China Reportedly Halts US Ag Purchases as US Mulls Sanctions

China reportedly ordered its state-controlled companies to stop buying certain U.S. agricultural products after the U.S. certified last week that Hong Kong no longer qualifies for special trade treatment. The decision also came after President Donald Trump said the U.S. will sanction Chinese officials, increase export controls on dual-use technologies, and end the special customs territory in response to Beijing’s so-called national security law (see 2005290047), which the State Department said threatens Hong Kong’s autonomy (see 2005270026).

China’s state-owned companies will halt orders of U.S. soybeans, pork, corn and cotton, according to a June 1 Reuters report. China’s Foreign Ministry threatened more retaliation during a June 1 press conference. “No words or actions by the U.S. that hurt China's interests will go without meeting firm counterattacks,” a ministry spokesperson said. “We urge the U.S. to immediately correct its mistakes.”

Chad Bown, a senior fellow at the Peterson Institute for International Economics, said that of the $6.9 billion in imports from Hong Kong in 2017, about half would be covered by Section 301 tariffs. However, the U.S. exports nearly five times as many goods to Hong Kong as it imports, so retaliation would be more economically significant for businesses located in the U.S. than the toll on importers. Derek Scissors, a China scholar at the American Enterprise Institute who has contacts in the Trump administration, said in an email that the phase one trade deal is dying. “We’re probably headed for more tariffs on China,” he said. “Higher tariffs is more likely than expansion range. There’s a reason we didn’t get to those goods.”

Although China does not want Hong Kong to lose special U.S. trade privileges, Beijing is growing frustrated with the international pushback to its national security law and believes it will not be significantly harmed by U.S. sanctions, Chinese experts said during a June 1 webinar hosted by the Center for Strategic and International Studies.

“I think they feel generally quite frustrated with the amount of external pressure they're getting,” said Jude Blanchette, a CSIS China expert. China hoped to implement the law while also dissuading foreign nations from interfering, he said. But China is not opposed to retaliating for perceived foreign interference, Blanchette added, including U.S. sanctions. “I think we need to be adjusting to a Beijing that is increasingly empowered and also exasperated with the general international environment and is willing to push back against it,” Blanchette said. “And that's going to lead to a proliferation of flashpoints for the U.S. to deal with.”

That may have led to China’s decision to halt purchases of U.S. agricultural goods, which could threaten the implementation of the phase one trade deal (see 2005130042), said Scott Kennedy, a China expert at CSIS. “I think phase one was always on weak legs,” Kennedy said. “And now we're seeing that.” But Kennedy also stressed that China doesn’t “want to just simply openly walk away from the deal,” as Trump has threatened (see 2005040012). That could have long-lasting repercussions for U.S. agricultural exports, Kennedy said. It would “be harder for American farmers and others in the Midwest,” he said, “who are counting on the growth of these exports to help them in the middle of the deepest recession the U.S. has faced in a very, very long time.”

China could retaliate further once the U.S. releases the details of its upcoming sanctions, which could include “very, very tough” measures, said Bonnie Glaser, a China expert at CSIS. But Trump’s vague announcement last week leaves questions as to what steps the U.S. will actually take, the experts said. “He announced an attitude. The U.S. took no specific measures,” Kennedy said. “He fudged it,” Glaser said. “It was not really clear what concrete steps the U.S. is going to take.”

The measures could include amplified export controls on Hong Kong because the island is a “less restricted destination” than the Chinese mainland under the U.S.’s Export Administration Regulations, according to a May 29 alert from Mayer Brown. Trump’s threats could therefore lead to “substantially heightened restrictions” on exports and reexports of goods, software and technology to Hong Kong, the law firm said.

Industry groups, including the U.S.-China Business Council (see 2005270011), have said new export control actions or other trade measures could severely limit U.S. business in Hong Kong. The American Chamber of Commerce last week said revoking Hong Kong’s trade privileges “would have serious implications for Hong Kong and for U.S. business,” especially companies “who exercise a positive influence in favor of Hong Kong’s core values.”

Despite the U.S. threats, China does not believe they will have a significant impact, Glaser said. “I think Beijing is confident that very little will be done to really harm Chinese interests going forward,” she said. “In my view, the Trump administration is trying to stare down Beijing and Beijing is trying to stare down the United States.”