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What can Brazilian agribusiness expect from a commercial dispute between the USA and China

A turbulence has started in the international market this year, when the United States government declared the intention to increase commercial tariff of several products imported from China. There is a list with roughly 1,300 products that can be surcharged regarding importation tariff of products from China. The goal of the USA is to lessen a commercial deficit with the Chinese partner, of more than 300 billion USD in 2017.

 

In response, the Chinese government has announced compensatory tariff measures to products from the US, in case the United States impose the restrictions announced.

 

Products of the agribusiness are not the focus of the American list. As for the Chinese list, on the other hand, agricultural products have importance, mainly grains. Some products, namely ethanol, meat (especially pork) and fruits, may be negatively affected by measures announced by the two countries.

 

Restrictions to trades tend to generate surplus of the product that suffered the taxation in the exporting country, which can, in turn, affect negatively local prices, and even impact on the balance level of values in the international market. Moreover, it creates the necessity of the country to flow this supply surplus to a new destination.  

 

As a result, Brazil, which is one major producer and exporter of products from the agribusiness, may also have to find new destinations for its products. In this situation between the United States and China, some Brazilian products may be favored, as players from the soybean market expect. However, the result of short-term adjustments between exporters and importers to restrictions imposed to the free functioning of the market is not clear. For instance, under some hypothesis, while Brazil could gain part of the Chinese market previously supplied by the US, this country, now with lower domestic prices, could obtain parts of the European market previously served by Brazil, and even increase its exportations to Brazil. If restrictions are long-lasting, long-term supply and demand adjustments may occur, pushing up prices.

 

Some years ago, Brazil was in a similar situation in a commercial dispute between Russia and some European Union countries. In August 2014, Russia prohibited importations of some food products (fruits, vegetables, dairy products and meat) from the European Union. The embargo was adopted as an answer to sanctions imposed against Russia by the EU and the USA. This prohibition to the importation of European products affected directly exportations of the EU, which had to sell its production surplus to other countries, as the case of onions to Brazil.

 

The supply of the product in the Brazilian market reduced onion quotes in the domestic scenario to levels below production costs in some cases. As a result, players have pressed the Brazilian government to adopt restrictive measures to the entrance of the product in the Brazilian market. Then, the government included onions in Letec (List of Exceptions to the Common External Tariff), increasing importation tariff for countries that are not part of Mercosur.

 

The onion case indicates that these international trade restriction measures may affect several countries, even those that are not directly involved in the commercial dispute. The effect of a dispute between European countries has changed balance prices, affected the productive sector of several producing countries and changed relations of commercial partnerships between countries that are not involved in the dispute, given that Argentina, in this case, has also lost share in onion importation to Brazil. Still, the case is a small indication of the impacts that may occur in sectors such as ethanol, fruits and meat.

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