an ongoing conversation that we're talking with them about,” Doud said. “Well, we'll see how that goes. Let's just leave it at that, shall we?”

Is USTR prepared to defend our ag policy from challenges brought by trading partners because of what most people would say is needed domestic agricultural support, not only from the trade mitigation, but also coming with this ag assistance relative to Covid-19? Doud: “We are confident as always that the United States will maintain policies consistent with our WTO obligations.”

President Trump keeps saying we have lost "all of the cases" at the WTO. A paper we saw just published on WTO dispute settlement (link) shows that of the cases involving the Agreement on Agriculture, the U.S. has won on 85% of the claims that we have brought against countries, including the two recent big wins against China on TRQ administration that we talked about earlier and subsidies (which were initiated under President Obama). Any comments? “What I will say from an agricultural perspective is there's a long history here of WTO cases in ag. Yeah, we've been successful in the WTO. But when you say, we won a case at the WTO, my question to you is, what does that mean? In other words, how do you translate legal success into fix and reform. And that's the great challenge we have going forward with this. That's an ongoing struggle that we have. We won the beef hormone case. But what was the prize at the end of the day? We've continued to struggle to deal with the Europeans on the use of technology and agriculture. We won the two WTO cases with China on domestic supports and tariff free quota administration. But we've got to make sure they comply. Ultimately, the goal here is to have reform and what the policies are. You have to affect change at the end of the day.”

Back to China, what about Phase 2? Are talks taking place? “No, not yet,” Doud said. “What we're very busy working on is Phase 1 implementation. There is still a lot going on there. I don't have any update for you on Phase 2... we've been overtaken by events here just a little bit.”

Regarding China, do you still talk to your counterpart that you had so many discussions with getting Phase 1 nailed down? “Have I talked specifically to the vice minister recently? No,” Doud noted. “Most of the conversations have all been going on a technical level. But those are going on almost every day.”

Fox News quoted reliable sources suggesting the Covid-19 virus began at a biology lab in Wuhan.China's patient zero, the first person to get it, was reportedly a lab worker who went out into the city and spread the virus from there. Chinese authorities then reportedly tried to cover it up. They delayed action and data and suppressed doctors and journalists who reported the truth. Observers say the development is an indictment of China and the communist authorities and that it may dramatically change the U.S./China relationship. This could include frayed relations in future Chinese purchases of U.S. farm products. Asked to comment on this, Doud simply said: “That's way out of my lane.”   

Wrapping up, the last time we interviewed you, you were fairly upbeat on improving U.S./China trade relations. Are you still optimistic? Doud: “We are improving U.S./China trade relations in agriculture and in implementing Phase 1. We've been very successful today, but we've still got steps to go through and boxes to check here and all the different things that we've agreed to make progress on. But so far, so good. And now we've got to see this translate into purchases. The challenge here is global economics. The other side of that is at these prices, what a tremendous opportunity for consumers in the world to step up to the plate and buy the best ag products on earth which are from the U.S. Now one of the challenges that we have going forward amid all of this economic turmoil is the strength in the value of the dollar. It continues to be a real challenge for us, particularly versus the Brazilian real, the Argentine peso and I would even throw in there the Russian ruble, which has really been hit so far this year. Those impact Russian wheat, Brazilian soybeans and corn, Argentine soybeans and corn. They're going to be difficult competition for us given what's happened to their currencies.”

Final word? “There are all kinds of one-off issues around the world that we're dealing with,” Doud said. “We're actually busy. There's a lot of different challenges that we deal with on a daily basis around here and hopefully we will continue to make progress with China and get started with the U.K. looking forward.” So, Doud is not so lonely when it comes to trade issues ahead.

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