The Administrations’ Trade Policy: What It May Mean for the Future!

December 5, 2018

PAER-2018-15

Author: Russell Hillberry, Professor of Agricultural Economics

USDA is projecting agricultural exports of $141.5 billion in fiscal year 2019, down from $143.4 billion in 2018. (Cooke and Jiang, 2018) Much of the expected decline in total exports is attributable to soybeans and cotton. Declining sales to China are expected to affect soybeans, while the lower forecast for cotton exports is linked to slowing growth in global demand.

Under normal circumstances, one might expect macroeconomic conditions to be the central focus of an annual agricultural trade outlook like this one. But in 2019, as in 2018, international trade policy will likely affect agricultural trade more than economic conditions alone. Figure 1 shows how trade policy can matter. After tracking closely for more than a decade, the prices of soybeans in the U.S. (yellow line) and Brazil (red line) diverged sharply this spring, as China responded to U.S. tariffs with their own 25% tariff on U.S. soybeans. The price gap between Brazilian and U.S. soybeans rose to as much as U.S. $89/metric ton in October ($2.42 per bushel lower U.S. prices). This meant that U.S. producers were bearing the full burden of the 25% Chinese tariff. The two price series have converged since then at a lower level, reflecting a variety of economic responses that one would expect in such a situation.

Figure 1. Soybean prices in Paranagua Brazil (red line) and Chicago (yellow line) in USD/metric ton

Figure 1. Soybean prices in Paranagua Brazil (red line) and Chicago (yellow line) in USD/metric ton

The trade policy environment in 2018 was extremely volatile. While 2019 should be somewhat calmer, it seems unlikely that all the damage done in 2018 will be undone. In circumstances like these, a review of the trade policy landscape is probably most informative for understanding the agricultural outlook for 2019.

The Administration’s trade war can be described as having three fronts: 1) Canada and Mexico, 2) China, and 3) much of the rest of the world (notably the European Union). Aside from the back and forth with individual countries, another big issue for 2019 involves the President’s actions to limit the effectiveness of the global system designed to defuse trade wars. We briefly review each front in the trade war, and then discuss the global dispute system and the President’s actions there.

Trade war front 1: Canada and Mexico

At this time last year, there was considerable uncertainty about the ongoing renegotiation of the North American Free Trade Agreement (NAFTA). Together with his Canadian and Mexican counterparts, the President signed an updated version of the agreement on December 1, 2018. The agreement, now named the “U.S. Mexico and Canada Free Trade Agreement” (USMCA), is substantively very similar to the original NAFTA agreement. What remains to be determined in 2019 is whether or not the new agreement will be ratified by the U.S. Congress. Democratic control of the U.S. House of Representatives may pose a political hurdle to passage of the agreement (Rodriguez 2018). The President has threatened to leave the NAFTA agreement if Congress refuses to ratify the USMCA. Last year we reviewed the open legal question of whether the president has the authority to withdraw without the consent of Congress (Hillberry 2017).

Outlook: Trade relations with Canada and Mexico appear much less likely to hurt American farmers in 2019 than they did in 2018, but the situation is not fully back to normal yet.

Trade war front 2: China

Chinese exports were affected by a series of U.S. trade policy actions in 2018. U.S. “safeguard” tariffs on washing machines and solar panels were applied in January; Tariffs on aluminum and steel that were rationalized under the national security provisions of U.S. trade law were announced in March. These provisions affected Chinese exports, but also other countries that export the affected products. But another salvo in the trade war was aimed specifically at Chinese exports. $50 billion of tariffs on Chinese imports were announced in June and applied in July. China responded with retaliatory tariffs of 25% on 659 items, including soybeans. Another round of tit for tat followed in September and further escalation threats were issued. The U.S. announced subsidies for U.S. soybean growers to account for some of the losses related to the Chinese tariffs (Bown and Zhang 2018). Recent negotiations between the President and the Chinese premier seem to have halted further escalation for now, but there seems to be little progress on the removal of trade barriers that were put up this year. (Rugaber and Nicholson 2018)

Outlook:
While further escalation seems less likely than de-escalation, prospects for a return to normalcy are quite low. U.S. soybean farmers will continue to bear a significant share of the costs of the trade war with China.

Trade war, front 3: Rest of world

The U.S. aluminum and steel tariffs announced in March are the primary reason for ongoing disputes with countries other than China and our NAFTA partners. The European Union retaliated against the aluminum and steel tariffs by applying tariffs on a range of U.S. products. U.S. food and agricultural products facing higher tariffs were cranberries, orange juice and peanut butter (Bomey 2018)) Subsequent high profile negotiations stopped a further round of tit for tat, and generated an announcement that the European Union would buy more U.S. soybeans. But the agreement offered no substantive progress back towards the initial situation. “Simply put, the EU offered what it was already going to do. And in exchange, the U.S. agreed not to do what it hasn’t done yet” Livingstone and Oroschakoff (2012). Russia, India and Turkey also imposed retaliatory tariffs in response to the U.S. Steel and Aluminum tariffs.

Outlook: U.S. tariffs and retaliatory tariffs remain in place with these countries, though the cycle of escalation seems to have stopped. Perhaps the most likely outcome for 2019 is that things stay where they are on this front. For agricultural producers, no change is probably the most likely outcome, and the best that might be expected.

WTO reform and/or the undermining of the dispute settlement mechanism

While the headlines have been dominated by the U.S. tariffs, the world’s reaction to them, and the economic consequences of both, a potentially much more important systemic issue has been brewing at the World Trade Organization (WTO). One of the most important functions of the WTO is to referee trade disputes among its members, a process known as the dispute settlement mechanism (DSM). Until recently, the DSM had been quite successful in limiting the damage done by international disputes like those discussed earlier in the article. Motivated (they say) by a desire to reform the system, President Trump and his team are threatening to break the DSM if it is not reformed in the ways that they wish. Another possibility is that President Trump is seeking to break the DSM because the DSM is likely to find that the President’s tariffs violated U.S. obligations under its WTO commitments.

The actions the president has been taking along these lines is to block the appointment of new judges to oversee appeals to the initial decisions of the DSM (Miles 2018). When the number of appellate judges becomes too small, the WTO will no longer be able to sanction retaliation against a member country that violates its commitments to follow WTO rules. It will be difficult, in those circumstances, to use the world’s international trade rules to constrain U.S. actions, or those of any other country that wishes to violate its WTO commitments. This is a time of unprecedented danger for the DSM, which had been viewed as an important achievement of the international community, and with U.S. leadership of that community.

Outlook: The president is unlikely to waiver in his refusal to allow new judges to be seated in the DSM appellate body. A recent G20 summit passed a resolution pledging to reform the DSM, but it is unclear how soon this will occur (or whether the President would be satisfied by the reform that did occur). The DSM will be barely functional after Sept 30, 2018. After December 2019, it cannot operate as designed without the appointment of new judges. The DSM is critical to a rules based trading system. American agricultural interests have long argued that a rules-based system is enormously important to U.S. farmers.

 


References

Bomey, Nathan 2018, “European Union tariffs take effect in Trump fight: How they will hit American products”, June 22, USA Today, accessed at https://www.usatoday.com/story/money/2018/06/22/european-tariffs-donald-trump/725672002/

Bown, Chad and Eva Zhang 2018, “First tariffs, then subsidies: Soybeans illustrate Trump’s wrongfooted approach on trade,” July 30, Petersen Institute for International Economics, Trade and Investment Policy Watch, accessed at https://piie.com/blogs/trade-investment-policy-watch/first-tariffs-then-subsidies-soybeans-illustrate-trumps

Cooke, Bryce and Hui Jiang, 2018, “Outlook for U.S. Agricultural Trade”, November 29, U.S. Department of Agriculture, accessed at http://usda.mannlib.cornell.edu/usda/current/AES/AES-11-29-2018.pdf

Hillberry, Russell (2018) “NAFTA Uncertainty Looms Over U.S. Ag”, December, Purdue Agricultural Economics Report, accessed at https://ag.purdue.edu/agecon/Documents/PAER%20December%202017_2018%20Outlook%20Final.pdf

Livingstone, Emmet and Kalina Oroschakoff (2018) “Trump and Juncker: The art of the no-deal”, July 26, Politico, accessed at https://www.politico.eu/article/donald-trump-jean-claude-juncker-trade-the-art-of-the-no-deal/

Miles, Tom (2018) “U.S. blocks WTO judge reappointment as dispute settlement crisis looms.” August 27, Reuters, https://www.reuters.com/article/us-usa-trade-wto/u-s-blocks-wto-judge-reappointment-as-dispute-settlement-crisis-looms-idUSKCN1LC19O

Rodriguez, Sabrina (2018) “Pelosi casts doubt on passage of Trump’s new NAFTA without changes”, December 6, Politico, accessed at https://www.politico.com/story/2018/12/06/pelosicasts-doubt-on-trumps-usmca-passage-without-changes-1014361

Rugaber, Christopher and Blake Nicholson (2018) “White House hails China trade truce as skeptics raise doubts”, December 4, Associated Press, accessed at https://wset.com/news/nationworld/white-house-hails-china-trade-truce-as-skeptics-raise-doubts

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