TRADE UPDATE

Food & Agriculture
August 2, 2022

By Michael Anderson, Vice President of Trade and Industry Affairs

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HIGHLIGHTS

  • USMCA: USTR holds a public hearing this week regarding the interpretation of USMCA’s rules of origin for automotive vehicles. Mexico, later joined by Canada, requested a USMCA panel back in January after consultations last year failed to produce a resolution.
  • USMCA: A top Mexican trade official said Mexico seeks to hold frank and open discussions on its energy policies following USMCA complaints filed by the U.S. and Canada regarding. Mexican President Lopez Obrador dismissed the complaints as “political sanctions.”
  • IPEF: During the first Ministerial (virtual), the 14 IPEF members reaffirmed their ambitions to reach a “high-standard and inclusive” agreement, according to a USTR and Commerce Department joint statement. Ambassador Katherine Tai and Commerce Secretary Gina Raimondo noted the ministerial discussions were “positive and constructive.”
  • IPEF: During the virtual IPEF ministerial meeting focusing on trade, chaired by USTR Katherine Tai, multiple countries suggested that the IPEF include transition periods to ensure commitments can be met by all members. More details on the IPEF trade pillar and negotiation parameters are expected from the office of USTR over the coming weeks or next month.
  • WTO: The WTO’s Trade Monitoring Report observed that the global economic outlook has “deteriorated” amid Russia’s war in Ukraine and ongoing pandemic surges, although countries are showing restraint in imposing trade restrictive measures.

“I think the reason that [farmers] associate those three letters — FTA or free trade agreement – with market access is they look back at past performance and what that has done for them.” “In my role as chief agricultural negotiator, it will be to give them the kind of market access that they are expecting they need regardless of what the title at the top of the document says. I wouldn’t be interested in [this job] if I didn’t think I could make a difference for farmers.”

— Doug McKalip, nominee for USTR Chief Agricultural Negotiator, testifying at Senate Finance Committee confirmation hearing

USMCA

Public hearing on dispute over USTR’s interpretation of auto rules

  • A public hearing is taking place this week regarding the interpretation of USMCA’s rules of origin for automotive vehicles. Mexico requested a USMCA panel back in January after consultations last year failed to produce a resolution. Canada, as a third party, joins Mexico’s side.
    • The dispute concerns differing interpretations of methodologies for calculating vehicles’ regional value content (RVC). Under USMCA, vehicles and core parts of vehicles must contain enough (RVC) to satisfy the origination threshold. Mexico and Canada argue that if a core part qualifies that it originates in North America, it should count as 100% in RVC. The U.S. states asserts that any foreign content must be accounted for – even if it qualifies as originating in North America.
    • When Canada joined Mexico, Canadian Minister of International Trade, Export Promotion, Small Business and Economic Development Mary Ng said that “The Government of Canada will always stand up for our auto industry and workers as we build toward a sustainable economic recovery.”
    • In its comments in May, the U.S. wrote that, “If those flexibilities were ‘rolled-up’ into the overall RVC calculation, they would significantly reduce — rather than enhance — the actual regional value content of the vehicle. This would turn what was clearly intended to be an additional, heightened content requirement into an effective loophole.”

EV tax credits to expand to USMCA trade partners in proposed U.S. budget deal

  • During the unveiling of the “Inflation Reduction Act of 2022,”observers noted the budget bill includes electric vehicle tax credits that are not exclusive to the U.S. The “critical minerals credit” would apply if the electric vehicle battery is “extracted or processed in any country with which the United States has a free trade agreement in effect” or is “recycled in North America.” In addition, “the battery component credit” says “the value of the components contained in such battery that were manufactured or assembled in North America” must be at least 50%.
    • This version was revised from an earlier proposal in “Build Back Better” that mandated vehicles to be manufactured in the U.S., as opposed to North America.
    • The Senate is expected to vote on the budget deal this week.

Mexican officials open to constructive consultations over Mexico’s energy policy

Luz Maria De la Mora, Mexico’s Deputy Economy Minister
  • Mexico’s Deputy Economy Minister Luz Maria De la Mora said Mexico seeks to hold frank and open discussions on its energy policies with U.S. and Canadian officials following a USMCA request for consultations. “We want to take advantage of this consultation phase … to see how we can reach a mutually satisfactory solution through an open, frank and constructive dialogue, which will allow us to overcome these differences,” De la Mora told Reuters. De la Mora’s response to allegations by the U.S. and Canada that Mexico is violating its USMCA commitment, stands in stark contrast to the initial response by President Manuel Lopez Obrador who dismissed the complaint.
  • In his recurring morning press conference, López Obrador Thursday called the requests “political sanctions.”  He continued, “We’re going to defend ourselves,” contending the requests came from “created interests” that aim to “loot Mexico.”
  • As reported earlier, the U.S. announced it has requested consultations with Mexico over the country’s energy policies, due to several violations of USMCA. A senior USTR official told reporters that “Looking broadly at these issues, we’ve seen a move away from adherence to the USMCA commitments that they made just a few years ago, and so what we’re asking for is for a return back to compliance with those obligations.” One aspect of the complaint involves the Mexican government’s action of a 2021 amendment to the country’s electricity law that prioritizes government-run electricity plants over “cleaner,” privately run plants, according to USTR.
    • The U.S. and Mexico will enter consultations within 30 days of the U.S. request. If the consultations fail to produce a resolution within 75 days of the request, the U.S. can call for the establishment of a panel, as expressed in USMCA.

Indo- Pacific Economic Framework

IPEF members ask for transition periods to meet goals

  • The U.S. hosted a virtual ministerial with its 13 IPEF partners last week. USTR Tai chaired the meeting, which focused on the trade pillar. Multiple countries suggested that the Framework include transition periods to ensure commitments can be met by all members. Following the meeting, Malaysian Trade Minister Mohamed Azim Ali said in a Twitter thread that, “In order to advance our scoping exercise, Malaysia highlighted the imperative of the inclusion of transition periods and other reasonable flexibilities,” he continued. “This would pave commencement of the negotiations, thereby translating the Framework into actionable plan.” Malaysia claims they are not alone in seeking transition periods.

Civil society letter on IPEF Ministerial

  • As reported earlier, In advance of the meeting, over 100 civil society organizations sent a letter to  President Biden urging U.S. officials to increase transparency and public participation in the IPEF talks. “A transparent and participatory negotiating process is critical to ensuring the best possible outcomes from IPEF or any other future trade negotiations, such as the recently announced Americas Partnership for Economic Prosperity.” The organizations warned that the current closed, non-transparent negotiating process excludes public input, which was a sore point in the Trans-Pacific Partnership talks for many groups. The organizations further called on the administration to revamp the corporate advisory system with an on-the-record public process, including public hearings, to formulate U.S. positions and obtain comment on draft and final U.S. negotiating text, as well as consult and engage with Congress throughout the process.

U.S. – China

Chip Acts clears Senate while trade provisions postponed until Fall

Senator Charles Schumer (D-NY)
  • The Senate last week passed a slimmed down version of USICA and America Competes Act, known as the Chips Act of 2022 by a vote of 64-33. Senate leadership removed other trade provisions on import tariff relief, low-value import rules, supply chain improvements, forced labor, and other trade-related issues as conferees struggled to reconcile trade components of the House and Senate bills.
    • The Chip Act of 2022 now moves to the House, where it is expected to pass, though not without some debate by both parties. President Biden has expressed public support for the legislation, which contains deep incentives and technology-focused provisions and funding for increased domestic spending on research and development and production of semiconductors. Specifically, the measure includes $52 billion in funding for semiconductor manufacturing subsidies, tax credits for continued semiconductor production and funding for research at the National Science Foundation and Department of Energy.
    • During Senate passage of the Chips Act, Senator Schumer (D-NY) expressed optimism for continued work on the trade titles in the China competition bills after the August congressional recess. “Now of course, while this bill contains many critical investments in chips and scientific research, there are other major proposals from both sides that are still in the works within the conference committee,” he said. “That important work must continue, it will continue, and it is my intention to put the Conference Committee bill on the floor in September after their work is complete,” he continued. 

U.S. – India

Senators seek reductions on India’s high pecan tariffs

  • Eight senators led by Senator Raphael Warnock (D-GA) are urging USTR to confront India over its 100% tariff on pecans. “Demand for tree nuts continues to grow in India, and high tariffs mean that the pecan industry is not able to participate in this booming market,” the senators say in a letter to Ambassador Tai. “Expanding export market opportunities is key to the future of the pecan industry, and we are committed to working with you in support of this goal.” While India is a participating country in the U.S.-led Indo-Pacific Economic Framework, market access and tariff negotiations are excluded from IPEF.  Should USTR take up the request, tariff discussions would likely occur through other channels.
  • In 2019, in response to the U.S. revoking India’s trade privileges under the Generalized System of Preferences program, India raised tariffs on several U.S. agriculture products, including pecans. Notably, Georgia produces about one-third of all American pecans.

Section 301 & 232 Tariffs

Biden -Xi talks omit tariff topic

  • During President Joe Biden’s call with Chinese President Xi Jinping last week, he included concerns regarding Chinese trade practices but avoided tariff discussions, according to press reports.  Some groups had hoped President Biden would engage on potential removal of U.S. tariffs imposed on $370 billion worth of Chinese goods under former President Donald Trump during his call with President Xi.
    • “He did not discuss any potential [tariff] steps he might take with President Xi, and it would be wrong to believe that somehow a decision on any next steps was somehow waiting for this conversation,” the senior administration official said.

Biden administration wrestles with China tariff strategy

  • President Biden continues to weigh the administration’s options on section 301 tariffs, particularly those imposed on consumer goods, National Security Council Spokesman John Kirby said last week. “He wants a review of the tariffs that are in place to make sure that they are aligned with our strategic economic priorities, that they’re in our best national interests, and quite frankly, the best interests of the American people, but he hasn’t made a decision,” Mr. Kirby said.
    • The Trump-era tariffs, imposed in the beginning of 2018, are being called by the White House and some administration officials as being “poorly designed,” according to Mr. Kirby. In addition, the tariffs have not had the intended effect of curbing China’s harmful trade practices. Beijing failed to meet all the commitments it made under the so-called phase one trade deal. “So we thought that the previous administration’s approach to tariffs was a shoddy deal,” he stated.
  • Several reports have suggested President Biden’s revised approach to the inherited Trump-era section 301 tariffs on China could involve multiple components.
    • The administration could lift tariffs on a narrow set of consumer goods (e.g., bicycles) to ease inflationary pressures and respond to advocates for tariff removal.
    • Opening a new section 301 exclusion process, allowing stakeholders impacted to petition for tariff relief is also under consideration. Earlier this year USTR granted tariff relief for 352 types of imports from China, but industry groups and lawmakers have urged USTR to expand the exemptions. Ambassador Katherine Tai has consistently characterized the tariffs as leverage with China, which she said the U.S. must not forgo.
    • Additionally, USTR may initiate a new section 301 investigation around concerns with China’s subsidies of key competitive sectors, such as high-tech sectors (e.g., semiconductors and lithium batteries) that unfairly disadvantage foreign competition. A section 301 investigation could pave the way for new tariffs on such sectors in an effort to level the playing field for American firms to counter China’s subsidization practices.

Trade Trends

June goods trade deficit declines

  • The monthly advanced goods trade deficit declined 5.6%, from $104.0 billion in May to $98.2 billion in June, as U.S. imports continued to decline from previous highs. Exports of goods for June were $181.5 billion, $4.4 billion more than May exports. Imports of goods for June were $279.7 billion, $1.5 billion less than May imports.

Declining world trade volumes forecasted

  • The International Monetary Fund (IMF) forecasts that 2022 and 2023 global trade will likely slow by more than previously expected, according to new data released in its World Economic Outlook Update. The IMF observed the slowing trade volumes reflects the “decline in global demand and supply chain problems.”

U.S. – Japan

U.S.-Japan economic policy to prioritize supply chains

  • On Friday, the first ministerial meeting of the U.S.-Japan Economic Policy Consultive Committee occurred and at its conclusion produced the US.-Japan Economic Policy Consultive Committee 2022 Plan of Action. The joint statement says that “the U.S. and Japan pledge to support the openness of our agricultural supply chains” and “seek to advance efforts under the Japan-U.S. Commercial and Industrial Partnership and other frameworks to foster supply chain resilience in strategic sectors, including, in particular, semiconductors, batteries, and critical minerals.”
    • Other priorities include “working together to mitigate the effects of Russia’s aggression against Ukraine on markets for energy and food; countering economic coercion and unfair and opaque lending practices; and more effective and agile export controls on critical and emerging technologies.”

U.S. – Peru

U.S. extends restrictions on certain imported Peruvian lumber

  •  USTR announced the U.S. will block any timber imports from a Peruvian exporter that has illegally harvested lumber in its supply chain. Customs and Border Protection (CBP) – under the direction of the Office of USTR – will prohibit importation of timber imports from Inversiones WCA E.I.R.L. (WCA).  According to USTR, the Peruvian government still has not demonstrated that WCA has complied with all applicable laws, regulations and other measures of Peru governing the harvest of and trade in timber.
    • “The Biden Administration is committed to combatting illegal deforestation and keeping illegally harvested timber out of supply chains,” said Ambassador Katherine Tai. “Illegally harvested timber not only harms the environment and depletes natural resources but also disadvantages workers and businesses who use lawful and sustainable means to make their goods.”
    • In 2018, the U.S. initiated action on the illegal timber imports under the US-Peru Free Trade Agreement. The government of Peru subsequently investigated its domestic producers and determined that timber products contained in a shipment from WCA were not harvested and traded in compliance with applicable laws and regulations.

U.S. – Philippines

Philippines lowers tariffs on certain ag imports

Daniel Whitley, Administrator, USDA’s Foreign Agriculture Service
  • The Philippines announced lowering tariffs on corn, pork, poultry, dairy and potato products in a move to combat inflationary pressures on consumers, according to Daniel Whitley, the Agriculture Department’s Foreign Agricultural Service administrator, after leading a U.S. trade mission to the Philippines. Whitley noted that the Philippine government had lowered the tariffs “unilaterally” through the end of the year, which he contended “would be a good path for the Philippines.” Whitley added that other governments are reviewing their tariff and overall trade policies in light of supply chain and inflation issues. “We are in a different world.” Trade partners looking for a reliable supplier has become a paramount issue, he added. 
    • The Philippines is one of the largest customers for U.S. agriculture and food products. The Philippines has one of the fastest rates of people moving from poverty into the middle class, which increases the interest in eating protein, Whitley added.
    • Approximately 30 companies participated in the USDA trade mission and more than 500 meetings were held. Coinciding with the trade mission, USDA released a GAIN Report  on the retail food sector in the Philippines.

Biden Nominees

McKalip Senate hearing dominated by market access

  • The Senate Finance Committee hearing to consider Doug McKalip’s nomination as the next chief agricultural negotiator for the office of the USTR was on July 28th. A majority of his hearing was spent with McKalip arguing that he would be able to increase market access for U.S. farm goods without negotiating new free trade agreements. Sen. Lankford (R-OK) asked “How are you prepared to work with countries to be able to get new free trade agreements, because we need new places to sell pork,” adding that, “We need new places to send pork. We need new places to send beef. We need new places to send wheat. We need new places to send soybeans.”
  • McKalip responded to Republican senators’ calls by stating that “I think the reason that [farmers] associate those three letters — FTA or free trade agreement – with market access is they look back at past performance and what that has done for them.” He continued, “In my role as chief agricultural negotiator, it will be to give them the kind of market access that they are expecting they need regardless of what the title at the top of the document says. I wouldn’t be interested in [this job] if I didn’t think I could make a difference for farmers.”
    • On IPEF, McKalip said that he will push for trade to be “a much larger percentage of the results” compared to other pillars.

Supply Chains

Ocean freights costs continue to decline

  • Costs for primary U.S. and EU shipping routes with China continued a downward trajectory, according to latest data for containerized shipping rates, yet remain well above pre-pandemic levels.

WTO

WTO report cites deteriorating global economic conditions

  • In its recently released Trade Monitoring Report, the WTO observed that the global economic outlook has “deteriorated” amid Russia’s war in Ukraine and ongoing pandemic surges, although countries are showing restraint in imposing trade restrictive measures. The 70-page report, which covers the period October 2021 to May 2022, noted that the amount of trade covered by trade-facilitating measures over that period — more than $600 billion — far outweighed the amount of trade affected by restrictive measures (about $24 billion). Additionally, only 33 export restrictions related to the pandemic remain in place out of 122, the report says.
  • Food security, a paramount topic at the WTO’s 12th Ministerial, was also highlighted in the report, noting that “30 members and observers have introduced 55 measures prohibiting or restricting exports of food, feed, fuels and fertilizers. Of these, 15 measures have since been phased out, but 25 members and observers still have 40 measures in place.”
    • “Members understand the importance of keeping markets open and letting trade flow. At the same time, we should clearly not underestimate the risks generated by the pandemic, which is still very much with us, along with the more recent disruptions associated with the war in Ukraine and new diseases like monkey pox that are showing up and which we hope don’t also morph into pandemics,” WTO Director-General Ngozi Okonjo-Iweala said last week in conjunction with the report. “The global food security situation is a case in point, and we are keeping a watchful eye on this. High prices for food and fertilizer have been met with export restrictions, even if we know from experience that such measures can make price spikes much worse,” she continued.