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Trade with China featuring Li Zhao

March 10, 2017

*Reposted from www.businessrecord.com

For all the uncertainty about U.S. trade in an era of a strong dollar, President Donald Trump’s insistence on better deals, and maneuvering by our trading partners, China stands out as particularly important to Iowa’s future.

Iowa has an outsized relationship with the giant Asian nation. Our governor, Terry Branstad, is preparing to become U.S. ambassador to China on the strength of his string of trade missions and his longtime friendship with Chinese President Xi Jinping. Some of Iowa’s biggest international companies — John Deere, Kemin Industries, Vermeer and DuPont Pioneer among them — have operations in China. Principal Financial Group Inc.’s international operations have connections in China, too. 

President Trump famously took a call from the leader of Taiwan, to the chagrin of Chinese government officials. He has used China as a top exhibit in his argument in favor of better trade deals. 

The tensions between Trump and China’s leaders will test Branstad’s ability to mediate. Iowa will look on far more than casually, considering China is the fourth-largest importer of Iowa goods, much of it commodities. Canada ranks first, ahead of Mexico, Japan, China and Germany. For perspective, Canada imports Iowa goods worth six times what China buys.

Debi Durham, director of the Iowa Economic Development Authority, has made four trade missions to China with Gov. Branstad and Lt. Gov. Kim Reynolds. She notes that Iowa’s exports of manufactured and value-added goods rose from $947 million in 2014 to $1.2 billion in 2015 before sinking to $491 million last year. 

Li Zhao works with Stine Seed Co. and other clients in her role as president of China operations for the West Des Moines-based China Iowa Group. She expects Iowa’s exports to her home country of 1.4 billion people to rise significantly.

“President Xi said China supports globalization,” Li said. “That’s a huge market for U.S. goods and services. I’m very confident it will be a bright future.” 

In an interview, Li said Branstad’s role can only help Iowa, and other American export interests. The governor has known President Xi for decades, and the Chinese leader calls Branstad a close friend. Xi has visited Iowa, and understands the strong agricultural roots. He first visited in 1985, when he was an agricultural official. 

Chris Nelson, president and CEO of Kemin Industries, agreed that Branstad’s presence in China should help. “There is no doubt that Washington can significantly influence trade opportunities,” Nelson said in an interview via email. “The ability of U.S. sellers to enter Chinese markets will be most directly impacted. In this atmosphere, the appointment of Ambassador Branstad is incredibly good news. His long-term experience and very even temperament plus his excellent knowledge of Asian culture will serve both the U.S. and Iowa extremely well. Kemin is looking forward to continued growth in China as a direct result of this appointment.”

Branstad declined to be interviewed for this story; his aides said he was busy with preparations for his confirmation. Lt. Gov. Reynolds, who also has visited China, wasn’t available.

“I think there’s nobody who knows more about trade than (Branstad),” Trump told a Sioux City crowd during the campaign, hinting Branstad would have a future in Beijing.

Li agreed with that assessment.

“No one can do this job better than Gov. Branstad,” Li said. “They have a close relationship that is very rare. He can leverage that and get more things done. They can have candid conversations. He also has a good relationship with President Trump.” Branstad’s son Eric ran Trump’s campaign in Iowa.

During her trips to China, Durham marveled at the relationship between Xi and Branstad. “It really is a remarkable relationship,” she said. “It is genuine. It is based on trust and immense respect.”

Durham saw this when she attended a meeting with Branstad at the Great Hall of the People at the edge of Tiananmen Square in Beijing. She watched as Branstad and Xi proceeded through a formal meeting. But she noticed something about the Chinese ruler.

“Xi would go off his script due to the comfort he felt,” Durham noted. “He does call Gov. Branstad an old friend.”

A challenge is that China’s economy is growing more slowly these days, though still far faster than the United States’. Fighting inflation and other challenges, China added 13 million jobs in 2016. 

Also looming is Trump’s threat to impose a 45 percent import tariff on goods and services. Li is hoping he is just trying to prompt serious discussions about economic relationships. “There is nothing wrong with negotiating,” Li said. “It could take both countries into a better place.” 

While China imports corn and other grain from Iowa, other elements of the ag world are important, too. Vermeer is making equipment there. China/Hong Kong ranks third behind Japan and Mexico in the value of imports of U.S. pork. 

What are our best prospects for increasing trade?

“Obviously, the commodities,” Durham said. “But we have the opportunity on the value-added side in agriculture,” including processed foods, she added. She also could envision gains in pharmaceutical business in China. 

“We need China, and China needs us,” Durham said. 

Nelson said it will be important to avoid a trade war. If that is possible, he expects three key trends to drive the trade relationship in the next decade. 

“Primarily, the demand for animal protein in the forms of meat, milk and eggs will continue to grow in China,” Nelson said. “This had made China the single largest animal feed market in the world, producing over 180 million tons of feed annually, compared to 135 million tons produced in the U.S. Secondly, China cannot produce the corn and soybeans required to feed these animals, and importation of corn and soybeans is not sustainable in the long term. Lastly, importation of meat and home production of eggs and milk will become more dominant over the next 10 years. These factors provide an unprecedented opportunity for Iowa.”

Larry Zimpleman, former chief of Principal Financial Group Inc., sees promise. “I am very optimistic about the U.S. and China trade relationship while acknowledging there will be some ups and downs,” he said. “I’m very positive about Gov. Branstad becoming the U.S. ambassador to China because of his long and positive relationship with President Xi and the Chinese people.  

“The U.S. and China trade relationship remains among the most important trade relationships for the U.S.,” Zimpleman continued. “Trying to predict where that might go in the next five to 10 years is a bit challenging right now, as we don’t know exactly what the new Trump administration’s trade policy will be with China. But my personal view is that given the importance of the U.S. and China relationship, it will remain as an important relationship both for the U.S. and, especially, for Iowa. 

“Part of my belief that the U.S. and China relationship will remain important is Gov. Branstad becoming the U.S. ambassador. This is very important for the U.S., and especially for Iowa. The Chinese culture celebrates history and the 30-year relationship between President Xi and Gov. Branstad positions the U.S. ahead of every other country in China.

“One way I’ve described this is that there might be only a handful of people in the world that could call up President Xi’s office, ask for a meeting and be sure they could get that. Gov. Branstad is one of those people,” Zimpleman added.

Zimpleman said agriculture will remain key, with 25 percent of American soybeans now headed to China. “But when we think about areas of growth in the China and U.S. relationship, we can believe that the areas for growth will be areas like financial services, which I’ve personally been very involved with for the past 15 years, and advanced manufacturing — benefiting companies like Rockwell Collins, Vermeer, etc. I do believe that we’ll see increased trade between China and Iowa, and the goods involved in that expansion will begin to be in areas outside the historical agricultural area.”

Will the strength of the U.S. dollar affect all this? “Certainly a strong dollar can be a bit of a headwind, but the overall trajectory will not be impacted,” Zimpleman said. “So a strong dollar will impact pace more than direction.”

Said Nelson: “As China moves to make the yuan a worldwide currency, its value will determine Chinese purchasing power for American goods. A strong dollar makes Iowa protein more expensive for the Chinese. In my observation, the currency will fluctuate with normal macro-economic forces, and both buyers and sellers will need to factor this into their long-range plans.”

Tips from Li Zhao

President of China Iowa Group

  • Study the country well — the history, recent changes, the culture. 

  • Arrange a key Chinese partner. “It’s not mandatory, but it’s easier. The culture is different.”

  • Expect lots of people at meetings. Only the most important person in each group generally speaks. Having many associates there shows respect. 

  • Remember that younger generations think differently. When Victoria’s Secret tried to impress Chinese viewers with an ad that featured a woman in underwear who had wrapped herself in a dragon, many were offended. Forbes explained the situation in an article (http://bit.ly/2lxFOVb). Basically, dragons are sacred symbols in Chinese culture and many found the ad tacky for that reason. Others saw the dragon as a symbol of old China, not the changed China millennials are hoping for. 

  • Social media is important. Even though the Chinese government bans Twitter and Facebook, many Chinese are well-connected with $100 to $200 smartphones, and internet access is readily available.

  • Expect added trade in beef, biotech, agriculture consulting and software.