Beijing fought back after U.S. tariffs on $34 billion in Chinese goods came into effect on Friday as trade tensions between the two countries continue to intensify.
It levied the same amount of tariffs — $34 billion — on 545 U.S. goods including agricultural products, vehicles and aquatic products. Another list subject to tariffs at a later date includes crude oil, Beijing said earlier.
On the surface, Beijing's decision to target commodities may seem a strategically sound move: By definition, commodities are interchangeable, so the Chinese marketplace should be able to swap out its U.S. imports for those from another country. But that might not work out quite so well for China, experts said.
"The picture is a little more nuanced," said Caroline Bain, research consultancy Capital Economic's chief commodities economist.
Take soybeans, for example.
U.S. exports constitute 40 percent of all soybeans traded internationally. China, meanwhile, imports about 60 percent of all soybeans in the global marketplace. In other words, the U.S. has been an important supplier for China, but Beijing's July 6 tariffs will include a 25 percent levy on American soybeans.
Brazil already supplies about half of China's soybean imports, and Chinese buyers are purchasing more and earlier from the South American country this year, Bain said.
And, in a sign that China is planning to ramp up soybean purchases from other countries to work around U.S. supplies, Beijing said that it would remove import tariffs on animal feed ingredients including soybeans from five Asian neighbors, Reuters reported, citing China’s Ministry of Finance.
Unsurprisingly, prices of benchmark Chicago soybean futures have slumped about 6 percent since news of the latest round of trade tensions broke.
While much has been said about the slump in soybean prices, the decline also tracked a general fall in commodity prices due to fears about a global fallout from an all-out trade war between Washington and Beijing, Bain said in a recent note.
In fact, there have been few significant changes on the cargo front. Outbound dry bulk shipments from the U.S. to China have fallen recently, but that appeared to be a seasonal lull, according to shipping data provider VesselsValue. Dry bulk cargoes include grains and soybeans.
After all, there's only so much more China can buy from Brazil, or the world — without U.S. supply, soybean exports from the rest of the world will not able to cover Chinese import needs. Brazil also can't export that much more as its large livestock industry needs soybeans.
According to data from the U.S. Department of Agriculture, China is projected to import 103 million metric tons of soybeans in the next marketing year that starts on September 1. Excluding the U.S., the rest of the world only exports about 100 million tons. So, at the very least, China will have to buy a few million tons of the 62 million tons of soybeans exported by the U.S.
However, China said in May it will cut soybean imports for the first time in 15 years for the next marketing year to about 96 million tons, Reuters reported. What that means is farmers will have to find alternative animal feed.
"Of course, farmers could substitute soybean meal with grains in animal feed, but this is not ideal given the lower protein content of most grains. As such, some imports from the U.S. appear inevitable, at least for now," Bain added, noting that tariffs may eventually prove disruptive — not just for the U.S., but also for China.
That would all get remedied, however, with a deal between the two global powers.
"We still think that an eventual compromise will be reached which may even result in the lifting of tariffs and non-tariff barriers. After all, China has selected goods produced by key constituents of Trump's support base, which suggests a desire to force more negotiation," said Bain.
The potential tariffs for energy products provide greater clarity into what China doesn't want to do with its high-profile retaliatory moves.
The list of U.S. exports it would target in the next tranche notably includes gaseous natural gas. According to Bain, that's "a bit of a nonsense as there are no pipelines between the U.S. and China."
China, however, has notably not targeted the super-cooled transportable version of the fuel: liquefied natural gas (LNG).
"LNG demand is growing rapidly in China [and] the U.S. will be the key source of incremental supply growth in 2018 and 2019," said Nicholas Browne, head of Asia-Pacific gas and LNG at commodities consultancy Wood Mackenzie.
Beijing is pushing hard to cut air pollution caused by coal, switching to gas for energy sources instead. Tariffs on U.S. LNG would push costs up and potentially limit the availability of the product in China, analysts said.