1. NS3040 Summer Term 2018 U.S. Tariffs: Agricultural Costs
US-Actions-Raise-Agricultural-Costs, Oxford Analytica, July 4, 2018

2. Overview I
In June President Trump targeted Canada’s supply management system for dairy, poultry and eggs as an example of unfair restrictions on agricultural exports to that country
Meanwhile, Canada, Mexico, China and the EU, the largest US farm export markets are imposing retaliatory measures on key agricultural and food imports from the US in response to US tariffs on
Steel
Aluminum and
Chinese manufactured goods
On July 1 Canada imposed tariffs worth 12.8 billion dollars on several US export sectors, notably in agriculture.

3. Overview II Governments set agricultural policies to enable them to
Stabilize markets
Respond to negative impacts on their farming sectors and
Guarantee food security
Ironically the G7 communique
Underlined the importance of a rules-based international trading system and
Vowed that governments should strive to reduce tariff barriers, non-tariff barriers and subsidies
However in the near term the number of non-tariff barriers, domestic subsidies, and interventions is likely to increase across the world in response to US actions.

4. Recent Developments I
Agricultural markets and products have made substantial progress over past two decades
Trade has grown rapidly – about twice pace of total global trade since 2000
Demand is rising along with populations and incomes
Agricultural production exports and growth shifting to emerging economies, especially South America and southern, central and Southeast Asia
These trends, together with shocks, including climate events and government decisions are driving agricultural prices and influencing agricultural policy trends.
Despite progress at liberalization, agricultural trade and domestic support policies remain contentious

5. Recent Developments II

6. Recent Developments III
Multilateral negotiations have stalled in recent years, but most bilateral and regional trade agreements now include clauses that exceed commitments under the WTO in areas such as
Tariff cuts and
Agricultural market access concessions

7. Recent Developments IV
Still significant tariff and non-tariff barriers persist
Tariff rates on certain products are set at levels that effectively reduce or exclude imports
In case of tariff rate quotas, any imports above the agreed quota are charged at a higher rate to protect domestic producers.
High import tariffs on Canada’s supply-managed products a good example.
1993 Agreement on Agriculture obliged Canada’s supply-managed sectors to switch from a regime of controlling the number or mix of imports allowed to a tariff rate quota system
Example, taxing dairy products above a certain quota at 270%

8. Recent Developments V

9. Retaliatory Measures I
China, Canada, Mexico and EU are four largest markets for US farmers
Together account or just over half of the 140 billion dollars in agricultural products exported from US in 2017 as well as most of the growth in US export sales.
All four are imposing retaliatory tariffs on imports from the United States equivalent to the value of trade affected by the new US tariffs on imports of steel and aluminum.
US tariffs on Chinese manufacturing goods came into effect on July 6
China started its retaliatory tariffs on the same day

10. U.S. Agricultural Imports

11. U.S. Agricultural Exports

12. Retaliatory Measures II
The retaliatory measures target agricultural and food products from vulnerable Republican constituencies
Bourbon from Kentucky
Pork products, corn, soybeans and sorghum from Mid-West
Prepared foods from the northern states
Orange juice from Florida
Cheeses from Wisconsin
Fruits, nuts, rice and tobacco from southern states.

13. Retaliatory Measures III

14. Consequences I
If they take effect for a prolonged period, the retaliatory tariffs will have a number of negative impacts
Reduce international demand for US agricultural exports (which account for approximately one-third of domestic agricultural production) and erode trade balance in sector US has a large surplus
Depress prices for affected agricultural commodities and farm incomes across integrated North American markets. Fears of Chinese retaliation have already caused futures prices to fall sharply
Global market price volatility will increase

15. Consequences II
Competition within North America will also increase, although opportunities will be created for agricultural exporters outside the United States including producers from
Canada
Mexico
South America
Australia and
Asia
Tariffs will disrupt existing supply chains for food processing and agriculture-related industries
US manufacturers of agricultural equipment will be hit the hardest as steel and aluminum costs rise when customer demand falls

16. Scenarios I
The near-term risk is that even if all sides agree concessions to avoid disputes escalating and the costs of trade spiraling, the higher prices that consumers and businesses will face will discourage them from spending
As a result even if an agreement can eventually be reached between the US and its trading partners, medium-term global growth prospects could already be damaged

17. Scenarios II Several scenarios are possible
First scenario is that the economic damage to the US agricultural sector and resulting political reaction will put sufficient pressure on Trump administration to
Drop tariffs on steel, aluminum and Chinese imports and
Soften its demands with respect to Canada’s supply management system.
Signs this might be possible
Farmers in all three countries support existing NAFTA deal
If Trump administration can see that US exporters are making progress towards expanding the markets in which they can sell, tariffs and hardline demands may prove short lived.

18. Scenarios III
The second scenario sees a vicious spiral developing – the more likely scenario.
Here the US trade actions and retaliatory tariffs will
Encourage more restrictive agricultural trade practices and
More restrictive agricultural trade practices
U.S. administration’s “America First” trade actions and public comments about unfair practices on the part of its closest trading partners already
Causing international customers to look for sources of supply from outside the US
US actions are hardening government policy positions on agriculture and other trade issues.

19. Scenarios IV Several Actions
Trump’s post G7 comments induced Canada's parliament to pass a unanimous resolution in support of supply management
China was prepared to open its market to $70 billion worth of US agricultural and energy imports if the US did not impose threatened tariffs on certain Chinese manufactured goods – China has withdrawn this offer following the impositions of tariffs

20. Scenarios V Concessions could come eventually
However, the goalposts are changing regularly. All sides remain open to talks
Energy is one area in which US could find middle ground with both EU and China with its LNG development
EU wants to diversify its energy supply beyond Russia and the Middle East
China’s population and income levels are growing rapidly, requiring more energy

21. Assessment Predicting the timing of US policy changes is difficult.
In meantime the retaliatory measures will increase the likelihood of new discriminatory non-tariff barriers being imposed on agricultural trade
In emerging markets food security and price stability will become a major problem with
Market disruptions and
A spike in Chinese demand for agricultural goods and markets outside the US to replace the goods it previously imported from the U.S.
Could lead to
More producer subsidies
Market price supports and
Export restrictions