TRADE UPDATE

Food & Agriculture
January 4, 2022

By Michael Anderson, Vice President of Trade and Industry Affairs

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HIGHLIGHTS

  • USMCA: Canada launched a challenge against U.S. duties on Canadian softwood lumber under the USMCA, according to Canadian Trade Minister Mary Ng. Canada and Mexico are also jointly pursuing challenges to U.S. interpretation of USMCA’s auto rules-of-origin. Canadian and Mexican officials are also preparing to counter the proposed U.S. electrical vehicle (EV) tax credits, including possibly retaliatory tariffs.
  • U.S. – China: China’s new food regulations (e.g. Decrees 248 and 249) went into effecting over the weekend despite prior calls from the U.S. and other countries for a 18-month delay. The new laws require sweeping new registration, inspection and labeling requirements food imports.
  • Section 301: Several House of Representatives are leading a letter on Section 301 tariffs to USTR calling for the renewal and expansion of the Section 301 tariff exclusion process.
  • Section 232: President Biden issued two proclamations – Adjusting Imports of Steel into the United States and Adjusting Imports of Aluminum into the United States formalizing the U.S.-EU agreement on the removal of Section 232 duties on steel and aluminum imports announced last November. The proclamations officially implements a tariff-rate quota (TRQ) program on EU exports through 2023.
  • RCEP : The new year ushered in the largest multilateral global trade agreement, the Regional Comprehensive Economic Partnership (RCEP), effective January 1st, covering 30% of the world’s population, and about 30% of global GDP. RCEP member countries are Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Republic of Korea, Singapore, Thailand, and Vietnam.
  • CPTPP : The list of countries pursuing CPTPP membership just got longer as Ecuador said it has filed 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.

“In the next year, we will continue to put workers, small business owners, farmers and producers, and entrepreneurs at the center of our work. We will protect the dignity of work and make sure everyone is treated with respect no matter where they live. We will fight for increased labor standards and build diverse coalitions of like-minded allies to achieve our shared goals.”

— U.S. Trade Representative Katherine Tai, twitter New Year’s Eve message

China Trade

Phase One Agreement

  • The year-end trade data for purchase commitments related to the China Phase One agreement will be released later this month raising expectations the Biden administration may comment on the fate of the agreement going forward.  While China will fall short of meeting its purchase commitments based on analysis through November 2021, especially in the areas of energy and manufactured goods, several observers note that both countries have an interest in building off the elevated level of bilateral trade, whether formally or informally.  Some observers suggest one outcome is an extension of time to meet the  purchase commitments because of supply chain disruptions or an announcement of some new Chinese commitment.  Others suggest China will not feel compelled to pursue a continuation of the purchase commitments and have adjusted to the nearly $350 billion in U.S. tariffs on Chinese goods imposed under the Trump administration.
  • 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

Mary Ng, Canadian Trade Minister
  • On December 21, Canada launched a challenge against U.S. duties on Canadian softwood lumber under the USMCA, 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. 
  • Separately, Canada signaled its intention to join Mexico to formally dispute U.S. application of auto rules of origin provisions in in the USMCA.  Mexico launched USMCA consultations on the issue last August and recently confirmed Mexico will likely request a formal dispute panel. Luz María de la Mora Sánchez, under secretary for foreign trade in Mexico’s Economy Secretariat said that Mexico was likely to request a dispute panel to settle the disagreement. “We are compiling all of the information that we need and trying to build a very strong case,” she said.
  • A Canadian embassy official confirmed that USMCA consultations “regarding the application and interpretation of certain elements of the rules of origin that apply to motor vehicles” under the agreement had “failed to produce a resolution” and that Mexico and Canada “are considering next steps, which could include a request for the establishment of a dispute settlement panel” under Chapter 31 of the deal, according to Inside U.S. Trade.  “Canada will continue to closely monitor developments and defend the interests of the Canadian automotive sector,” the spokesperson added. 
  • Mexico and Canada have disputed the U.S. interpretation of calculating the regional value content for vehicle production under the USMCA. Mexico maintains that once component auto parts qualify as originating, they should count as 100 percent originating in the calculation for a vehicle as a whole. But the U.S., according to Mexico, maintains that any foreign content in core parts – even if they qualify as originating – must be factored into the regional value content calculation for the vehicle overall. 
  • Adding to USMCA implementation issues, Canadian and Mexican are preparing to counter the proposed U.S. electrical vehicle (EV) tax credits. Mary Ng, Canadian Minister of International Trade and Tatiana Clouthier, Mexico’s Secretary of Economy recently met to discuss the USMCA and a shared strategy for challenging the U.S. EV tax credits. According to reports, “Minister Ng reiterated that she has deep concerns about the proposed electric vehicle provisions and highlighted the steps that Canada has taken to defend its auto industry and workers, including outlining retaliatory options should the United States proceed with discriminatory measures.” Ng noted Canada’s determination to work with Mexico to address the U.S. “reinterpretation” of USMCA rules of origin for autos, including possible dispute settlement consultations.
  • Tensions on the U.S. EV tax were elevated last month as Canada joined Mexico in threatening retaliatory tariffs under USMCA should Congress pass legislation regarding tax incentives for U.S. EV production. Canada and Mexico assert the EV tax credits violate the USMCA and Canada would launch dispute settlement proceedings under the agreement. Canadian officials wrote in a letter sent to U.S. lawmakers. “In that regard, 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 last month but is stalled in in the Senate. Provisions in the bill 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. However, the future of the Build Back Better Act has been put into question following Senator Machin’s (D-WV) public disagreement with the bill. The bill would need his vote for it to pass the Senate.

COVID-19

  • The advance international trade deficit in goods increased 17.5% to $97.8 billion in November from $83.2 billion in October as exports decreased and imports increased. Exports of goods for November were $154.7 billion, $3.3 billion less than October exports. Imports of goods for November were $252.4 billion, $11.3 billion more than October imports.
  • The U.S. current-account deficit rose by $16.5 billion, or 8.3 percent, to $214.8 billion in the third quarter of 2021, the Commerce Department reported. The revised second-quarter deficit was $198.3 billion. The third-quarter deficit was 3.7 percent of current-dollar gross domestic product, up from 3.5 percent in the second quarter. The $16.5 billion widening of the current-account deficit in the third quarter reflected a reduced surplus on services and expanded deficits on secondary income and on goods that were partly offset by an expanded surplus on primary income. The current account is the broadest measure of trade and includes trade in goods, services, and transfer payments. The current account also reveals whether a country is a net lender or debtor. The current account gap represented 3.7% of gross domestic product last quarter, up from 3.5% in the July-September quarter,  the largest percentage since 2008.
  • According to Sea-Intelligence, the port container logjam is likely to continue for some time.  “Congestion issues are worsening in Europe and are sustained at a historically high level in North America, with no indication of an improvement. In terms of intermodal congestion, this continues to get worse in North America, and in Europe there are also recent signs of a slightly worsening of the situation. As we are heading into the pre-Chinese New Year rush over the next six weeks, it is very likely that this condition will get worse before it gets better,” the group reported.

Section 232 Investigations

  • President Joseph Biden issued two proclamations – Adjusting Imports of Steel into the United States and Adjusting Imports of Aluminum into the United States – formalizing U.S.-EU agreement on the removal of Section 232 duties on steel and aluminum imports announced last November. The proclamations officially implement a tariff-rate quota (TRQ) system that will restrict the quantity of steel and aluminum articles imported into the United States from the EU. The approved aggregate TRQ volume for steel articles is 3.3 million metric tons annually;  and TRQ volume for aluminum articles is 18,000 metric tons of unwrought aluminum and 366,040 metric tons of semi-finished wrought aluminum.  The TRQs expire on December 23, 2023.
  • In the proclamations, the White House noted that:
    • “The United States has successfully concluded discussions with the EU [European Union] on behalf of its member countries on satisfactory alternative means to address the threatened impairment of the national security posed by [steel and aluminum] articles imports from the EU.  The United States and the EU have agreed to expand coordination involving trade remedies and customs matters, monitor bilateral steel and aluminum trade, cooperate on addressing non-market excess capacity, and annually review their arrangement for alternative means and their ongoing cooperation.”
  • In early 2022 the U.K. and U.S. plan to resolve the steel and aluminum dispute. Commerce Secretary Raimondo and U.K. International Trade Secretary Anne-Marie Trevelyan, according to a Department of Commerce readout, discussed “finding a path early in the new year for both governments to engage expeditiously in consultations on steel and aluminum, with a view to combating global excess capacity and addressing outstanding concerns on U.S. tariffs and UK countermeasures.” As part of the renewed push to finalize discussions on the tariffs, Trevelyan invited Raimondo to London in order to “make progress on the issue,” though Trevelyan noted the final discussions had yet to begin.

Section 301 Investigations

Congresswoman Jackie Walorski (R-IN)
  • Representatives Ron Kind (D-WI), Jackie Walorski (R-IN), Suzan DelBene (D-WA) and Darin LaHood (R-IL) are leading a House Dear Colleague Letter on Section 301 tariffs to USTR calling for the renewal and expansion of the Section 301 tariff exclusion process.  According to a congressional source, the letter coordinators are seeking at least 60 signatures and aim to send the letter in early January to Ambassador Katherine Tai. 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.”
  • Canada reportedly is pushing through with passing a digital service tax (DST) that may elevate U.S. – Canada trade tensions. This tax, separate from the deal being made between the U.S. and multiple countries, would be implemented in 2024 and be retroactive back to 2022. Observers note that the unilateral tax would only become effective if the OECD multilateral tax of 15% is not implemented by 2024. “I think the U.S. would view this as a step backwards,” said Maryscott Greenwood, CEO of the Canadian American Business Council. “I also think it comes at a fairly precarious time in the bilateral relationship.” The Canadian government says that this measure is merely a backstop, and that the government still sees the multilateral tax deal as the priority.

Biden Transision

  • Last Wednesday, 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. She began her career as a law clerk for a U.S. Circuit Court of Appeals judge and later served as the Director of the Boston Redevelopment Authority and Chief Economic Development Officer for the City of Boston, President and CEO of the Empire State Development Corporation, Director of the Office of International Affairs for the U.S. Securities and Exchange Commission, and Global Head of Compliance for a major investment bank.
  • As noted earlier, María Pagán’s nomination as Deputy USTR and U.S. ambassador to the WTO was blocked in late December by Sen. Mike Lee (R-UT). Lee said he did not object to Pagán as WTO ambassador, 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 last week. “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. They know it is not right,” Lee said. “They give me those assurances, we can move on.”
  • 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.
  • With the Senate returning this week and a full legislative agenda, Senate confirmation of Christopher Wilson, Deputy USTR for Intellectual Property, along with the confirmation hearing for Elaine Trevino, Biden’s nominee for Chief Agriculture Negotiator at USTR remain in limbo.

RCEP

  • The new year ushered in the largest multilateral global trade agreement, the Regional Comprehensive Economic Partnership (RCEP), which went into effect on Jan 1st.  The fifteen-member country agreement covers 2.3 billion people or 30% of the world’s population, encompasses about 30% of global GDP, accounts for $12.7 trillion in trade, over a quarter of global trade in goods and services, and 31% of global foreign direct investment inflows (FDI). More than 90 percent of goods trade between member countries will eventually enjoy zero tariffs. Those include immediate reductions of tariffs to zero and cutting of tariffs to zero gradually in 10 years. RCEP members are  Australia, Brunei Darussalam, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines , Singapore, South Korea, Thailand and Vietnam.
  • China issued RCEP certificates of origin signaling confidence that countries are moving forward with trade liberalization and immediately foster deeper regional integration under the agreement. The China Council for the Promotion of International Trade (CCPIT), China’s foreign trade and investment promotion agency, issued RCEP certificates of origin for 69 Chinese enterprises nationwide on Jan 1, 2022.  The certificates afford preferential tariffs to entities exporting goods to RCEP member countries. Certificate coverage includes exports of mechanical and electrical products, textiles and chemical products, valued at $12 million, and the RCEP certificates of origin are expected to help reduce tariffs for the related Chinese enterprises by $180,000, CCPIT said.  Currently, Singapore, Thailand, Japan, New Zealand and Australia have adopted electric issuance of RCEP certificates of origin.

CPTPP

Guillermo Lasso, Ecuadorian President
  • The line of countries joining CPTPP just got longer as Ecuador said it has filed 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, under its new President Guillermo Lasso, continues to pursue market opening reforms and seeks to diversify its economy through exports, reducing its reliance on oil, its leading export, according to reports.  In the fall of 2021, Ecuadorian President Lasso said he wanted to expand trade with top economies. “Our aim is very clear: signing free trade agreements with at least the world’s 10 largest economies,” Lasso said. “This includes the United States, China, Japan, South Korea and also the Euro-Asia group.”  
  • While Ecuador may face hurdles in meeting CPTPP’s stringent market liberalization requirements, it joins a parade 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

  • Several trade observers are supportive of the Biden Administration’s deeper engagement in Asia yet are concerned whether the Indo-Pacific Framework or similar approach will deliver equally import results for U.S. industries as formal free trade agreements One observer noted that Secretary Raimondo, Secretary Blinken, and Amb. Tai, leading the efforts on U.S. Indo-Pacific policy, are “acutely aware of the need” for the U.S. to elevate its economic engagement in the region and  several Asian trade partners would welcome such U.S. actions. “But the preferences of most of those partners is that we do so through trade agreements,” said Bonnie Glaser, the director of the Asia program at the German Marshall Fund.
  • “There’s an appetite, there’s interest, there’s desire,” she said. “They want to understand what the realm of the possible is and then where they can work with the U.S. But there is concern about the U.S. not having a really strong trade agenda.”  Other observers listed several pathways for deeper U.S. economic and trade engagement in the region in 2022, including through cooperation with partners on semiconductor supply chains and sustainability as well as engagement with Association of Southeast Asian Nation (ASEAN) members and the Asia-Pacific Economic Cooperation (APEC) forum.
  • Commerce Secretary Raimondo recently met virtually with Korea’s Minister of Trade, Industry, and Energy Moon Sung Wook to discuss a joint goal of “developing an economic framework that is both inclusive and focused on strengthening the economic competitiveness of like-minded partners across the region,” according to Commerce.  Separately, Raimondo “welcomed” feedback on the framework from Singapore’s Minister for Communications and Information Josephine Teo, Commerce said in a separate readout. The meetings follow recent trips to Asia by both Raimondo and Amb. Katherine Tai to build support and flesh out details for the Biden administration announced plans to launch a new Indo-Pacific economic framework.
  • Industry stakeholders and business groups are eager for more specific details on the framework and how the administration plans to counter the declining U.S. influence and market access in the region having firmly rejected calls re-engaging in CPTPP.  In a recent visit to Indonesia, Secretary of State Anthony Blinken laid out five U.S. goals void of specifics and details:
    • advancing a free and open Indo-Pacific in which people, countries and the region will choose their own paths and goods, ideas and people will flow freely;
    • stronger U.S. connections within the region, including with the Association of Southeast Asian Nations (ASEAN);
    • promoting broad-based prosperity, including through an economic framework with the region that will focus on shaping the rules of the growing digital economy;
    • helping to build a more resilient region by cooperating on the continued global pandemic and the impacts of climate change; and
    • bolstering security in the region.
  • 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 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 recent 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.

U.S. – Japan Trade

Hayashi Yoshimasa, Japan’s Foreign Affairs Minister
  • In late December, U.S. Trade Representative Sarah Bianchi met virtually with Japanese Foreign Affairs Minister Hayashi Yoshimasa to continue consultations over Japan’s beef safeguard, which the U.S. wants Tokyo to raise. The limited beef safeguard, which Japan implemented following the limited U.S.-Japan trade agreement, safeguard trigger that increases tariffs on U.S. beef exports if they exceeded a certain amount. If the safeguard is invoked twice in a three-year span, the deal says the U.S. and Japan “shall enter into consultations to adjust the applicable safeguard trigger levels of that safeguard measure to higher levels.” The current trigger import volume is 242,000 metric tons, which when reached would raise the tariff on U.S. beef exports from 25.8 percent to 38.5 percent. Under the agreement, Japanese beef tariffs are scheduled to go down to 9 percent over the next 15 years.

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 planned for the weekend. However, the postponement raises practical questions regarding the momentum and pressure to achieve compromises and resolves differences on agriculture negotiations, harmful fishing subsidies, and talks on a proposed waiver of some elements of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) or COVID-19-related products, major agenda items for MC12. In the case of agriculture negotiations, for example, a sharp divide remains on the special and differential treatment. domestic support, market access and transparency, the core issues of the Cairns Group, U.S. and EU on the one side, and supporters of a permanent solution for public stock holding programs, the special and safeguard mechanism for developing countries and demands for addressing the historical asymmetries on the domestic support, on the other.
  • Last month a group of senators transmitted a letter to Ambassador Katherine Tai and USDA Secretary Tom Vilsack requesting the administration pursue a WTO case regarding India’s domestic support for rice and wheat production. The U.S. has previously highlighted India’s non-compliance through counter-notifications at the WTO Committee on Agriculture. The Senators wrote, “American rice and wheat producers are operating at a clear disadvantage compared to their competitors, primarily from India, where the government is subsidizing more than half of the value of production for rice and wheat, instead of the 10 percent allowable under [WTO] rules.”
  • Under WTO developing country provision India is allowed to subsidize its commodities up to 10 percent of the value of production. The U.S. has alleged in counter-notifications at the WTO  that India’s domestic support programs regularly exceed that value for a number of commodities. The Senators noted that, “India has raised support prices multiple times since the counter-notifications were first submitted.” “Additionally, in October, India announced they will provide an additional $3.8 billion to fertilizer companies as compensation for reduced prices of agricultural inputs to shield their rice and wheat growers from rising input costs.”