TRADE UPDATE

Food & Agriculture
February 1, 2022

By Michael Anderson, Vice President of Trade and Industry Affairs

HIGHLIGHTS

• USMCA: Senate Finance Committee Republicans expressed their opposition to the EV tax credit proposal in a “dear colleague” letter, highlighting that it “undermine[s] America’s trade interests,” violating U.S. trade commitments.
• U.S. – China: Senators Grassley and Ernst penned a letter requesting the Biden administration to continue building on progress made with China under the Phase One agreement and seriously consider U.S. application to join the CPTPP.
• U.S. – South Korea: Ambassador Tai and South Korean Minister Yeo Han-koo discussed the future of the KORUS FTA, global supply chain issues, Section 232 tariffs, and the Indo Pacific Economic Framework (IPEF) at a meeting in D.C. last week.
• U.S. – EU: The U.S. has begun to evaluate its options in implementing the recommendations of the WTO Dispute Settlement Body (DSB) a month after the DSB found the U.S. imposed illegal anti-subsidies duties on Spanish olives.
• Section 232: The U.S. and EU’s awaited Global Arrangement on Sustainable Steel and Aluminum “would favor keeping a small group” of participating countries “at least initially,” according to USTR General Counsel Greta Peisch and Director at European Commission Rupert Schlegelmilch.
• Section 301: An amendment to The America COMPETES Act, released by the House as a counter to USICA, would require an exemption process that’s “nearly identical” to the Senate’s USICA version of a product-exclusion process for Section 301 tariffs. The House is expected to vote on the Act this week.
• WTO : The WTO agricultural negotiating text remains a source of significant debate ahead of rescheduling the 12th Ministerial. The document, which highlights WTO members’ major agricultural trade concerns, remains a point of contention, as members continue to disagree on the text’s level of ambition regarding the issues.

“The Year of the Tiger commemorates courage, power, confidence and immense positive energy. These are qualities we at the WTO will need to deliver results…and to move ahead on WTO reform, agriculture, and other important issues.”

— WTO Director-General, Ngozi Okonjo-Iweala

USMCA

• The Biden administration’s proposed electrical vehicle (EV) tax credit, despite being stalled in the Senate along with the Build Back Better Act (BBBA), continues to spark critique from foreign and national officials. In a letter written by the Republicans on the Senate Finance Committee, fourteen Senators expressed their opposition to the EV tax credit proposal, emphasizing that it “undermine[s] America’s trade interests.” The letter goes on to explain, “No less than 25 Ambassadors have told Congress that those provisions violate U.S. trade obligations. At a time when America should be rallying its allies to confront China on trade policy, such provisions are needlessly driving a wedge between the United States and our allies by promoting Chinese-style industrial policy.”  The EV tax credits are part of BBBA, which passed the House in late 2021, and would provide up to $12,500 in tax credits for buying an electric vehicle, including $4,500 if a vehicle is assembled at U.S. plants with unionized labor and $500 if it has at least 50 percent domestic content and U.S.-made battery cells. Starting in 2027, credits would only be available for vehicles assembled in the United States.
• Mexico’s request for a USMCA dispute panel regarding the U.S. interpretation of USMCA’s automotive rules of origin is moving forward, with official support from Canada, which joined the request.  Last month Mexico said it would request a USMCA dispute settlement panel challenging the U.S. interpretation of the trade deal’s rules of origin for automobiles. Mexican officials indicted the action was necessary given earlier consultations failed to resolve the differences between the U.S. and Mexico.”
• The USMCA raises the regional content requirement for passenger vehicles to 75% from around 62% under the NAFTA. After a phase-in period that ends in 2023, only vehicles that meet the content requirements will have duty-free access to the United States. Mexico and the U.S. disagree on the treatment that can be given to certain materials or parts from outside the region in calculating regional content of vehicles. Canada earlier echoed similar concerns and may join Mexico in formally challenging U.S. application of auto rules of origin provisions under the USMCA.  This is the first dispute settlement case filed by Mexico under the USMCA.

China Trade

• Members of the U.S. House of Representatives released their highly anticipated, anti-China bill the America COMPETES Act, meant to act as an alternative to the Senate’s Innovation and Competition Act (USICA). The bill features the reversal of the raised de minimis threshold under the Trade Facilitation and Trade Enforcement Act (2015), strengthened antidumping and countervailing duty measures, a government screening process for outbound U.S. investments, as well as other anti-China provisions. “The America COMPETES Act reflects a whole-of-House effort, involving the deep expertise of Chairs, Members and staff across our committees to produce a historic bill that will be most effective at strengthening our competitiveness at home and abroad,” commented Speaker of the House Nancy Pelosi. The bill signals a hard stance on China and increased momentum within congress to step up U.S. action in response to the China’s harmful economic practices.
• The WTO arbitrator reached a decision on a U.S.-China countervailing dispute that dates back to 2012. The case ruling states the U.S. used “WTO-inconsistent methodologies” in countervailing duty proceedings regarding imports from China and thus, China is entitled to place retaliatory tariffs on $645 million of U.S. goods. USTR Spokesperson Adam Hodge called the decision “deeply disappointing,” going on to say that the ruling “reflects erroneous Appellate Body interpretations that damage the ability of WTO Members to defend our workers and businesses from China’s trade-distorting subsidies.”  Moreover, the edict, according to Spokesperson Hodge, “reinforces the need to reform WTO rules and dispute settlement.” It is unknown which U.S. goods will be hit by the retaliatory tariffs at this time.

• The Biden administration is seeking comment on its pending import restrictions on Xinjiang-connected goods that may come from forced labor. On January 24, 2022, the Biden administration, as part of the implementation of the newly signed Uyghur Forced Labor Prevention Act (UFLPA), issued a Federal Register notice, inviting public comments on “how best to ensure” that goods connected with forced labor in China are not imported into the United States. The public comment period — which runs through March 10, 2022 — is the first phase of a UFLPA implementation process that will occur over the next six months.
• Last week, China’s Commerce Ministry launched review of the existing anti-dumping and countervailing duties on U.S. dried distillers grains (DDGs). As part of the review, China will be accepting public feedback through Feb. 7, according to USDA’s Foreign Agricultural Service. China was the largest foreign market for DDGs from the U.S. before the Commerce Ministry levied the steep anti-dumping and countervailing duties. The U.S. exported 6.5 million metric tons of DDGs to China in 2015, worth $1.6 billion, according to the U.S. Grains Council. Additional details available in the USDA GAINS Report.
• Erik Hansen, Director of the USDA’s Agricultural Trade Office in Shanghai, brought attention to the Chinese e-commerce market as a promising trade avenue for U.S. agriculture. At a United States Heartland China Association event, Hansen spoke on the central role China plays in U.S. agricultural trade as well as the country’s growing dominance in the e-commerce landscape, notin,g “There is no question that China is the world’s biggest force when it comes to e-commerce.” As internet access increases across China, so too do Chinese virtual marketplaces. “It’s really important to kind of be knowledgeable … because there are tremendous opportunities for our exporters to do very, very well, I believe, once they can get a handle on the e-commerce ecosystem here in China,” said Hansen. According to a 2020 report by J.P. Morgan, China’s e-commerce market generates $1.7 trillion in sales a year.

Phase One Agreement

• President Biden commented recently on his desire to ease China tariffs but stopped short of any specifics. “I’d like to be able to be in a position where I could say they’re meeting their commitments, or more of their commitments, and be able to lift some of them,” Biden responded to a question on U.S.-China trade relations, “but we’re not there yet.” Commenting on China’s agriculture purchases under the Phase One trade deal, USDA Secretary Tom Vilsack said China is “about $13 billion short” on the commitments, and that Ambassador Katherine Tai will certainly press the Chinese officials to meet all of the commitments under the trade pact.
• In previous statements, Ambassador Tai ruled out pursuit of a “phase two” agreement, but she and other Biden administration trade officials said the U.S. will hold China accountable for meeting its commitments under the Phase One deal, though other specifics remain elusive. 

COVID-19

• The International Monetary Fund (IMF) forecasts economic growth of 4.4% this year, down from a prior estimate of 4.9%, according to an update of its World Economic Outlook. The IMF expects inflation of 3.9%, up from a previous 2.3% forecast, propelled by higher energy and food prices. Supply chain disruptions led to a lower growth estimate for the U.S., the world’s largest economy, to 4%, down from the 5.2% previously expected. For Germany, the biggest economy in the European Union, the IMF reduced its growth forecast to 3.8% from a prior 4.6%.

• The international trade deficit was $101.0 billion in December, up $2.9 billion (3.0%) from $98.0 billion in November, the Census Bureau reported last week. Exports of goods for December were $157.3 billion, $2.2 billion more than November exports. Imports of goods for December were $258.3 billion, $5.1 billion more than November imports. The December $101 billion merchandise trade deficit set another record as imports continued to rise, outpacing exports.

Section 232 Investigations

• At an Atlantic Council event on transatlantic trade, USTR’s General Counsel Greta Peisch and the European Commission’s Directorate General for Trade Director Rupert Schlegelmilch spoke on tariff-rate quotas (TRQs), Section 232 tariffs, and carbon trading. USTR’s Peisch emphasized the ambitious nature of the U.S. and EU’s goal of working toward a Global Arrangement on Sustainable Steel and Aluminum, noting the necessity for an interim agreement, which has taken form as a TRQ system. Peisch and Schlegelmilch agreed that the U.S. and EU would like to enlist a community of like-minded countries into the Global Arrangement but that the current conditions for crafting the agreement “would favor keeping a small group, at least initially.” Back in October of 2021, the U.S. and EU issued a joint statement announcing the U.S.’ easing of 232 duties and establishing the two entities’ intent to create a larger global agreement that “reflects a joint commitment to use trade policy to confront the threats of climate change and global market distortions.”

• The U.S. and U.K. have commenced discussions on global steel and aluminum overcapacity to find a mutual resolution for the Section 232 disputes. Secretary of Commerce Raimondo, Ambassador Tai, and U.K. Secretary of State for International Trade Trevelyan met virtually recently, discussing U.S. Section 232 tariffs on U.K. imports and U.K. retaliatory tariffs on U.S. exports to the U.K. “They agreed that, as the United States and the United Kingdom are close and long-standing partners, sharing similar national security interests as democratic market economies, they can partner to promote high standards, address shared concerns and hold countries that practice harmful market-distorting policies to account,” according to a U.S.-U.K. joint statement on the issue. Following the introduction of these tariffs, the EU and U.K. established retaliatory tariffs on several U.S. goods. In October of 2021, the U.S. and the EU reached an agreement, restoring U.S.-EU market-oriented conditions. Now, long-awaited talks with the U.K. have also begun.
• Two weeks earlier, the U.S. and Japan launched negotiations to resolve the tariff dispute over Section 232 steel and aluminum tariffs. The U.S.-Japan Business Council (USJBC) issued a statement welcoming the talks to address global steel and aluminum overcapacity and U.S. tariffs on Japan’s steel and aluminum imports. “The U.S.-Japan Business Council welcomes the agreement between the United States and Japan to start consultations on steel and aluminum overcapacity and urges the U.S. government to swiftly rescind the Section 232 tariffs on Japan.”

Section 301 Investigations

• The House anti-China bill, coined the America COMPETES Act, was released this week without mention of holding USTR to restart an expansive product-exclusion process for Section 301 tariffs on Chinese goods. This provision was, however, included in the Senate counterpart to the America COMPETES Act, known as USICA. Despite the lack of inclusion in the House bill, the Section 301 product-exclusion process provision has received bipartisan support in congress. A letter, written to Ambassador Tai, signed by both Republican and Democrat members of congress articulated, “We sincerely believe that such a process is a critical component of a worker-centric trade agenda, given that many Americans work in industries that are struggling to adjust their supply chains while remaining competitive with global competitors and adapting to the pandemic that continues to threaten their lives and livelihoods.”

• Over the weekend, Ways and Means member Rep. Stephanie Murphy (D-Fla.) introduced an amendment directing the Biden administration to set up an exemption process for Section 301 tariffs “nearly identical” to the one in the Senate version.
• As reported earlier, a bipartisan group of lawmakers requested the Biden administration to renew and expand the Section 301 tariff process to tackle supply chain issues and provide tariff relief as inflationary pressures in U.S. economy mount.  Reps. Ron Kind (D-WI), Darin LaHood (R-IL), Suzan DelBene (D-WA), and Jackie Walorski (R-IN) were joined by 137 other lawmakers on the letter. The letter referenced Trump-era tariffs on imports from China as harming many U.S. businesses struggling amid a pandemic that has affected supply chains around the world. However, the lawmakers emphasized their support for “tough and effective action to address China’s unfair trade practices.” The letter noted the restart of “a limited number of expired tariff exclusions is an important first step to help workers in industries that have limited, if any, alternative sourcing options as they continue to struggle through the pandemic and supply chain disruptions.”  “That process, however, is too narrow, opening only 1 percent of the original exclusion applications for reconsideration.” The letter calls on USTR to “expand its exclusion process as quickly as possible to give American workers, businesses, and families badly needed economic relief.”

Biden Transision

• No significant updates since Secretary Vilsack noted the Biden administration is vetting an unnamed person for the USDA’s Under Secretary for Trade position.  Vilsack emphasized the complexity of the process, stating the vetting process has been underway “for a considerable period of time,” owing to a “very complex set of business relations” of the person and they’re currently working through potential “ethics problems” with the person’s financial investments.
• Separately, Elaine Trevino, Biden’s nominee for the Chief Agriculture Negotiator role at USTR awaits scheduling of a Senate Finance confirmation hearing.  Additionally, the nominations of María Pagán and Christopher Wilson, for Deputy USTR roles, are presently blocked at the Senate Finance Committee by Senator Mike Lee (R-UT) over concerns with the Biden administration’s position on an IP waiver at the WTO regarding COVID vaccines.

Indo- Pacific Framework

• More details about the Indo-Pacific Economic Framework (IPEF) are slowly being released by the Biden administration. According to Inside U.S. Trade, members of the administration have started “reaching out to stakeholders and setting up a system of topic-specific ‘modules.’” These modules will outline the structure of the IPEF and cover the core objectives of the framework released by the White House in October of 2021: “trade facilitation, standards for the digital economy and technology, supply chain resiliency, decarbonization and clean energy, infrastructure, worker standards, and other areas of shared interest.”
• The Center for Strategic and International Studies (CSIS) released a report commenting on the structure and goals of the IPEF, acknowledging that “the IPEF holds promise, but it will need to be well engineered and managed if it is to advance U.S. economic and strategic interests, become a credible alternative to other regional initiatives, and be seen by allies and partners as a durable U.S. commitment to the region.” CSIS went on to emphasize the necessity of making the IPEF a comprehensive and binding agreement, citing the U.S.-Mexico-Canada Agreement as a key example and reference point for the new trade pact. In crafting the Indo-Pacific Economic Framework with “stronger rules and standards,” according to CSIS, “the Biden administration will need to offer tangible benefits to regional partners, especially less-developed ones.” When all is said and done, for the IPEF to be successful and accepted by partnering countries, the agreement will need to be firm and mutually beneficial.

U.S. – South Korea

• USTR Ambassador Katherine Tai and South Korea’s Minister for Trade Yeo Han-koo met recently to discuss the future of the U.S. – Korea Free Trade Agreement (KORUS FTA), which will celebrate its 10^th anniversary this year. During their talks, Ambassador Tai and Minister Yeo spoke on the importance of tackling “global supply chain issues” and using KORUS to enhance economic ties between the U.S. and South Korea. According to a USTR readout on the meeting, Ambassador Tai also “emphasized the challenges of global overcapacity driven by non-market practices and ongoing strong concerns of U.S. stakeholders, as the United States focuses on existing conversations to develop a global arrangement that addresses the carbon intensity of steel and aluminum trade.” South Korea remains a strong trading partner to the United States, although officials continue to express concerns about U.S. Section 232 steel and aluminum tariffs. Moving forward, USTR Tai and Minister Yeo will stay in close communication and deliberate the Indo-Pacific Economic Framework.

U.S. – EU

• A month after the receiving the WTO ruling that found the U.S. had imposed illegal anti-subsidies duties on Spanish olives, the U.S. has reaffirmed its commitment to abide by the WTO panel’s decision. A communication from the U.S. to members of the WTO Dispute Settlement Body (DSB) stated, “It is the intention of the United States to implement the recommendations and rulings of the DSB in these disputes in a manner that respects its WTO obligations, and we have begun to evaluate options for doing so. The United States will need a reasonable period of time in which to do this.” The U.S. is set to now lower tariffs on numerous Spanish olive producers, despite push back from the Olive Growers Council of California, which has argued the WTO decision provides EU olive producers with an unfair advantage.
• EU trade chief Valdis Dombrovskis warned his U.S. counterpart Katherine Tai during a recent call that proposed EV tax credits could “potentially discriminate between domestic and foreign car manufacturers.” Last fall the EU ambassador, Stavros Lambrinidis, in a letter to congressional leaders, argued that the proposed tax credit would violate U.S. international trade commitments.

U.S. – U.K. Trade

• A successful conclusion to the U.S. – UK steel and aluminum tariffs dispute may facilitate other bilateral trade policy conversations according to a senior representative of a BritishAmerican Business group. Emanuel Adam, executive director of BritishAmerican Business, noted the positive momentum created by commencing negotiations to Section 232 tariffs. In December, The BritishAmerican Business group released a proposal calling for the establishment of a “U.S.-UK Trade & Economic Council” to advance bilateral trade policy discussions, Adam says he hopes the countries soon could begin to revive.
• Negotiations on a bilateral free trade agreement with the United Kingdom are indefinitely on hold. According to a prior statement by Ambassador Katherine Tai, “The FTA is on pause, but the conversations have not paused.” Tai emphasized how the bilateral relationship needs realignment following Britain’s decision to leave the EU. Tai characterized the present bilateral trade relationship akin to the breakup of a personal relationship. “You know, maybe we all have this experience in life. When you have friends who are couples and they split up right? You have to realign your relationships a little bit,” she said. It is important for the United States to respect the “dynamics” around Brexit, she added.

WTO

• This week, WTO members discussed the fate of the organization’s draft agricultural negotiating text ahead of the 12^th Ministerial. The current major topics of agricultural trade negotiation include domestic support, market access, export competition, export restrictions, cotton, special safeguard mechanism and public stockholding for food security uses. Members disagree on many aspects of the current draft agricultural negotiating text written by Committee on Agriculture Chairperson Gloria Abraham Peralta. “This text reflects the reality of where we are today. It acknowledges the current state of play in members’ positions and the difficulties we face in building convergence or narrowing the gaps on some key issues,” said Ambassador Peralta. The U.S., among other countries, has highlighted the importance of transparency when engaging in negotiation on the topic of agricultural trade.
• Angela Ellard, Deputy Director-General to the WTO, addressed the topic of subsidy talks among WTO members at an Asia Society Policy Institute event. Responding to a question about Chinese industrial subsidies, Ellard noted that “there has been a lot of work” done to assess the situation and the effects of Chinese subsidies on the larger global economy. The Deputy Director-General continued by acknowledging a “real interest” among WTO members to dive further into the subsidies question, which has been brought up numerous times by the U.S. and like-minded countries in the context of WTO reform. At the same event, Ellard also discussed WTO progress that has been made on domestic regulation, gender, and the environment as well as ongoing work regarding intellectual property, the COVID-19 pandemic, fishery subsidies, and agriculture. “The postponement of MC-12 doesn’t mean the work has stopped,” commented Ellard, “in fact, we are doing everything possible to increase the momentum to get to the point where ministers can make decisions.”