Is It Now Russian & Chinese State Policy To Push US Exports Out Of Asia?

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Russia Benefiting from US-China Trade War as United States Becomes An Unreliable Trade Partner For Beijing

Op/Ed by Chris Devonshire-Ellis

Four months ago I wrote an article “China’s US$60 Billion Tariffs On United States Products A Good Opportunity For Russia To Push The US Out Of Asia”. At the time it was considered pretty bearish on the United States, and garnered numerous negative comments (mostly from American’s, and usually questioning my sanity and/or general partisanship).

Today, that view is becoming more real than partisan as the trade war continues to heat up. In short order, Beijing has prepared for this eventuality rather more than Washington has, and has long been planning and enacting increasing trade ties across the world. The United States has not. It’s not just with US sanctions and trade disputes, it’s within the entire US attitude to foreign trade, which seems to be based on the mantra that the United States is the Holy Grail and that a trade deal with it is akin to winning the World Cup in whichever sport you happen to follow. An example is Free Trade Agreements (FTA). One clever way to assess which way a countries trade fortunes are going is to examine any recent Double Tax Agreements (DTA) it has signed. DTA are the essential tariff wheels upon which free trade is based, as they both identify specific products and services to be traded between two countries and identify the tariffs to be charged. They also provide for profits tax reducing mechanisms, by allowing the substitution of withholding tax charges (typically 10%) instead of the more onerous profits tax (typically 20%). Mechanisms as how this works are discussed here (complimentary download). A nation wanting to increase its bilateral trade on a global basis will be active in this regard, one that isn’t, will not. It is telling therefore that over the past five years, the United States has entered into 3 FTA, while China has signed off 17. That is preparation.

The other issue with the United States that has been developing, and increasing under the current administration, is one of reliability. In many eyes, the United States has become an unreliable partner, and not just in trade. Withdrawing from several other internationally agreements such as the Paris Climate Accord, the Iran non-Nuclear proliferation treaty and others has only served to project the US as unreliable and unpredictable. That does not sit well with larger countries such as China, India and Russia among several others, who need to plan ahead to keep their national populations satisfied. Neither does it sit well with the global supply chain, which needs a consistent approach to the various component parts it needs to put together to make a single, globally branded product. An example is the iPhone, and the number of different countries that supply materials to make it. A revealing article on that subject courtesy of Livewire can be accessed here.

Consequently, there are reactions to the current US ability to disrupt trade and supply chains. Some of them involve Russia, where sales of grains, soy and other agricultural produce to China is skyrocketing. I wrote about this recently, in the article Russia Takes Advantage Of US-China Trade War To Expand Grain Exports however this process is also accelerating.

The Russia-China Investment Fund, which has a billion dollars at its disposal, has announced that it is interested in investing in the share capital of Russia’s Rusagro Group who are major suppliers of produce, included sunflower and soy to China. Their CEO stated yesterday “We just concluded an agreement on soy supplies to the Chinese company COFCO and plan to sell 50,000 to it at the first stage, though that is just the beginning. After obtaining the required certificates, Rusagro also plans to start supplying beet pulp and sunflower meal to China.”

Russia is also a growing export market for chickens, and is expected to supply over US$100 million of poultry to China this year. Russia’s Agricultural Ministry stated that Russia has already supplied 18,700 tonnes of poultry worth more than US$41 million to China this year. “Meanwhile, the monthly supplies dynamics is demonstrating solid growth, having risen from 54 tonnes this February to over 7,500 tonnes in August,” the statement said. According to the ministry, 31 Russian companies now have the right to deliver poultry to the Chinese market.

These developments call into question exactly what is the outcome of the US-China trade war. With figures like this – and they continue to unfold across other countries throughout Asia and Africa as well – is that the United States has been extremely unwise in picking this fight with China. No-one has assessed how American companies, now tarnished with the brush of trade unreliability – will ever get the China market back again. Although one way perhaps would be to establish subsidiary LLC’s in Russia to compete or set up Joint Ventures with some of the Russian suppliers.

The marker in the trade war appears to be whether it will be resolved or not. The dawning truth of the matter may well be that a ceasefire is called. But the real question is whether the US will ever recover these markets. It seems possibly not. In the face of American sanctions and tariffs, it appears that China and Russia have agreed in response to push US exports out of Asia. It makes sense in a lot of ways; it brings sourcing much closer to their own sphere of influence, inflicts less of a carbon footprint in shipping, and hands greater control of the global supply chain to Asia. If that is indeed a matter of strategic policy, then there is now no way back for the United States. And that in turn means developing Asia is the place to be for opportunities.

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Russia Briefing is written by Dezan Shira & Associates. The firm has 27 years of advising MNC’s and Governments on business strategy, legal and tax advice throughout Asia, and maintains 28 offices throughout China, India, ASEAN and Russia. Please contact us at asia@dezshira.com for assistance or visit us at www.dezshira.com

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