AFRE Assistant Professor Aleks Schaefer discusses the impact of the U.S.'s policy shift from a "free trade" ideology toward a more "managed trade" mindset.
The past two decades have seen almost constant expansion of US agricultural producers’ participation in international markets. Last year, the United States exported about $140 million of agricultural products. Our five largest markets (ordered by value of ag exports) were (1) Canada, (2) Mexico, (3) China, (4) the European Union, and (5) Japan. As a result of the ongoing tariff war, this ranking is a change from the previous year in which China led all other countries.
The transition from the Obama to the Trump Administration in 2017 saw a major shift in US policy away from the “free trade” ideology toward a more “managed trade” mindset. Initially, this shift appeared to threaten our (apparently) perpetual march toward trade growth. However, recent developments on the policy front have led me to be cautiously optimistic for the future of US trade relationships.
An Expanding Tariff war and a Ceasefire in the East
The shift in the political ideology of trade from Obama to Trump was made evident in March 2018 when President Trump announced tariffs on steel and aluminum products imported into the US from abroad. Unsurprisingly, the rest of the world responded in kind. Several countries – and most notably China - responded by imposing tariffs of their own against US products. Almost all responding countries chose to retaliate against at least some agricultural and food products. This is no surprise – agricultural products are grown in every US state, and much of the products that are exported originate from America’s heartland, which is highly red. The retaliating countries hoped to hit Trump where it hurts – the ballot box. In total, 800 US agricultural and food products currently face tariffs abroad as a result of the ongoing tariff wars.
On October 14 of this year, President Trump announced a potential ceasefire with China in the trade war, stating that the country agreed to purchase “about $40 billion to $50 billion worth of agricultural products” as the first phase of a three-phase trade deal. At the same time, the Foreign Agricultural Service announced that these purchases had already begun. The following week, China provided limited duty-free quota allotments to some state-owned enterprises. This appears to be the first real progress made in the trade war to date. Yet, China’s largest agricultural purchases from the US came in 2016 with just over $20 billion, and I’m skeptical that any ceasefire to the trade war would include a 100% increase in agricultural exports to China.
Advancement on Other Fronts
The US-China trade relationship is not the only one undergoing major changes. The US Trade Representative announced that a trade deal with Japan should be finalized (and implemented) by early next year. This is a big deal–until recently Japan has been one of the most heavily protected agricultural markets in the world. Japanese concessions under the agreement provide for tariff reductions for beef and pork products. Japan has also agreed to immediate or phased tariff elimination for selected dairy, horticultural, and specialty crops. In some sense, though, the US-Japan Agreement was the final nail in the coffin regarding US participation in the Trans-Pacific Partnership (TPP) – a trade bloc across the Pacific that importantly did not include China. The US formally pulled out of the TPP in 2017. Other members of the TPP moved forward and finalized the agreement in 2018. The US-Japan Agreement effectively provides the US with equivalent access to TPP members, but only for Japan.
The US has also re-negotiated an agreement with its North American trade partners. After announcing that the North American Free Trade Agreement (NAFTA), negotiated under President Bill Clinton, was “the worst trade deal maybe ever signed anywhere”, President Trump announced that the US-Mexico-Canada Agreement (USMCA) was “the most important trade deal we’ve ever made”. So, what’s changed from the worst to the best trade deal ever made? For the agriculture industry, practically nothing. Agricultural provisions in the USMCA are virtually identical to NAFTA. Agricultural tariff structures remain unchanged under the updated agreement.
The USMCA provides the following improvements with respect to agriculture. US dairy and poultry producers receive slightly improved market access into Canada. The Canadians also agree to provide national treatment to US wheat. Currently, US wheat is graded as “feed grade” in Canada. Under the updated USMCA, US wheat comparable to Canadian wheat will receive identical treatment to Canadian wheat. The critical issue, though, is “comparability”. Currently, no US wheat varieties are approved in Canada, and Canada could implement very stringent approval processes for US wheat, which may offset any supposed benefits.
A Bastion Against Unfair Trade Practices
Of course, some agricultural commodity groups in the US see trade liberalization not as an improvement in market conditions, but as increasing pressure in an already bear market. Such groups have frequently turned to trade remedy law – antidumping and countervailing duty investigations - as a bastion against unfair trade practices. In September, the US tomato industry concluded successful re-negotiations of the tomato suspension agreements with Mexico. US tart cherry producers received successful preliminary determinations against Turkey with duties exceeding 600% and are set for final determinations later this month.
Congress is currently considering rule changes that would make it easier for agricultural producers to bring these types of claims in the future. Currently, proceedings require support from more than 50% of US producers. Representatives from several Southeastern US states recently introduced a bill in the House (H.R. 101 – Defending Domestic Produce Production Act) that would amend antidumping and countervailing duty laws to allow regional groups (comprising less than half of the US industry) of US raw agricultural products to initiate investigations.
Of course, implementation of the USMCA, any potential US-China Trade Deal, and the proposed amendments to trade remedy law would require passage by the US House of Representatives and the Senate. In the current political climate, with a divided Congress in which political parties remain deeply divided on trade issues, we may have to wait before any progress is made. Until then, I remain cautiously optimistic.