US-China trade deal: Industry observers remain conservative about potential infant formula benefits

By Tingmin Koe contact

- Last updated on GMT

The US and China signed the first instalment of the trade deal last month. ©Getty Images
The US and China signed the first instalment of the trade deal last month. ©Getty Images

Related tags: Trade deal, China, Infant formula, Dairy

The US-China trade deal has lowered trade barriers for the US in areas such as the infant formula sector, but industry observers remain conservative on the potential benefits, citing unanswered questions in how the deal would actually work and international competition as key concerns.

The two countries signed the first instalment​ of the deal mid last month, with the dairy industry featuring heavily.

Phase one of the deal would provide US farmers and dairy companies expanded access to China’s rapidly growing demand for imported dairy and infant formula products.

For example, China-specific inspections of US dairy facilities is no longer needed as the country has agreed to recognise the US system of oversight for dairy products as providing the same level of protection as China’s.

According to an industry observer, while the agreement is ‘a good start’,​ it is the follow-up actions by the Chinese authority and the amount of time that they take to do so, that would ultimately determine if the agreement would benefit the US companies.

The agreement may offer some opportunities for the dairy and infant formula industry because some provisions appear to offer more relief and flexibility compared with existing practices.

“It remains to be seen how long it will take for the government to take action to implement the agreed upon deals,’ ​partner at Keller and Heckman LLP, David Ettinger told us.

There are also a number of questions which remained unanswered, for example, whether the Chinese authority would revise the current regulations or draft new rules to accommodate the requirements for US companies.

It is also uncertain if the industry’s voice would be heard and considered during the legislative process to ensure the implementing rules would equate to a fair and equitable access to the China marketplace, according to Ettinger.

Multi-cornered fights?

While the US dairy firms would have access to preferential treatment, stiff international competition in China’s market might discount the perks of the deal.

For one, the local Chinese dairy brands have a strong domestic presence, and this is further coupled by competition from the European and Australian brands, executive director of Health Products Association (HPA) China Jeff Crowther said in response to queries from NutraIngredients-Asia.

“There is some strong domestic as well as European competition, which would be difficult for any international brand to push a side. Moreover, in recent years, Chinese consumers have begun embracing all things Australian.

“Both supplements and diary from Australia have done very well in China riding the ‘Green and Clean’ perception of Australia.”

Examples of Australia-made Infant formula products that have earned a following in China include Bellamy’s.

The Australian Financial Review ​reported that Australia would try to piggyback off the US-China deal and lobby Beijing to offer similar concessions for their local firms.

Quelling competition ​ 

Given the trend of Chinese firms going on an acquisition spree, it would not come as a surprise if the US companies were someday acquired in a bid to stem international competition, said Crowther.

‘It is my feeling that if any US diary company began posing a real threat to domestic Chinese players, there would end up being a merger, joint venture, acquisition or some type of investment to stave off such competition.’

Doing so also helps to win consumer confidence damaged by the melamine incident that happened 10 years ago.

Mengniu, for example, is set to acquire Bellamy. This follows its earlier acquisition of Kirin Holding’s Australian beverage unit Lion Dairy & Drinks last year.

Another China firm, Yili, also completed the takeover​ of New Zealand’s Westland Dairy last August.

Related topics: Markets, Nutritionals, Emerging Markets

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