Why soybeans are a double-edged sword in any US-China trade war

China yuan coins

Soybeans may be tipped as China’s weapon of choice in any trade war with the U.S., but Capital Economics noted that targeting the U.S. crop will also figuratively scorch China’s earth.

China is the dominant purchaser of U.S. soybeans, buying as much as two-thirds of U.S. exports, with the major producers in states which voted for Trump, but targeting the crop would cost with heavy costs for the mainland, Capital Economics said in a note on Wednesday.

“There simply aren’t enough soybeans in the world outside the U.S. to meet China’s needs,” it noted. “China already buys three quarters of
the soybean exports of Brazil, which is the biggest exporter after the U.S., and nearly the entire crop of Argentina, the third biggest producer. China’s soybean imports are greater than the entire exports of non-U.S. producers.”

Hill of beans

But Capital Economics added that a more plausible threat would be for China to shift some of its purchases to other countries, while also trying to lower its dependence on imported soy. It also pointed to one new Chinese policy that could be “a shot across the bow” at the U.S.: New, more stringent quality specifications for U.S. soybean imports which won’t be applied to imports from Argentina and Brazil.

China has no “magic bullet” to reduce its dependence on U.S. soybeans, especially without increasing costs on the mainland, the Capital Economics note said.

Indeed, some analysts have noted that clamping down on U.S. soybeans would produce inflationary pressure on the mainland.

Any effort to increase domestic production of soybeans would happen slowly, without affecting import demand much, it said. China could also consume fewer soybeans, which the mainland mainly uses to feed pigs, by substituting corn as a feed, but soy tends to be preferred, Capital Economics noted.

China could also run down its soybean inventories, currently at roughly six months’ worth of imports from the U.S., but that’s only a temporary threat, the note said.

Capital Economics also noted that other threats from China would also have some domestic blowback.

The limits of other targets

If China decides to go after another major U.S. export to China, aircraft, it would mark a relatively straightforward and easy-to-implement punishment of Boeing, but it would also mean Chinese airlines would likely need to lease or buy second-hand planes as Airbus may not have the slack to meet the mainland’s demand, the note said.

Additionally, if China targets another major import from the U.S., autos, this would escalate tensions as the U.S. is already singling out the sector as the mainland charges high tariffs of 25 percent on auto imports, compared with 2.5 percent on imports to the U.S., the note said.

Separately, Maybank KimEng recently noted that if China goes after pork-related U.S. exports, Thailand could be a beneficiary as it could step up exports of chicken to the mainland.

Capital Economics noted that China’s hands aren’t entirely tied if the trade saber-rattling intensifies, as the mainland is likely to bear some cost if the situation escalates.

“But any steps that China took to curtail trade with the U.S. would hurt China’s economy too,” it said. “Trade is mutually beneficial.”