TRADE UPDATE

Food & Agriculture
January 11, 2022

By Michael Anderson, Vice President of Trade and Industry Affairs

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HIGHLIGHTS

  • USMCA: The U.S. prevailed in a USMCA dispute on Canadian dairy restrictions under the first dispute panel under the new trade deal. Separately, Mexico will pursue a USMCA dispute settlement panel challenging the U.S. interpretation of the USMCA rules of origin for automobiles, Mexico’s first dispute panel request under the USMCA.
  • U.S. – China: The Biden administration will request additional purchase commitments from China as the expiration of the “phase one” bilateral trade deal approaches, according to a top USDA trade official.
  • Section 232: U.S. and foreign automakers are opposing potential imposition of tariffs on imports of neodymium magnets under national security concerns related to the a Section 232 investigation at the Department of Commerce. U.S. auto producers argue that imposing tariffs on neodymium magnets would increase the cost of domestic electric vehicles and only benefit non-U.S. producers.
  • Biden transition : Lisa Wang was officially sworn in last week as Commerce Assistant Secretary for Enforcement and Compliance, while the nominations of María Pagán’s and Christopher Wilson as Deputy U.S. Trade Representatives are presently blocked at the Senate Finance Committee by Sen. Mike Lee (R-UT) over objections to the Biden administration’s positions on intellectual property waivers at the WTO related to COVID-19 vaccines.

“For CPTPP countries, it is a win-win if South Korea joins. As more and more countries participate, the benefits get bigger and bigger due to the network effect. I understand that the CPTPP is a treaty for the future.”

— South Korean Trade Minister Yeo Han-Koo

China Trade

  • As reported earlier, China reportedly will approve the safety of more genetically modified (GMO) corn varieties produced by domestic companies, the agriculture ministry said at the end of December. The three new corn products are produced by China National Tree Seed Corp and China Agricultural University, Hangzhou Ruifeng Biotechnology, and Beijing Dabeinong Technology Group Co, according to a notice posted on the website of the Ministry of Agriculture and Rural Affairs

Phase One Agreement

Daniel Whitley, Administrator, Foreign Agriculture Service, USDA
  • A top USDA trade official said the Biden administration will request additional purchase commitments from China as the expiration of the “Phase One” bilateral trade deal approaches. Dan Whitley, Administrator for USDA’s Foreign Agricultural Service Administrator said the administration seeks to hold China fully accountable to meeting its purchase commitments under the Phase One deal. Whitley’s comments were given at American Farm Bureau Federation conference yesterday where he described the expiration of the trade pact as a “soft end.” Whitely expressed U.S. ambitions to put tariff and non-tariff barriers in China on the table in Phase One discussions with China. He noted that USDA also wants to work with USTR officials to add some agricultural inputs to the list of Chinese imports excluded from the Section 301 tariffs but did not specify which products.
  • While U.S. agriculture exports to China are forecast to hit a record $36 billion, China’s purchases of under the Phase One deal are expected to fall short of targets for 2020-2021 by several estimates.  In the case of agriculture purchases China presently lags the target purchase level by 18% based on trade data through November 2021. The Phase One Agreement, officially titled, the “Economic and Trade Agreement Between the United States of America and the People’s Republic of China: Phase One” went into effect on February 14, 2020. Under the agreement China agreed to expand purchases of certain U.S. goods and services by a combined $200 billion for the two-year period from January 1, 2020, through December 31, 2021, above the 2017 baseline levels. In year one of the agreement  (January – December 2020), China committed to purchase no less than an additional $162.1 billion of covered goods (agriculture, manufacturing, energy, and other products) from the U.S. relative to 2017 imports baselines.  In year two, (January – December 2021) China committed to purchase no less than an additional $98.2 billion of covered goods from the U.S. relative to these 2017 baselines.

USMCA

  • A USMCA dispute panel agreed with U.S. complaint that Canada’s administration of dairy tariff rate quotas (TRQs) are inconsistent with USMCA.  The U.S. complained that Canada violated the trade pact by reserving 80 to 85 percent of the dairy TRQs for its own domestic processors essentially allowing those processors the ability to determine which U.S. products are imported under the quota system instead of other market players, such as retailers and distributors.
  • USTR Katherine Tai lauded the decision in a statement, “Enforcing our trade agreements and making sure they benefit American workers and farmers is a top priority for the Biden-Harris Administration.” Tai continued,  “That is why this Administration filed the first-ever panel request under the USMCA.”  Tai further noted that, “This historic win will help eliminate unjustified trade restrictions on American dairy products and will ensure that the U.S. dairy industry and its workers get the full benefit of the USMCA to market and sell U.S. products to Canadian consumers.” Canada has until Feb. 3 to comply with the decision or face U.S. retaliation. However, senior USTR officials told reporters that retaliatory duties are “certainly not our focus right now” and they hope to reach an agreement with Canada to avoid that action.
  • Several U.S. lawmakers praised the U.S. trade victory and touted their support for deeper enforcement of trade deals. “Throughout House Democrats’ work to improve the USMCA, we knew that strong enforcement mechanisms would be key to the deal’s success. The improvements to the USMCA that we negotiated finally made the agreement enforceable by preventing a country from being able to block the formation of a dispute settlement panel,” House Ways & Means Committee Chair Richard Neal (D-MA) said in a statement. “[This] landmark victory illustrates how important enforcement of our trade agreements remains to ensure that America’s workers, farmers, and industries benefit from these deals.” Senate Finance Committee Chair Ron Wyden (D-OR) and Senate Agriculture Committee Chair Debbie Stabenow (D-MI) praised the dispute panel outcome as evidence of Democrats’ commitment to enforcement measures in the deal, “Democrats insisted on strong enforcement in this deal, so I am particularly pleased USTR was able to take effective action to ensure that our farmers received what we bargained for in USMCA,” Wyden said in a statement.
  • Canadian officials reacted to the panel’s decision by citing a silver lining in the panel report that the country’s dairy supply management system was upheld. In a joint statement,  Canada’s trade minister, Mary Ng, and agriculture minister, Marie-Claude Bibeau celebrated the panel’s decision that “expressly recognizes the legitimacy of Canada’s supply management system,” a long-standing program that the country uses to control its domestic milk production based on consumer demand and foreign imports. “Our government, as it proceeds with the next steps in the process, will continue to work closely with the Canadian dairy industry,” the two officials said. “Canada takes its commitments and obligations under international agreements seriously.”
  • In contrast, U.S. officials maintain the panel ruling was a clear-cut U.S. victory, overturning Canada’s “practice of reserving allocations to processors,” according to  a senior USTR official. “The panel has spoken very clearly to that, using the provision that we negotiated [in the USMCA] specifically to address that practice.”
  • Separately, Mexico will pursue a USMCA dispute settlement panel challenging the U.S. interpretation of the trade deal’s rules of origin for automobiles. The Mexican government said earlier consultations failed to resolve the differences in interpretation between the United States,  Mexico and Canada, moving the dispute to the next phase under USMCA. “The United States imposes requirements that are inconsistent with the USMCA on automotive producers in order to calculate the Regional Value Content of passenger vehicles, light trucks and their parts,” Mexico’s Ministry of Economy said in a statement.
  • 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. 
  •  A USTR spokesperson said, “We are reviewing Mexico’s request to establish a panel and remain confident that the U.S. interpretation of the automotive rules of origin is consistent with the USMCA. The U.S. is the destination for roughly 80% of Mexico’s vehicle exports. Mexico produced 3 million cars and light trucks in 2020, of which it exported close to 2.7 million, with both output and exports down 20% from the previous year due to reduced production pressured by the pandemic. This is the first dispute settlement case filed by Mexico under the USMCA., and the second under USMCA, the U.S. complaint on dairy TRQs being the first. A decision on the auto rules of origin complaint is expected sometime in 2022.
  • In addition to the dairy and auto rules of origin disputes, Canada launched a challenge against U.S. duties on Canadian softwood lumber, according to Canadian Trade Minister Mary Ng. Canada’s action responds to a U.S. Department of Commerce decision to double duties on imports to 17.9% following a “review of its anti-dumping and countervailing duty orders regarding certain softwood lumber products from Canada.” The U.S. accuses Canada of unfairly subsidizing and dumping softwood lumber, a large component of new home construction. Canada denies it is dumping the lumber. Canada is challenging the results of that review under chapter 10 of the USMCA trade deal, according to a statement from the federal government, in which Ng called the U.S. duties “unjustified” and said Canada was “extremely disappointed” in the Department of Commerce action.
Senator Joe Manchin (D-WV)
  • Trilateral tension on the proposed U.S. electrical vehicle (EV) tax credit abated  with the apparent demise of the Build Back Better (BBB) Act when Senator Joe Manchin (D-WV) in late December declined to support the overall legislation, which now appears stalled in the second session of the 117th Congress.  Mexico welcomed the developed as a “Christmas present” for Mexico and welcomed easing of North America trade tensions on the issue. Prior to the development, Canadian and Mexican were preparing to counter the potential EV tax credits, including retaliatory tariff measures. Mary Ng, Canadian Minister of International Trade and Tatiana Clouthier, Mexico’s Secretary of Economy met in December to discuss shared strategy for challenging the U.S. EV tax credits. Canadian officials wrote in an earlier letter sent to U.S. lawmakers that, “Canada will have no choice but to forcefully respond by launching a dispute settlement process under the USMCA and applying tariffs on American exports in a manner that will impact American workers in the auto sector and several other sectors of the U.S. economy.”
  • The EV tax credits are part of the Build Back Better Act, 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.

COVID-19

  • The November 2021 U.S. trade deficit surged 19.4% to a new record high, the Commerce Department reported last week. The combined goods and service trade deficit for the first 11 months of the year totaled $785 billion — already higher than the annual record of $763 billion set in 2006.
  • November exports were $224.2 billion, $0.4 billion more than October exports. November imports were $304.4 billion, $13.4 billion more than October imports. The November increase in the goods and services deficit reflected an increase in the goods deficit of $15.1 billion to $99.0 billion and an increase in the services surplus of $2.1 billion to $18.8 billion.
  • Food prices declined modestly in December but remain at historic highs according to the Food and Agriculture Organization (FAO).The FAO Food Price Index (FFPI) averaged 133.7 points in December 2021, down 1.2 points (0.9 percent) from November, but still up 25.1 points (23.1 percent) from December 2020. The FFPI jumped 28% in 2021, the highest level in a decade and signs of a return to more stable market conditions this year are slim, according to FAO.
  • Except for dairy, the values of all sub-indices encompassed by the FFPI registered monthly declines, with international prices of vegetable oils and sugar significantly falling month-on-month. For 2021 as whole, the FFPI averaged 125.7 points, as much as 27.6 points (28.1 percent) above the previous year with all sub-indices averaging sharply higher than in the previous year.

Section 232 Investigations

  • Several U.S. and foreign automakers are opposing potential imposition of tariffs on neodymium magnets, currently under consideration through a Section 232 investigation at the Department of Commerce.  The neodymium magnets are used in electric vehicles, as well as defense applications like fighter aircraft, naval ships and missile systems, and increasingly essential magnets are also components in wind turbines, computer hard drives, audio equipment and magnetic resonance imaging equipment.
  • Both the American Automotive Policy Council, which represents GM, Ford and Stellantis, and Autos Drive America, which represents foreign brand manufacturers, expressed caution that imposing tariffs on neodymium magnets and component materials would increase the cost of producing electric vehicles (EV) in the U.S. and  would benefit non-U.S. EV manufacturers and promote certain EV production outside the U.S. The EU, Japan, and Canada filed comments warning that Section 232 tariffs were unwarranted on national security grounds or that such action would not comport with the list of  exceptions to WTO rules and would strain trade relations with the United States.
  • The Commerce Department launched a Section 232 investigation into certain magnets last September as part of the Biden Administration’s 100-day supply chain review. Under Section 232, Commerce’s Bureau of Industry and Security (BIS) examines whether certain imports pose a risk to national security and whether the U.S. should impose tariffs or other import restrictions on the imports, in this case neodymium magnets to safeguard national security. The BIS has 270 days ending on June 18 to conclude its investigation, which is subsequently delivered with recommendations to President Biden. Under the Section 232 statute the President has 90 days to announce what policy action, if any, to pursue.

Section 301 Investigations

  • As noted earlier, several lawmakers are developing Dear Colleague Letter on Section 301 tariffs to USTR calling for the renewal and expansion of the Section 301 tariff exclusion process. According to sources, the draft letter highlights a long-held view by many lawmakers that the tariffs, imposed by the Trump administration on hundreds of billions of dollars’ worth of Chinese goods, are harming many U.S. businesses struggling amid a pandemic that has affected supply chains around the world. “We applaud your recent announcement of a new exclusion process and appreciate your willingness to consider additional exclusion processes,” the draft letter states, referring to USTR’s decision to restart the process of evaluating requests for products to be exempted from the duties. The letter notes 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 “immediately expand its exclusion process in order to support American workers, businesses, and our economic recovery.”

Biden Transision

  • Lisa Wang was officially sworn in last week as Commerce Assistant Secretary for Enforcement and Compliance. In her new post, Ms. Wang will oversee the Enforcement and Compliance division of the International Trade Administration (ITA). The division enforces U.S. antidumping and countervailing duty laws and compliance by U.S. trade partners to existing multilateral, regional and bilateral trade agreements. “No business should be undercut by unfair foreign trade practices, and I will make sure we counter with strong and effective trade enforcement that asserts America’s role in global trade,” Ms. Wang said in a statement. “When trade is fair, no one can beat the American worker.”
  • Earlier, Marisa Lago was sworn in as Under Secretary of Commerce for International Trade (ITA), under the Department of Commerce.  A former Obama administration Treasury appointee – Assistant Secretary for International Markets and Developments – Lago will lead a team of over 2,200 ITA employees across over 100 domestic offices and nearly 80 countries that represent 95 percent of global gross domestic product (GDP) and 97 percent of U.S. trade, according to a Department of Commerce press release.
  • The nominations of María Pagán’s and Christopher Wilson are presently blocked at the Senate Finance Committee by Sen. Mike Lee (R-UT). Lee said he did not object to Pagán and Wilson for their respective Deputy USTR roles, but to the administration’s positions she would represent in Geneva. “I have no concerns with this individual in particular; rather, with the authority that she might wield and the assurances I am wanting to receive from the administration on that authority, some assurance that this administration will not unilaterally wipe out intellectual property protections that have resulted in the vast majority of COVID–19 remedies,” Lee said. “All I want is some assurance from the administration that it is not going to wipe out intellectual property protections. That wouldn’t be right.”
  • Earlier this year the Biden administration announced it would support a waiver on trade in intellectual property (TRIPS) for vaccines. The proposal, put forward by India and South Africa in October 2020, would waive a swath of TRIPS provisions – including patents, trade secrets and copyright – for COVID-19-related diagnostics, therapeutics and vaccines. Much of the WTO membership supports a waiver, although not all support the expansive original version – including the U.S. The EU, U.K., Switzerland and some other countries hold strong objections stalling any agreement to date.

CPTPP

  • No significant updates on CPTPP since Ecuador announced filing its application with New Zealand, the CPTPP depository country.  Ecuador’s foreign ministry tweeted Dec. 17 that it has “submitted the letter of application for membership” in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. A spokesperson for New Zealand’s Ministry of Foreign Affairs and Trade said: “The next step in this process is for the CPTPP group as a whole, through the CPTPP Commission, to decide whether to commence accession processes with Ecuador.”  Ecuador joins a growing list of countries seeking CPTPP membership in the past several months, including the U.K., China, Taiwan, and South Korea. Ecuador is the first Latin American nation to apply for membership since CPTPP’s inception. If successful, Ecuador would join Mexico, Chile and Peru, the other Latin American countries and part of the original 11 signatories to the trade pact.

Indo- Pacific Framework

Chris Coons, U.S. Senator (D-DE)
  • Sen. Chris Coons (D-CA) expressed his support for the Indo-Pacific Economic Framework as vehicle to address climate change, deepen U.S. engagement in the region, and potentially a step to a broad trade arrangement. “I think we are gradually moving towards a place where there is more and more openness towards recognizing the urgency on climate change in both parties,” Coons remarked according to Inside U.S. Trade. Senator Coons focused his comments on a sweeping agreement on climate change within the Biden administration’s proposed Indo-Pacific Economic Framework, but noted a trade agreement could follow, despite the expected challenges. “Exactly how this will take place, how we will get bipartisan consensus in the Senate on moving forward in a sort of next regional trade agreement? It’s going to be hard,” Coons noted. “But if you don’t begin by saying there’s an interest in doing it then there may be an inclination to dismiss the concept altogether as politically impossible. I don’t think that’s the case.” “I think this is something that actually really could succeed,” Coons said.  
  • Senator Coons acknowledged the blueprint a for a trade agreement in the region that adequately addresses climate change remains unclear “I have had positive constructive conversations with people across the administration about the significance about re-engaging around trade,” he said. Coons acknowledged the Biden administration is resolutely focused on the domestic economy, the global pandemic,  and several foreign policy matters pushing attention on new trade agreements down the policy priority ladder.  Coons concluded, “So that’s not “no’” on trade deals. “The question is, is there the bandwidth and the bipartisan support for making it ‘yes,’ and I’m continuing to work on that.”
  • The Biden administration has consistently declined requests to revisit U.S. CPTPP engagement. Rather, it will forge an “Indo-Pacific economic framework” focusing on the digital economy, supply chains and climate change, among other areas. Commerce Secretary Gina Raimondo characterized the framework as a “coalition of democracies” that she says the U.S. plans to formally launch in early 2022. The U.S. “wants to and will play a much greater role in the economies of the entire Indo-Pacific region,” Raimondo said.

U.S. – EU

  • Following the WTO ruling that found the U.S. had imposed illegal anti-subsidies duties on Spanish olives, the Biden administration said it will not appeal the ruling. The U.S. will now role back its tariffs on various Spanish olive producers, with some tariffs as high as 27%. The move helps both the U.S. and EU avoid a potentially long legal fight after a year of cooperation in trade between the two. The EU had previously pledged to use new trade defense tools against any country that appealed a WTO ruling. The Olive Growers of California had called on the U.S. to appeal the WTO ruling, citing the “enormous olive subsidies” that the EU provides as harming U.S. business.

U.S. – U.K. Trade

  • No significant updates on potential restart of negotiations on a bilateral free trade agreement with the United Kingdom. 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

  • Rescheduling of the postponed WTO’s 12th Ministerial (MC12) in 2022 remains in limbo as WTO ministers are still assessing the best opportunity for rescheduling. Despite the uncertainty of rescheduling MC12, Members agreed to push forward on outcomes for several key priorities, including a proposed IP waiver, harmful fishery subsidies, and agriculture. According to WTO officials the chairs of ongoing negotiations at the time said they would continue with meetings going forward. 
  • Last November the WTO’s General Council agreed to “postpone the 12th Ministerial Conference (MC12) after an outbreak of a particularly transmissible strain of the COVID-19 virus led several governments to impose travel restrictions that would have prevented many ministers from reaching Geneva. MC12 was due to start on 30 November 2021 and run until 3 December 2021.”  In the announcement the WTO noted that, “No date has been set for the rescheduling of the Ministerial Conference. This marks the second time that the pandemic has forced a postponement of MC12. The meeting was originally due to take place in June 2020 in Nur-Sultan, Kazakhstan.”

Ag Economy Barometer

  • The Ag Economy Barometer rebounded modestly in December to a reading of 125 from 116 in November,  reversing several months of decline. The 9-point rise in the barometer is attributable mostly to an improved perspective on current conditions in the agricultural sector, mainly increased positive sentiment on the financial performance of farming operations. Farmers, however, maintain deep concerns with rising input costs with 47% of producers reporting that input costs are the top concern in 2022 and nearly 40% of respondents indicated they expect farm input prices to rise by more than 30% in 2022 compared to 2021. Supply chain issues also weigh heavily on famer sentiment as 45% of respondents indicated tight farm machinery inventories were adversely impacting potential farm equipment purchases.