Soy Source Gives True Taste of Mnuchin's `Good' China Talks

(Bloomberg) -- Talk is cheap. Actions are priceless.

That’s why we should be paying less attention to the “very good conversation” that Treasury Secretary Steven Mnuchin and other members of a U.S. delegation were having with their Chinese counterparts in Beijing this week, and more to the real action happening elsewhere.

Take soybeans. Markets are already on high alert after China, the biggest importer, said it was considering slapping 25 percent tariffs on shipments from the U.S. Change could be coming sooner even than that. The dreaded non-tariff barriers — unofficial embargoes like the ones China imposed on Korean automobiles, stores and beauty products in response to rising military tensions last year — may already be going up.

“Whatever they’re buying is non-U.S.,” Bunge Ltd. Chief Executive Officer Soren Schroder told Mario Parker of Bloomberg News Wednesday. “They’re buying beans in Canada, in Brazil, mostly Brazil, but very deliberately not buying anything from the U.S.”

Soy Source Gives True Taste of Mnuchin's `Good' China Talks

While Schroder’s contention is backed up by signs that China is canceling some import commitments, it’s hard to know how seriously to take the threat in the long term.

It’s now May, and northern soybean harvests have been complete for months, with the 2018 planting season starting within weeks. Between now and November, China barely imports the U.S. crop, focusing on South American beans. The activity described might represent the start of a wider boycott, but it might also represent a smaller shift that’s spooking sellers in a thin market.

“There’s a very strong possibility that there’s not going to be any soybean tariffs,” said Brennan Turner, founder of FarmLead, an online grain marketplace. “At the same time traders are going to be very cognizant of the risk that soybeans in the U.S. are less attractive than those in Brazil now.”

Soy Source Gives True Taste of Mnuchin's `Good' China Talks

Markets look to be discounting that risk. Prices have risen for Chicago soybean contracts right out to 2020 compared to recent months. Some of that could come from short-term domestic demand factors as the Midwestern market switches away from export trade, dragging up the spot price and the rest of the curve with it. Still, if China starts provoking the sort of havoc in the oilseeds market that Mnuchin has been causing with aluminum, longer-dated U.S. contracts could have a way to fall.

So much for Beijing’s stick. But there’s also the prospect of a carrot: The State Council is considering plans to cut its 25 percent duty on automobile imports to 10 percent or 15 percent, people familiar with the matter told Bloomberg News last week.

The problem, though, is who gets the carrot. While both BMW AG and Daimler AG’s Mercedes ship cars to China from U.S. plants, the only homegrown hero that would seriously benefit is Ford Motor Co.’s Lincoln brand — and even there it’s a mixed blessing, since the uncertainty must complicate Dearborn’s plans to ramp up Chinese production of the marque.

As a result, it’s much better to look at any move on automotive tariffs as a cynical ploy by China to gain the appearance of some moral high ground. The cuts would also help to build political capital in Europe and Japan, trading powers that Beijing would never have dreamed of being able to woo, were Washington not going out of its way to antagonize them. Making premium cars cheaper for the wealthy and well-connected back in China serves a domestic purpose as well, given the damage that locals may be called on to tolerate should the trade tensions turn to blows.

That would be in keeping with the generally immovable tone that Beijing has been trying to strike in this dispute. It’s approach doesn’t look so much like carrot-and-stick, as stick-and-stick.

To contact the author of this story: David Fickling at dfickling@bloomberg.net.

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