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A jump in pork prices is revealing China's unexpected economic resilience -- and the exposed underbelly of American farming. (Illustration by Eric Chow)
The Big Story

A beef over pork: How farm goods give Beijing an edge in the trade war

China's abrupt ban on US agriculture hits Trump's voting heartland

CK TAN, NIKKI SUN and ALEX FANG, Nikkei staff writers | China

SHANGHAI/HONG KONG/NEW YORK -- In a wet market in Shanghai's Hongqiao district on a recent Saturday morning, the meat stalls are doing a brisk trade. Poultry, beef and lamb are on offer, but the vast majority of vendors are selling pork. "Pork dishes are a must at home," said Cao, a cabdriver, out shopping for his family of three.

Pork is a staple of the Chinese diet. The country is, by some distance, the world's largest producer and consumer of the meat; per capita consumption has doubled since 1990, an emblem of the country's growing affluence. Rising household income and an increasingly large and industrialized domestic industry have put meat on the tables of hundreds of millions of Chinese consumers, who have become accustomed to available and affordable pork.

However, over the last 12 months, prices have jumped 30% -- the consequence of a devastating outbreak of African swine fever, a highly contagious and deadly virus that began spreading through Chinese herds last August. Millions of pigs have been destroyed; agricultural commodities specialist Rabobank forecasts that by the end of 2019, the country's pork production could fall by half. Imports, previously making up less than 3% of China's consumption, are needed to fill the deficit.

That makes this an inconvenient moment for China to be embroiled in a trade war. Faced with another round of punitive tariffs by the U.S. on Aug. 1, Beijing lashed out, announcing a halt to all imports of American farm products and cutting itself off from its biggest supplier.

It was a move fraught with jeopardy. The Communist Party of China -- desperate to broadcast a message of enduring prosperity and stability ahead of the 70th anniversary of the People's Republic this October -- already has to contend with long-running protests in Hong Kong and international opprobrium over its mass detention of Muslims in Xinjiang. Rising food prices, historically a driver of unrest, could add another dangerous dimension.

Pork vendors at a Beijing market: China is the world's largest producer and consumer of the meat.   © Reuters

But while the Chinese economy has undoubtedly suffered from the impacts of the trade war, in food it is showing a remarkable resilience -- the consequence of a concerted effort to cultivate alternative sources, and of a nationalist "rally around the flag" effect, which has helped consumers and importers to weather the effects of inflation.

Conversely, America's agriculture sector, already battered by bad weather and tariffs, is now bracing for another wave of pain, just as U.S. President Donald Trump hits the campaign trail ahead of the 2020 election. Pig farmers and producers of soy in the president's electoral heartlands face another bleak year -- challenging his assertion earlier in August that "the longer the trade war goes on, the weaker China gets and the stronger we get."

"There's this idea because China's got this big population and such a tremendous food demand, that it's in a position of vulnerability," said Jiayi Zhou, a food security expert at the Stockholm International Peace Research Institute. "But actually what you see in this trade war is the opposite effect."

"No big deal"

At the Hongqiao wet market, Cao said that his family is sticking with pork. "We still buy, despite the rise," he said, echoing others who spoke to the Nikkei Asian Review in and around Shanghai. Price rises are "no big deal," said one grandmother, pushing a baby stroller around a hypermarket in the city's Gubei district as she shopped for minced pork.

Consumers, and consumer-facing companies, have so far been able to absorb the short-term hit from the rise in pork prices, in some cases by substituting other sources of protein.

Peter Huang Ming-tuan, CEO of Sun Art Retail Group, China's largest supermarket chain and operator of the RT-Mart and Auchan brands, told Nikkei that although revenues did fall 6% in the first six months of the year, sales of seafood and meats other than pork have cushioned the blow, as a slow, but long-term, shift in Chinese diets accelerates.

"Pork has become replaceable," Huang said. "Now that Chinese consumers have more cash to spend, more and more people are eating beef."

Xiao Xingxing, an executive at Laowang, a restaurant chain known for its hot pot, said that his company mainly uses pork belly and organs, which are cheaper than lean meat. The company also now offers beef and lamb, helping to keep prices on its menus in check. "We want to satisfy our customers' needs without any price adjustments," Xiao said.

Some companies are benefiting from higher prices. Shenzhen-listed Shandong Delisi Food, a swine butcher and seller of pork products, announced on Aug. 20 that its January-to-June net profits rose by 57%, mainly due to a rise in the number of pigs it has processed and sold. Another Shenzhen-listed processor, Zhejiang Huatong Meat Products, said that its half-year net profit will rise by up to 10% on last year.

Even before August's announcement that agricultural trade would be suspended, Chinese pork importers were casting around for alternative sources. Tit-for-tat tariffs on American pork were already at 62%, making them uncompetitive -- although some buyers were willing to stump up to secure supplies. Even in the week of Aug. 2-8, after the latest round of tariff increases were announced, China bought more than 10,000 tons of U.S. pork.

Workers in protective suits disinfect a pig farm in Jinhua in China's eastern province of Zhejiang in August, in a preventative measure for African swine fever.   © Reuters

Henan Shuanghui Investment & Development, a subsidiary of Hong Kong-listed WH Group -- the world's largest pork producer -- imported more than 100,000 tons from the U.S. into China in the first half of the year. That number, which made up half of the company's total imports, was unchanged from the previous year's figures, despite growing demand in China. Henan Shuanghui's president said in a news conference on Aug. 13 that political factors were limiting the potential to expand that trade, and that the company was now looking to increase imports from Europe and South America.

At Lihe Frozen Foods, a meat trading company based in Guangzhou, a salesman who declined to be named told Nikkei that the company has stopped importing U.S. frozen pork since the swine fever broke out late last year. "The U.S. pork has become too expensive. There is no profit for us," he said.

Instead, the company has been sourcing pork from Brazil, as well as increasing its imports of beef and poultry, as consumers become more cautious about the safety of pork products due to the disease.

At Shenzhen-based Huicheng Frozen Food, the decision to stop buying American was political. "Just look at how the Americans are bullying our country. Any Chinese with dignity should not consider buying U.S. pork," an employee, who only gave his surname as Chen, said, adding that the company is now importing more pork from Brazil and Russia.

The ability of Chinese importers to substitute American goods with those from other producers lends it an advantage in the trade war -- an imbalance that further undermines the White House's reported belief that it can hold out longer than Beijing, and cut a better deal after the 2020 election.

Agricultural commodities are relatively fungible, and while the process of finding new sources of supply is not trivial, it is considerably more straightforward than uprooting the vastly complex supply chains that meet in China to assemble an iPhone for shipment to the U.S.

Chinese food importers can find suppliers from the European Union or Latin America who are unaffected by tariffs, while American importers of technology and consumer goods have few options.

Several American trade economists who spoke to Nikkei expressed surprise that the White House seems to have -- at best -- an incomplete understanding of how tariffs work, and that it is importers in the U.S., not exporters in China, who pay them.

U.S. President Donald Trump, as a presidential nominee in 2016, on the campaign trail at a farm market in Florida   © Reuters

This may have been a factor in the administration's decision to delay some tariffs on toys and tech products. On Aug. 1, Trump announced a 10% tariff on $300 billion of consumer goods, including clothes, televisions and toys, adding to several previous rounds, starting Sept. 1. Two weeks later, the president backtracked, announcing that some of those levies -- those on goods likely to be imported in the run-up to Christmas -- would be suspended until December 15, in order to boost American retail over the economically crucial holiday period.

While the U.S. economy's dependence on China for consumer goods is hard to break, Beijing has spent more than a decade trying to diversify its own sources of supply through a range of commercial investments, aid projects and trade deals.

In 2006, when Trump was still best-known as a reality television star and source of tabloid gossip, China launched a five-year plan to increase its investments in farming overseas -- part of a broader push to secure strategic resources that spanned oil fields in Angola, mines in Congo and farmland in Ukraine. Chinese direct investment in agriculture overseas grew from around $200 million in 2006 to $500 million in 2010. A second five-year plan accelerated this further, and by 2016 Chinese direct investment into agriculture totaled $3.3 billion, according to data from the country's Ministry of Commerce.

Some of that money has gone to help potential suppliers to increase their capacity. China has invested, for example, in soybean crushing facilities from Brazil to Ukraine. In 2017, Beijing announced a new agricultural "action plan" that runs in parallel with its huge "Belt and Road" global infrastructure initiative.

"This explicitly connects agriculture to its activities in the belt and road nations," SIPRI's Zhou said. "These countries are not traditional suppliers ... but they're definitely being looked at as potential suppliers. I think that's really something to watch over the next couple of years."

China, in short, was working to reduce its vulnerability to supply disruptions long before the trade war began. That does not mean that it is entirely insulated from the short-term impacts. Rising inflation is exacerbating the effects of a slowing economy; households will suffer. However, the vocal belligerence of the American president in prosecuting his trade war may actually be helping Beijing to resist the political fallout from the slowdown, according to Zhou.

With an external actor to blame for the country's problems, she said, "it becomes a matter of economic nationalism. ... Whether or not these price increases are actually connected to the trade war is really questionable. But in this context, it becomes very easy to blur the cause and effect."

Body blow

Trump is also an unashamed economic nationalist -- one who promised to go to bat for America's farmers. So far, his trade war has hit them hard. U.S. agricultural exports to China fell from $19.5 billion in 2017 to $9.2 billion in 2018. Farm bankruptcies increased across the U.S. by 13% in the year up to June 2019 -- a period that roughly tracks the escalation of the trade war -- according to the American Farm Bureau Federation.

In a statement in early August, Farm Bureau President Zippy Duvall called China's announcement that it would end all U.S. farm imports "a body blow to thousands of farmers and ranchers who are already struggling to get by."

The pain has probably been felt most by producers of soybeans, the U.S.'s biggest agricultural export to China. Soy protein is a major component of pig feed; as prices of U.S. soy rise due to tariffs, Chinese pig breeders have been changing their mix of feed and buying Brazilian soy. The Trump government has tried to cushion the blow with a $16 billion bailout, but analysts said that it is only a short-term fix -- and that, even if the trade war ends, it could take years to repair the damage done to American agriculture.

"Brazil is ratcheting up its production capacity; it's already the world's leading exporter of soybeans. I think the U.S. exporters stand to lose a lot of market share that they've spent 20-odd years building up," said Ian Sheldon, a professor of agricultural economics at the Ohio State University who specializes in trade. "It's very difficult to get it back again."

For American pig farmers, fears about the future have been exacerbated by a sense of a lost opportunity. Before Trump's election, many were looking forward to unlocking Asian markets through the Trans-Pacific Partnership, a 12-country trade agreement negotiated under the Obama administration. Trump withdrew from the treaty shortly after entering the White House. Today, farmers are being cut out of the biggest market opportunity in a generation in China, and even Mexico has put up retaliatory tariff barriers in response to Trump's trade policy.

"The industry geared up, looking forward to trade agreements like TPP and furthering our relationship with China. So far, we've got nothing," Brian Duncan, vice president of the Illinois Farm Bureau and an independent hog farmer, told Nikkei.

John Hardin, who runs Hardin Farms in Danville, Indiana, said that "the potential prices could be so much higher if we had not had the missteps of the Trump administration." Big producers can afford to cut back their production, he added, but as a relatively small business with 11,000 hogs a year, the future looks uncertain for Hardin. "We are small and a family operation. ... We are waiting to see, but I'm not optimistic," he said.

At Tosh Farms in Henry, Tennessee, third-generation hog farmer Jimmy Tosh said that the futures market hints at a grim 2020. The sharp drop in futures prices over the past few weeks translates to a loss of $8 to $10 per carcass and $25 a pig, Tosh estimates; his farms raise 800,000 hogs a year.

"The market got very excited and had a big run-up," Tosh said. "We had some great opportunities and we were really bullish on the export prospects to China. Because of trade tensions, they just haven't come through."

The president has already begun his reelection campaign, more than a year out from the next national polls. America's rural Midwest came out for Trump in 2016, and will be a key battleground in 2020. So far, there are few indications that there has been a wholesale shift away from the incumbent, despite the damage being wrought on rural economies by one of his signature policies.

"It's really surprising to me that farmers aren't aggressively attacking the president, because this is really hurting them," Ohio State University's Sheldon said. "I don't understand why farmers care so much about intellectual property in China."

If things get worse into next year, that could change. Asked if he would vote for Trump next time around, Jimmy Tosh, a lifelong Republican, said "no way."

"This is a Trump state -- Tennessee -- I guess I'll be in the minority," he said. "But I think we are starting to see a little crack in Trump's support."

Kenji Kawase, Nikkei Asian Review chief business news correspondent in Hong Kong, contributed to this report.

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