During his election and since taking office, US President Donald Trump has made trade policy one of his number one priorities. His trade policy is guided by a belief that US interest is best served by engaging bilateral trade agreement rather than multilateral agreements, like the proposed Trans-Pacific Partnership(TPP). The primary targets of this aggressive trade policy is the world second largest economy, China. To date, the Trump’s administration actions include 25 per cent tariffs on US$50 billion of Chinese imports and a further 10 per cent on US$200 billion worth of Chinses imports. The administration has also applied steel and aluminium tariff on variety of other trading partners including European Union (EU), India, Japan, Turkey, Canada and Mexico. Each of these countries have in turn put their own retaliatory tariffs on US goods. Alongside an implantation of tariffs, the US has also sought out to initiate new ‘trade deal’ and ‘trade agreements’ with various countries. The agreements are aimed at levelling what the US sees as ‘unfair advantages’ enjoyed by foreign exporters in accessing the US market while not allowing easy access for US exports.
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Australia has however, avoided being the target of the Trump’s administration new trade policy- as Australia is the only trading partner that’s exempt from the steel and aluminium tariff. This is likely because unlike other trading partners the US still maintains a trade surplus; however, the global agriculture trade interconnectedness means policies implemented by the US and its trading partners create both risks and opportunities for Australia’s agriculture export. The prospect of future bilateral FTAs between, the US and Japan, EU, UK and possibly even with Philippines and Brazil can also have ramification for Australia’s agriculture sector.
The main objectives of this report to help Australian agriculture stakeholder and policy makers understand the implication of the trade policy carried out by the Trump administration – in combination with the retaliatory measures enforce by key trading partners – could impact Australia’s agriculture sector. By calculating and evaluating these forces, the report is intended to provide recommendations to Australian industry and government to manage and diminish these impacts, and take advantage of any potential opportunities that may emerge.
The purpose of this report is to examine the likely influence the ‘bilateral trade wars’, currently ongoing between the US and key trading partners, can have on Australia agricultural exports. The study will primarily concentrate and discuss products identified by the Department of Agriculture as Australia top 5 exported agriculture products; beef, wheat, diary and wool.
1. The New Trade Environment
1.1 US Tariffs and Retaliatory Action
Section 232 Tariffs
In March 2018, President Trump imposed section 232 tariffs of 10 and 25 per cent on imports on a variety of steel and aluminium commodities under the auspices of national security. Exemptions were however made covering steel tariffs for South Korea and Brazil, while steel aluminium tariffs were permanently exempted for Argentina and Australia.
Even though the Section 232 only applied to steel and aluminium commodities, the move has impacted the agriculture market due to the retaliatory tariffs that have been enforce by a number of US trading partners, primarily targeting US agriculture. See appendix 1 and 2 for details of retaliatory actions taking by US trading partners.
Section 301 Tariffs on Chinese Goods
In 2017, following a Section 301 investigation into Chinese policy which concluded that China implements discriminatory policies that impede US companies including: “joint venture requirements; constraints on licensing terms; facilitating unfair acquisition of US companies to secure technology transfer; and promoting unauthorized access to sensitive commercial information” (ITS Global, 2019),the US imposed a 25 per cent ad valorem tariffs on Chinese import worth US$50 billion. At the end of 2018 an additional 25 per cent tariffs on another US$200 billion worth imports was scheduled but were however postponed as both nation attempted to reach an agreement.
The 10 per cent tariffs imposed by US included agricultural products; mainly, grains and other crops, horticultural goods, sugar, cotton and wool. In retaliation, China also targeted a broad range of US agriculture products for tariffs. See appendix 2 and 3 for an indication of the products targeted by US and Chinese tariffs.
1.2 New and Prospective Trade Agreements
The possibility of bilateral trade deals with Japan, EU, UK, even with the Philippines and Brazil are all currently in the process, or being considered by the US. Discussion with Japan, EU and the renegotiation of the North American Free Trade Agreement (NAFTA) with Canada and Mexico were all initiated by the Section 232 tariffs.
United States – Mexico – Canada Trade Agreement (USMCA)
The USMCA is a trilateral FTA negotiated by the US, Mexico and Canada as way to modernise the NAFATA agreement. It was signed by the three countries leaders, President Donald Trump, Mexican President Enrique Peña Nieto, and Canadian Prime Minister Justin Trudeau on the 30th November 2018. Each country’s legislature must pass and ratify the agreement before its implemented.
According to the Congressional Research Service U.S. thedairy sector may gain more than other agricultural sectors from the new agreement. This is due the expansion of access US dairy exporters will get from the expansion of primarily, the increase of the tariffs rate quota of 14 categories of dairy products that can enter Canada duty free seen in appendix 4. The preservation of tariffs free access to the Mexican market also benefit American diary exports. Canadian exporters will also benefit from the agreement to due to commitments that increase access to US market for certain dairy products.
The USMCA also includes pledges to enhance conditions for trade in wheat between the US and Canada; one of these include an agreement from Canada to revise its policies for grain grading. This would mean that US wheat isn’t assessed in way that is “no less favourable than that it accords to like wheat of national origin”. In continuation, would allow wheat to be grade in non-discriminatory basis to allow exports to be priced per their grade.
US – Japan Trade Agreement
In September 2018, the US and Japan agreed to negotiate a trade deal. The trade talks were initiated by the US because of concerns from their agriculture sector over competitive advantages gained by Canada and Australia due to the Japan Australia Economic Partnership Agreement (JAEPA) and the CPTPP
In a USTR NTE report it was indicated that the US would be seeking a number of concession; some being, “the elimination of tariffs on beef and pork, and elimination Japan’s beef global safe guard” (Lighthizer, 2019). During the first quarter of the Japanese fiscal year 2017(April-June) US imports of frozen beef exceed the threshold under the safe guard and consequently beef from the United States were imposed with a 50 per cent tariff. Australia was however cleared from the imposition of Japan’s beef safeguard because of JAEPA.
The USTR NTE also cited barriers to market access for wheat, mainly the requirement for every wheat to be imported through the Grain Trade and Operations Division of MAFF’s Crop Production Bureau.
US – European Union Trade Agreement
Formal negotiations between the US and EU are have yet to begun. The question as to whether agriculture should be addressed in talks has been the primary disagreement. The US have stated the inclusion of agriculture in talk is one of its priority. The reason for is that the US has its objectives, which are targeted at reducing and removing agriculture tariffs and focusing on dealing with the technical barriers to trade that arise from EU regulatory requirements and policies.
According to USTR NTE report, negotiation targets include dealing with non-tariffs barriers which create obstacles for US diary exports. For example, pursuing a modernisation certification requirement into the EU and loosening administration measure at the border. The report also highlights an aim to ‘promote greater regulatory compatibility to reduce burdens associated with unnecessary differences in regulations and standards, including through regulatory cooperation where appropriate’. (Lighthizer, 2019)
In combination with non-tariffs barriers noted above with diary, the US is likely to address the imposed EU bans and restrictions on meat produced using hormones. This has long been a clash between US and EU following the EU’s decision to ban, inconsistent to WTO rules, the import of beef treated with hormones from the US. It has also been reported that the EU could grant the US “between 15,000 – 35,000 metric tons of its 45,000-metric-ton tariff-rate quota”. (ITS Global, 2019)
US – United Kingdom Trade Agreement
The UK and US have shown the desire to negotiate a bilateral FTA after Britain’s exit from the EU. US industry have highlighted a change in regulatory standards, particularly for meats and grains as area that should addressed.
US – Brazil Trade Agreement
While a bilateral trade agreement between the US and Brazil hasn’t been, a bilateral understanding has been reached where both countries have pledged to reduced trade barrier to encourage investment and innovation in a variety of key industries including agriculture.
Substantive outcomes from the ‘bilateral agreement’ includes Brazil agreeing to implement a TRQ allowing the importation of 750,000 tons of wheat at a zero rate for ‘non-Mercosur countries’ annually.
The US also agreed to examine the possibility of reopening the US market to fresh Brazilian beef (closed since June 2017).
US – Philippines Trade Agreement
The proposed bilateral FTA with Philippines has the potential to improve market access for US agriculture exports. The US are most likely to attempt to reduce the high tariffs imposed by the Philippines on agricultural products.
Currently speaking, tariffs imposed by Philippines on agricultural goods are high. For example, averaging over 20 per cent for meat products, up to 45 per cent and bound up to 100 per cent.
2. Implication for Australia’s Agriculture Exports
Appendix 5 indicates that Asia takes the majority of Australia agriculture trade Seven of the ten exports markets by value are Asian nations.
The following sections of the report is an assessment of the implication current trade policy action has on Australia’s agriculture sector.
Fresh/Chilled and Frozen Beef
Appendix 6 highlights that in 2018, Japan was Australia’s top export destination for beef. As of now Japan involvement in Trumps’ trade has been limited; they have only been subject to the Section 232 tariffs on steel and aluminium products. Japan have also not yet imposed retaliatory tariffs on US agriculture exports. The two are also currently in discussion of a future trade agreement.
Currently, Australian beef export have a tariffs advantage over their US counterparts in access to the Japanese market. Under the terms stated in the CPTPP, Australian beef is subjected to and average tariff of 26.6 per cent, depending the cut. Compared to the US rate of 38.5 per cent. In addition to the tariffs disadvantage US exporters other barriers including global safeguards. Despite this appendix 7 indicates that the US (26%) is only 6 per cent behind Australia (32%) in suppling beef to Japan. This means any improvement in US access negotiated as part of a potential US-Japan FTA would diminish Australia’s competitiveness in the Japanese market; in turn US beef exports would increase at the expense of Australia beef exports.
The trade of beef between the EU and US hasn’t been targeted by tariffs action as of now; however, they have been longstanding disputes on beef hormones, in combination with US continuous threat to impose tariffs on automobiles.
The EU deliberation of whether to allocate specific quota of US harmonic free beef would negatively impact Australia’s beef export. At stake is 35,000 metric tons of the 45,000 metrics tons’ tariff rate quotas which is shared with 5 countries, including Australia. If implemented it would essentially squeeze Australia’s beef exports out of the European market.
Appendix 6 showcases that the US is Australia second largest export destination for beef. Australian beef exporters also have preferential access, as of result of the Australia United States Free Trade Agreement (AUSFTA), compared to exporter from other countries without an FTA with the US. Currently speaking, Australia’s primary competitor in US beef market are Canada and Mexico, who according to appendix 8 export 18 and 11 per cent (in 2015) of beef to the US respectively.
Due to their closeness, settled logistic links and preferential market access under NAFTA, now potentially USCMA, it’s likely the Canada and Mexico would continue to strengthen their supplement of beef into the US market. Under the current trade agreement with the US, Canada and Mexico have unrestricted duty free access to the US market for beef products; unlike Australia who have a zero tariffs rate bounded by a quota of 428,214 tonnes under AUSFTA.
As of right now, Australia’s beef export haven’t been the target of President Trump tariffs. As stated in section 1.1 of the report this is most likely because Australia on of the few trading partners where the US maintains a trade a surplus. It’s also unlikely the US would attempt to disadvantage Australia’s beef export in other ways, due to Trump’s desire to diversify US supply sources; which would reduce reliance on USMCA partners, Canada and Mexico.
Any potential increase in market access for beef in the US market by a US-Brazil trade agreement would negatively impact Australia’s competitive position in the market. This is because a US-Brazil trade agreement would indicate another trading partner in proximity to the US creating greater competition and in turn potentially decreasing Australia’s beef exports.
2.2 Grains and Other Crops
Appendix 9 demonstrates the fact that currently the primary destination for Australian wheat is China, Indonesia, Japan, Malaysia, South Korea, Vietnam and Philippines. The only two countries that have been affected from current US trade policy, in appendix 9, are India and China.
As of 2017, “Indian importers have purchased 2.7 million tonnes of wheat from Australia, France and Ukraine” (The Economic Times, 2017). This is despite the fact Australia doesn’t have any FTA, neither does any other major wheat exporter, with India. They is however, a regional FTA being negotiated with ASEAN (Association of Southeast Asian Nations) countries, Australia, New Zealand, China, Korea and Japan, known as the Regional Economic Cooperation Partnership (RCEP).
In 2018, India imposed retaliatory tariffs of a further 5 per cent to import of a few US wheat products. The US haven’t reported any exports of wheat over the last 5 years to India; so, these tariffs are unlikely to create any market opportunities for Australian wheat exports.
In recent years China total import of wheat has decrease, failing by almost 45 per cent between 2013 and 2017 (ITS Global, 2019).During that same period however wheat sourced from exports has doubled and in turn has made Australia, China number one source of wheat. At the same the second most important source of wheat for China, the US, exports have fallen by 69 percent over 2013-2017.
Under CHAFTA Australian wheat does not receive preferential access and subject to the 65 per cent tariff rate.
As a response to the Section 301 tariffs imposed by the US, China imposed retaliatory tariffs of a diverse range of US wheat. This has created an advantage, momentary, for Australian wheat exports.
During bilateral trade discussions with the US, China have expressed an eagerness to boost import of agricultural products from America; This means it’s likely that tariffs imposed on US wheat would be removed and China would increase their purchase of US wheat. Such corporation could potentially see the demand for Australian wheat decrease, unless China imports wheat to 2013 peak levels.
The trade action taken by the US discussed in section 1 of the report creates considerable risk and opportunities for Australia’s diary exports.
Concentrated Milk and Cream Products
As Australia’s largest export market for concentrated milk and cream product, China, has been the primary target of the Trump’s administration trade policy actions and in turn have been directly impacted by the policies.
Due to the tariffs imposed by the US, China have also imposed retaliatory tariffs of 25 per cent on US concentrated milk and cream products. As of a result of Australia free trade agreement with China, Australia already had a tariffs advantage over US suppliers (prior to the imposition of the retaliatory tariff): in 2018 Australia export of concentrated milk and cream products to China were subject to a 6.7 per cent tariffs, compared to US suppliers who were subject to China’s MNF rate of 10 per cent. So, with the additionally 25 per cent imposed on US products, Australia advantage increase as the demand for US concentrated milk and cream products would decrease. Yet, New Zealand even holds a greater tariffs advantage, paying just 0.8 per cent and zero form 2019 onwards due to their bilateral trade deal with China.
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Essentially, all else being equal, the additional tariffs imposed on US concentrated milk and cream products have the potential to create market opportunities for Australian suppliers. However, they will be faced with fierce competitions from other suppliers also looking to take advantage of the same opportunities; Especially New Zealand, who as noted above have tariffs advantage over Australia, are determined to rebuild their exports to China to 2014 levels seen in appendix 10.
The recently concluded (but yet to enter into force) USMCA is expected to have a significant impact on Australian diary export because the US and Canada aren’t major export market and both economies diary are still relatively closed.
Australia is currently the largest producer of wools in terms of value and volume. “The major markets for Australian wool (HS Code 5101) are China (US$2.1 billion), Italy (US$174 million) and India (US$168
million). (ITS Global, 2019)
“Australia currently sells almost 80 per cent wool to China” (Mr McNaughton,2019).
China currently provides virtually duty free access on wool, under a large tariffs quota of 287,000 tonnes. The tariffs rate imposed within this quota is set at 1 per cent. Under CHAFTA, Australia also received an exclusive duty free quota of 33,075 tonnes of clean wool from January 2018.
The US levied a 10 per cent tariff on diverse range of wool and wool products; In retaliation China also levied 10 per cent tariff on wool and wool products. This trade war could have unintended consequences.
Despite the tariffs imposed it’s being reported that Chinese buyers are still buying are still buying US wool and simply absorbing the tariffs.
In this instance US trade policy is unlikely to directly impact Australia wool export; however, the trade war between the US-China could cause business and consumer confidence to disappeared and in turn could cause things like wool prices to decrease (appendix 11). As we currently already see the trade war has also lowered global economic growth which has and will continue to impact Australian industry.
- Department of Agriculture, 2017. Australian Government. [Online]
Available at: http://www.agriculture.gov.au/abares/news/media-releases/2017/snapshot-aus-ag-reveals-record-production-2016-17
[Accessed 28 August 2019].
- Greene, J. L., 2019. Congessional Research Service. [Online]
Available at: https://fas.org/sgp/crs/row/IF11149.pdf
[Accessed 30 August 2019].
- ITS Global, 2019. AgriFutures National Rural Issues. [Online]
Available at: https://www.agrifutures.com.au/wp-content/uploads/2019/05/19-023-1.pdf
[Accessed 28 August 2019].
- Lighthizer, R. E., 2019. Foreign Trade Barriers, Washington DC: United States Trade Representative.
- The Economic Times, 2017. The Economic TimesIndia imports 2.7 million tonnes wheat so far this fiscal. [Online]
Available at: https://economictimes.indiatimes.com/news/economy/agriculture/india-imports-2-7-million-tonnes-wheat-so-far-this-fiscal/articleshow/56597980.cms?from=mdr
[Accessed 31 August 2019].