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« June 2006 Table of Contents

Seafood imports from China surge

U.S. seafood trade gap with China hit $1 billion in 2005

In April, when Hu Jintao, president of the People's Republic of China, made his first formal visit to the United States, President Bush urgently sought to address last year's $202 billion trade gap.

While the trade deficit was only one of many key issues on the diplomatic agenda, the message was clear: American consumers are hooked on imports from China, and many U.S. industries lean on China's low-cost processing and manufacturing services to make American products more affordable - and, of course, to make more money.

To U.S. seafood importers, China is a proven supplier with considerable aquaculture resources and an economical work force that makes it a formidable competitor in labor-intensive industries. A popular manufacturing technique known as "secondary processing," in which imported seafood like Russian pollock is breaded and packaged in Chinese processing plants before being re-exported worldwide, is widening the U.S.-China seafood trade gap, which in 2005 eclipsed $1 billion for the first time.

From textiles to tilapia fillets, the United States is increasingly dependent on imports: Three-fourths of all seafood Americans consume is from abroad, and nearly 15 percent of overall imported goods are from China. Finite marine resources and a restricted, land-based aquaculture industry limit what U.S. fisheries and fish farms can produce at competitive prices. Thus, the top suppliers look to China, which boasts the world's largest aquaculture industry and various processing services available for just cents on the dollar.

As a result, imports from China are increasing at a remarkable rate. According to the National Marine Fisheries Service, last year the United States imported from China 950 million pounds of seafood worth $1.4 billion, more than double the total in 2001. The seafood trade gap with China has increased nearly 250 percent since 2000.

The seafood gap is symptomatic of the big trade picture: China has become the United States' third largest trading partner behind NAFTA members Canada and Mexico, yet Chinese imports out-value U.S. exports by a six-to-one margin.

M ost experts agree that a healthy, growing trade relationship with China benefits both countries.

"China's exports to the United States and its investments in American financial assets help restrain U.S. inflation and interest rates, and thus permit faster economic growth and more job creation," according to the newly released book "China: The Balance Sheet," produced by think tanks the Center for Strategic and Inter­national Studies and the Institute for Inter­national Economics.

The current surplus of Chinese imports does not necessarily sail calmly into U.S. harbors, however. Shrimp imports from China are subject to tariffs of up to 113 percent to protect the struggling domestic shrimp industry, which filed an antidumping petition in late 2003. Importers are also paying millions in continuous bonds to import product.

Further, some in Washington want to stifle China's trade advancement because of its political philosophies, its human rights record and its stance on hot-button issues in Taiwan, Iran and North Korea, to name a few.

How Congress approaches trade with China in the future is a sensitive subject. Sens. Charles Schumer (D-N.Y.) and Lindsey Graham (R-S.C.) recently threatened a vote on a 27.5 percent tariff on all imports if China doesn't significantly revalue the yuan.

They contend the Chinese government undervalues its currency by as much as 40 percent (1 yuan is approximately 12 cents U.S.).

Sen. Graham, prior to a trade mission to China with Schumer this past March, said, "The fundamental disconnect between us and China is that we have a conscience and they don't."

"Generally speaking, we're in a China-bashing mode, politically," says Greg Rushford, editor and publisher of The Rushford Report, a Wash­ington monthly newsletter on international trade politics, and Trade Forum writer for SFB .

"China is not a democracy, they're not allies," says Rushford. "Will [protectionism] spill over into policy? That's the big question.

"There's so much money at stake, and trade is what brings us together diplomatically. You'd rather do business with them instead of having them as enemies."

"Made in China"

Despite the often-negative sentiment echoed in corners of our nation's capital and the mystery that often surrounds the world's most populous nation, many seafood companies are embracing trade with China. One is Newport International of St. Peters­burg, Fla., the nation's largest importer of Chinese blue-swimming-crab meat, the bulk of which comes from China and Indonesia.

Troy Turkin, executive VP of sales and marketing, says Newport has sourced Chinese crab since the 1980s - and for more than just the competitive prices.

"Domestic blue crab, there's simply not enough of it," he says, noting that Newport relies on China and Indonesia to supply its Jack's Catch® brand of canned crabmeat. "The reality is, it costs less for us to produce a product at the price point [our customers] want."

Crab is only one species within China's grasp. Howard Johnson, president of H.M. Johnson & Associates of Jacksonville, Ore., says China's most visible impact on the U.S. seafood industry is in supermarket freezers across the country.

"Of the top 10 seafoods consumed in the United States, China currently exports products in every species category," Johnson writes in his 2005 Annual Report on the United States Seafood Industry.

"Particularly shrimp (peeled, breaded and shell-on), crabmeat, pollock (fish sticks), salmon (twice-frozen fillets), tilapia, scallops and even good-old 'American' channel-catfish frozen fillets."

The lure to buy from China is ultimately the savings: Lump crabmeat from China is often $3 per pound less than product from nearby producers like Vietnam and Indonesia, Turkin says.

"Remember one thing," he adds: "There is no industry standard for crabmeat sizing, so one person's jumbo could be different in size and quality from another's."

While China's crab fishery is a 
viable resource, the country's aquaculture industry is what drives exports, accounting for 70 percent of its overall seafood output. China produced 38.6 million metric tons of seafood in 2003, the latest data available from the Food and Agriculture Organ­ization of the United Nations.

While several species of carp comprise a large portion of that total, the shrimp and tilapia China produces is typically available at irresistibly low prices for major seafood buyers, to whom cost often matters most.

And, with the price of China's processing services at a mere fraction of that charged by the U.S. labor force, buying from China drives up profits for distributors of value-added, retail-ready packaged seafood.

"Even with transportation factored in, it is still far cheaper to pick crab, fillet fish, bread portions and produce surimi in China than in the United States," notes Johnson.

The raw materials for the breaded shrimp and surimi seafood China produces are sourced from Russia, Alaska and throughout Southeast Asia. The products are then re-exported all around the world.

This secondary processing is a boon to U.S. seafood buyers, since breaded shrimp enters the country duty-free, exempt from U.S. Customs and Border Protection's continuous-bonds policy.

The growth of breaded shrimp imports from China in the past five years has been explosive, increasing from less than 90,000 pounds in 2001 to 73.7 million pounds in 2005.

Peter Redmayne, SFB contributing editor and president of seafood consulting and marketing firm Sea Fare Expositions in Seattle, which organizes an annual trade show in China, says China's seafood companies can satisfy price-driven buyers from the United States.

"If you're not a player in China, you're not a player," Redmayne says. "If you don't know what's going on over there, you're missing out, because it's going to affect you one way or another. If you don't buy from there, your competitors will."

Finding the right Chinese supplier, however, can become a trial-and-error exercise.

"You have to separate the wheat from the chaff to see who the legit people are," Redmayne says.

Further, trade with China can present several hurdles, such as accessing foreign currency, overcoming language barriers and negotiating payment conditions.

To overcome these obstacles, some seafood exporters choose to work through brokers. Others own and operate their own Chinese processing facilities.

Trident Seafoods, North Amer­ica's third-largest seafood supplier, with 2005 sales of $800 million, has run two operations in China since 1995 - a purchasing office in Dalian and a processing facility in Qingdao that fillets, portions and vacuum-packages Alaska pollock, cod, salmon and yellowfin sole.

For a company to succeed in China, it's important to understand the country's unique business culture, says Doug Van Devanter, VP of international project development and national accounts for Trident. The Seattle supplier has proven its cultural acumen by more than doubling its annual sales in the past six years.

"I notice [the difference] the most when I talk to people in other industries, who ask 'How do you handle all the problems with China?' We haven't had any problems," Devanter says. "You don't see the problems that you can avoid. We've gotten some good advice from our people over there."

Cooperative efforts between the two countries' seafood industries are forming. The China Seafood Certi­fication Institute of Beijing is working with the Aquaculture C erti­fication Council of Kirkland, Wash., so that buyers will see China's seafood in a positive light via certification of its responsible aquaculture operations.

CSCI is also wooing the Marine Stewardship Council to certify China's fisheries as sustainable.

John Ching, director of CSCI's U.S. branch in Seattle, says the group trains Chinese seafood companies about food-safety programs like ISO 9000 and HACCP (hazard analysis and critical control points).

"We do not want any inadequate seafood to exit China," says Ching, who hails from Hong Kong.

"We want to be able to say that Chinese seafood is as good as anybody's internationally."

Mass market

Though it's the world's fourth-largest economy and third-largest trading nation, China remains a poor country with a per-capita income estimated at one-twenty-fifth that of America's, 
according to "China: The Balance Sheet."

But its 1.3 billion people have a growing appetite for seafood, which should only increase as their economic conditions improve.

According to the book, almost 400 million Chinese have emerged from poverty since 1990. Whether this trend slows seafood exports in the future remains to be seen.

China's per-capita consumption of seafood in 2002 was about 28 kilograms, or roughly 60 pounds (more than half of that is carp, for which there is a limited export market), compared to the 16.6 pounds per capita Americans consumed in 2004, according to Johnson.

Needless to say, China presents huge opportunities for seafood buyers and exporters willing to explore the market.

"[China's] potential as a customer is probably without comparison," says Laura Fleming, communications 
director for the Alaska Seafood Marketing Institute, which has led several trade missions to China in recent years.

"Their market is expanding so fast. It's a dynamic situation."

Some suppliers see China as a rival. Merle Knapp, VP of sales and marketing at Glacier Fish Co. of Seattle, says China is a "stiff competitor" when it comes to pollock, Glacier's chief product.

But Knapp says the quality of twice-frozen blocks China sources from Russia simply can't compete with the quality of Alaska pollock, which is frozen only once at sea.

Still, Knapp, a director of the Genuine Alaska Pollock Producers and chairman of the whitefish committee at ASMI, says Glacier does not usually go "toe-to-toe" with Chinese pollock suppliers, nor does it sell to Chinese markets.

"There are good solid opportunities [for Alaska pollock] in our traditional markets. I know China is growing, but until it proves itself, you stay one step removed and see how it goes," Knapp says. "When you pioneer a market, you take a lot of arrows."

To which shellfish exporter Bill Taylor can surely attest. The VP of Taylor Shellfish Farms in Shelton, Wash., has learned to roll with the punches while cultivating a market in Southeast Asia.

"A lot of the folks [from China] we work with have Vancouver businesses, or are pre-Westernized," Taylor says. "But any time you get involved with the Chinese, it's going to be very competitive. They'll grind you on price if they can, and they're also very cognizant of quality."

Sustainable growth?

As a mass producer of shrimp, America's favorite seafood, and of tilapia, which has gone from obscurity to fame in less than two decades, China appears poised to remain one of the United States' top seafood suppliers.

But with the threat of future trade barriers and inevitable economic change within its own borders, its future status in that regard is unclear. And some fear that the long-term trade policies the U.S. government is wrestling with are a bad idea.

The impact of federal action has already been felt. Non-breaded shrimp imports have slowed. The continuous-bonds policy has taken millions of dollars out of the supply chain, and it may not stop at shrimp - Customs has said it intends to apply bonds to 13 other products, including Chinese crawfish.

But clamping down on imports from China may not necessarily yield the results sought by the U.S. government and the domestic industries it intends to protect.

"Whatever one says about the longer-term macroeconomic effects of trade deficits, it has always seemed to me that the protectionist responses - higher tariffs and other trade barriers - are exactly what not to do," says Rushford.

"Shutting down imports and more tariffs won't work. We need to keep our borders open in our own interests."

For many U.S. seafood suppliers, China provides an invaluable competitive edge; and Americans, who are consuming record amounts of seafood, save in the end.

"China, Thailand, Indonesia - I don't think there's any way you're going to see those countries not grow [in seafood production]," Turkin says. "We simply can't support all our needs domestically. More and more people want to eat healthier, and they're demanding more seafood."

Suppliers can find it in China.

Assistant Editor James Wright can be 
e-mailed at jwright@divcom.com