Open for business: leather trade between the US and China

When President Donald Trump visited China in November 2017 as part of a five-country tour of Asia, he met Chinese President Xi Jinping for a state dinner at the Forbidden City. On the menu was a variation of the US leader’s favourite dish – steak and ketchup (or in this case ‘stewed beef steak in tomato sauce’). The meal symbolised not only hope for improved trade relations between the two countries but also a shared appreciation for beef, something that has become a trend in China in recent years as its growing middle class has acquired a taste for it.

In 2003, China placed an embargo on US beef after cattle were infected with mad cow disease, but after a 14-year ban on imports, it was finally lifted in 2017. One of the motivating factors, according to Su Chaoying, president of the China Leather Industry Association (CLIA), was growing demand in the Asian nation for beef, as well as its by-products.

“Consumption of beef in China has been significantly increased over the past ten years,” he says. “According to the official statistics, in 2013–2015, the average annual growth rate of China’s consumption of beef was 3.9%, while the average increase for domestic beef production was only 2.1%. As a result, the price of domestic beef has been increasing.”

The problem is that China is consuming more beef than it can produce – by 2024, it is estimated that 500,000t of beef will need be imported annually.

Su says that by 2020, domestic beef production in China will be 7.84 million tons a year and 8.28 million tons in 2040, but that consumption will increase to 8.23 million tons and 8.77 million tons annually in 2020 and 2024 respectively.

Why can’t China meet this demand itself, by upping production? Su says: “The cattle population has been decreasing since 2009. Cows are generally reared by individual farmers that lack good technology and machinery for animal cost of domestic feeds is going up year on year, but the quality is not as good as that provided by overseas suppliers, which also bring negative impact on rearing cattle domestically.”

Mutual benefit

Along with Australia, New Zealand, Uruguay, Brazil and Argentina, which are also big exporters of beef to China, the US is an expert in cattle rearing, so a renewed trade relationship will be mutually beneficial. Stephen Sothmann, president of the US Hide, Skin and Leather Association (USHSLA), says, “The US beef industry is increasingly reliant on export markets for growth, and as one of the world’s largest importers of beef, China market access is extremely important to the long-term future health of the industry. As a by-product of the beef industry, the US hides and leather industry benefits from an increase in demand for US beef by stimulating more production of cattle and hides domestically.”

With the US a huge import market for raw hides to China, the lifting of the embargo will also open up trade links, benefitting China’s tanneries. “It is expected that the number of cattle hides in US will have a further increase due to this decision, which will provide China with more good quality raw materials, at a lower price than before,” says Su. “It is also believed that this decision will restrain the illegal smuggling activities in cattle hides and beef.”

Among the $250 billion worth of business deals Trump signed off on with Chinese companies was a $1.2-billion agreement to sell American beef and pork to China’s biggest online retailer, JD.com.

Commentators hope that some of these emerging pledges will benefit the leather industry, too, especially after the US president pulled out of the Trans Pacific Partnership (TPP) at the beginning of 2017, something that critics argue will handicap the nation as it closes itself off from globalisation.

“America First is one of the priority trade policies that President Trump focuses on,” says Su. “The decision to withdraw from the TPP gives us the impression that the era of mega-trade deals has come to a close.

“The US will be more inclined to create country-to-country bilateral trade partnerships. However, the development of the leather industry is very much driven by economic and trade globalisation.”

And from a US point of view? Sothmann says,“For the US beef industry, the loss of the tariff preferences in Japan – the largest export market for US beef – that the TPP would have afforded may be catastrophic in the long run. Without tariff concessions via a federal trade agreement, the US beef industry will be increasingly uncompetitive in the Japanese market when compared to Australia and other countries with an FTA in place.

“For hides and leather, the TPP would have provided US exporters with additional market access in Vietnam, which will be missed by the industry. However, a much more significant implication is the US’s apparent surrender of leadership in the writing of global trading rules. This may be more negatively impactful to the broader US agriculture industry in the long term than any of the specific tariff market access gains afforded under the TPP.”

The Trump effect

In light of Trump’s visit to China, Sothmann says, “I hope there was some agreement between the two leaders on issues that don’t relate directly to hides and leather trade, but could affect us in the future if they aren’t resolved. Issues such as excess steel capacity, intellectual property and investment issues are at the forefront of the negotiations between the two countries, and if they are able to resolve some of those issues, it bodes well for all bilateral trade between the countries, including hides and leather.”

With the lifting of the embargo on US beef to China seen as a positive step forward, there is still the matter of Decree 159, which will require certain standards to be maintained on the product.

“According to the Administration of Quality Supervision, Inspection and Quarantine of China, China will reserve the right to quarantine imported beef from the US to prevent the possible spread of disease, control safety risks and protect human health,” says Su. “Under Decree 159, nonedible animal products, including rawhides, are also requested to be quarantined on site by an expert team at random.”

Decree 159 poses a variety of challenges for US beef and leather producers. “There are no significant problems with Decree 159 per se,” says Sothmann. “However, as always, problems can arise as the regulations are implemented. There are many examples in other food and agriculture sectors where implementation of similar regulations in China has led to market disruptions and closure due to various problems arising during the implementation period. Therefore, USHSLA is working closely with our US Government representatives and the Chinese leather industry to ensure this regulation is implemented as smoothly as possible.”

The leather sector in China has changed significantly in recent years. “The industry has shifted from being export-led, quantity-oriented growth to consumption and innovation-driven growth,” says Su. “The production volume remains steady, but the growth rate has been down year on year, especially in leather garments and shoes. On the other hand, the upholstery and automotive leather sectors are operating well.

“The leather industry has been moving to manufacturing clusters where the effluent treatment facilities are well established and operated. Affected by strict environmental control policies, some small tanneries have closed down or been absorbed by medium and largesized enterprises. Additionally, driven by big changes in sales models and consumption behaviour, the ecommerce business in leather and leather products industries is developing rapidly.”

If all goes well, increased trade with China could have a profound effect on beef and leather production in the US.

“In the short term,” predicts Sothmann, “market access in China will have relatively little effect on US beef production levels because it will take several years before the supplies are available to properly service Chinese demand for US beef under the protocols negotiated between the two governments. However, in the long term, China may become a major importer of US beef and its demand could stimulate further growth of the US cattle and beef industries.”

Supply and demand

Various other steps are being taken to improve beef and leather business relations between China and the US. “The relationship between USHSLA and the CLIA is one of the most important in the global leather industry, ensuring the largest supplier of hides and skins in the world is working closely with the largest buyers and leather producers in the world,” says Sothmann.

“The recent US Beef China Roadshow in Beijing, Shanghai and Guangzhou was also a victory lap for achieving market access, as well as the foundation for future marketing and sales efforts.

“US beef market access in China was one of the most important political and economic goals of the US agricultural industry for many years.

“Now that the ball has been finally kicked across the goal line from a market access perspective, the US industry must now begin to market and sell its product to Chinese consumers.”

The leather industry in China looks set for a period of continued growth over the coming years “China has published some new policies including a tax reduction scheme and ‘the belt and road initiative’, which will create a sound environment for the development of the leather industry in China,” says Su.

“It is believed China’s leather industry will maintain steady growth over the coming years due to the recovery of the global economy and big demand in domestic market. Adoption of new technology in environmental control and application of digital and automatic machineries and production will make the operation of the industry more environmentally friendly and effective.

“However, China’s leather industry is facing many new challenges over the coming years such as the waste treatment, a lack of good-quality designers, rising labour costs, and manufacturers’ movements from China to South East Asian countries. There is still a long way to go.”