Playing chicken

Dim sums: Chinese consumers will foot the bill for chicken tariffs

The US is one of the world’s largest consumers of chickens, with the average American eating around 50kg per annum. Leg and breast meat are on the menu, but you won’t find chicken feet being offered as a side-dish at KFC.

So what happens to all of the uneaten feet? Unsellable to Americans, they are boxed up and sent to China, where they are something of a delicacy – “phoenix talons” for example, is a popular dim sum dish. This rather peculiar trade is part of a narrrowing field of ‘Made in America’ products that can be profitably exported to China. It is also a new front in the escalating trade war between the two countries, as China has now announced plans to introduce anti-dumping duties on US chicken products.

The problem is that US suppliers are shipping chicken feet in such high volumes, and at such low prices, that it hurts Chinese producers. “Chicken feet and wings are not wanted in the US so they sell them to China, they dump them below cost,” Wang Xiulin, president of the Chinese Poultry Association, told Reuters.

In the US, a pound of chicken feet sells for about 2 cents, while in China they go for 42 cents. Chinese competitors complain that the price in China is roughly equal to the cost of shipping the feet from America.

The full preliminary duties will be 105.4%, though they could be adjusted in a final ruling a few months later. Although some chicken companies appealed, it will be a widely-felt blow for US poultry manufacturers, who will be wondering what to do with all the unwanted claws.

There is some good news, however. The government will wait until February 13, the day before Chinese New Year, before implementing the tariffs. This means that Chinese consumers, especially those in the south of the country where feet are most loved, will not pay more when shopping for holiday supplies.

The introduction of tariffs is a response to similar actions recently taken by the US against Chinese products. Chinese tyre imports were the first target, followed by steel pipes (see WiC46). But this trade war is only one aspect of a broader breakdown in what is the world’s most important bilateral relationship.

Other trouble spots include the cyber-attacks on Google, and the company’s subsequent complaints about the censorship that it faces while operating in China (see WiC47). This became a political issue when the US government adopted Google’s cause – Secretary of State Hillary Clinton told China to drop the censoring. And the dispute has escalated since the US approved a $6.4 billion arms package to Taiwan.

Economics is another new battleground, as President Barack Obama recently promised to get tough on international currency rates – most notably, what he claimed was an undervalued renminbi. Beijing’s tight control over its currency is one of those diplomatic unmentionables: when Treasury Secretary Timothy Geithner accused China of being a currency manipulator early last year, it was met by virulent objections.

It seems slightly calculating for Obama to bring up the issue of the renminbi, since many economists believe that the currency will resume appreciating against the dollar, perhaps as soon as the first quarter of this year. In 2005, the Chinese government replaced the renminbi’s peg against the dollar and allowed it to appreciate. But when the financial crisis started in 2008, the dollar peg was reintroduced and appreciation stopped.

Now that domestic economic conditions can cope with a stronger renminbi – recovering global demand for Chinese goods is the main factor – it is only a matter of time before appreciation starts again. One theory is that Obama knows all this, but if China starts to revalue its currency soon after he complains about it, he might be able to claim credit for Beijing’s change in policy.

Observers are now starting to ask what underlies such a broad breakdown in Sino-US relations. Some suggest that the problems arise from the US: “Now the US domestic economy has serious problems. It wants to reduce imports and increase domestic employment, which will lead to new structural conflicts in trade and economic policies between the two sides,” Zhu Feng, a professor at Peking University told China Business Views.

Others see aggression originating from China. “From its perceived position of growing economic strength, China has been throwing its weight around,” said the Economist.

This is not only true with regards to its relations with the US, since it is making its presence felt more in key international debates, such as climate change and the contentious issue of Iran’s nuclear programme.

But the Economist also points out that some of the dispute is pure theatre. Take the Taiwan arms deal for example. Although the exact timing would not have been clear, its announcement was no surprise to the Chinese. They expressed outrage nonetheless. The threatened sanctions against the companies involved in the shipment are part of a political grandstanding: they have yet to be carried out. And even if they are implemented the companies involved do little business in China (Boeing is the exception).

So it is worth remembering that much of the aggression is still at the level of rhetoric. This might not be any consolation to US poultry manufacturers, but maybe they are just bit-players in a much larger political show.

Keeping Track: China’s Commerce Ministry has declared victory in its chicken war with the US. According to the China Daily, the ministry stated on Wednesday that the WTO had upheld its appeal against a ban on the import of Chinese chickens. The original dispute was reported in WiC49. A source at the China Animal Agriculture Association reckoned 150,000 tonnes of finished chicken products could be exported to the US as a result, valued at around $750 million. China has called it a victory against US protectionism.(30 July 2010)

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.