TRADE UPDATE

Food & Agriculture
December 14, 2021

By Michael Anderson, Vice President of Trade and Industry Affairs

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HIGHLIGHTS

  • USMCA: Canada has joined Mexico in threatening to take retaliatory action, including tariffs, if Congress approves electrical vehicle tax credits for U.S. production. In a letter to Congressional leaders, Canadian officials wrote, “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.”
  • U.S. – China: The house passed last week, with strong bi-partisan support, the Uyghur Labor Prevention Act, designed to stop all imports from the Xinjian region of China. Meanwhile, China’s implementation of new food import regulations (i.e., Decree 248) is rapidly approaching (January 1st) as U.S. agriculture and food exporters scramble to comply. China has declined requests from the U.S., EU and other countries for an 18-month extension of the new regulations.
  • CPTPP: CPTPP features prominently in a recent analysis of new “Trade Agreements and U.S. Competitiveness.” The analysis shows that China, Japan, the EU, Canada and others are surpassing the U.S. in their pursuit of trade agreements that open export opportunities, in part due to CPTPP. Separately, South Korean Finance Minister Hong Nam-ki announced on Monday that the Korean government will begin the process to join the CPTPP.
  • U.S. – U.K. : Ambassador Tai confirmed trade talks for a free trade agreement with the U.K. remain paused. U.K. Trade Secretary Anne-Marie Trevelyan said Britain “stands ready” to pick up those negotiations once the Biden administration is ready.
  • WTO : The gulf between developed and developing countries positions remains on special and differential treatment in the harmful fisheries talks, as the WTO ministers discuss rescheduling of the 12th Ministerial in 2022.

“The FTA is on pause, but the conversations have not paused.”

— USTR Katherine Tai commenting on status of a U.S. – U.K. free trade agreement

China Trade

  • House lawmakers last Wednesday passed in a wide bi-partisan vote the Uyghur Labor Prevention Act. This act is designed to stop all imports from the Xinjian region of China. According to bill sponsor Jim McGovern, the “bill to stop the exploitation of the Uyghur people and prohibit imports from Xinjiang, China due to the prevalence of forced labor there.” The House had passed a similar bill in 2020, but it stalled in the Senate. Now in July 2021 a similar bill was introduced in the Senate by Sen. Marco Rubio. This bill follows the implementation of an order from the Trump Administration in January that prohibited the importation of cotton and tomatoes from Xinjian.
  • With only a few weeks until implementation of China’s new food regulations (e.g. Decrees 248 and 249) on January 1, 2022, USDA published updates on the scope of products (e.g. HS codes) and other clarifications on the Decrees. More details in the USDA report, “China: Decree 248 HS Codes Published in GACC Single Window.” U.S. industry stakeholders have expressed frustration regarding the short implementation time frame and lack of necessary details in conjunction with the new import guidelines. China’s Degree 248 mandates that all overseas food manufacturers, processors, and storage facilities be registered with the Chinese authorities to export product to China.” Multiple countries, including Australia, Canada, the European Union and Switzerland, expressed their concerns with Decree 248 and 249, requiring sweeping new registration, inspection and labeling requirements food imports. Several of these countries and the U.S. have requested that China delay the food-import measures for “at least 18 months. China has not responded to the extension request at this writing.

Phase One Agreement

  • According to analysis by the Peterson Institute for International Economics, China’s overall Phase One Agreement purchases of U.S. goods (i.e., agriculture, energy, and manufactured goods) are lagging by approximately 41 percent through October 2021. From January 2020 through October 2021, U.S. exports to China of covered products under the agreement were $186.2 billion, compared with a Phase One target of $310.8 billion.

USMCA

  • Canadian has joined Mexico in threatening retaliatory tariffs under USMCA should Congress pass legislation regarding tax incentives for U.S. electrical vehicle (EV) production. Canada and Mexico assert the EV tax credits violate the USMCA and Canada would launch dispute settlement proceedings under the agreement. “We want to be clear that if there is no satisfactory resolution to this matter, Canada will defend its national interests, as we did when we were faced with unjustified tariffs on Canadian steel and aluminum,” Canada’s Deputy Prime Minister and Minister of Finance Chrystia Freeland and Minister of International Trade, Export Promotion, Small business and Economic Development Mary Ng wrote in a letter sent last Friday 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,” they emphasized. In addition to dispute settlement action, they noted that the EV tax credits would result in “a significant change in the balance of concessions agreed to” in USMCA, prompting Canada to consider suspending certain “concessions of importance to the U.S.” in the agreement, such as tariff-rate quotas on dairy, they wrote. “We have been building cars together for over 50 years,” Freeland and Ng wrote. “Given the deep integration of our respective automotive industries, the proposal would have important repercussions in the U.S., affecting American production and jobs.” “This issue is at the top of Canada’s agenda with the United States,” they added. Canada’s list of U.S. goods that could face tariffs is expected sometime this week.
Chrystia Freeland, Canada’s Deputy Prime Minister and Minister of Finance
  • Freeland and Ng’s letter was addressed to Senate Majority Leader Chuck Schumer (D-NY), Minority Leader Mitch McConnell and to the Democratic and Republican leadership of the Senate Committees on Finance, Foreign Relations and Energy & Natural Resources. Freeland and Ng said the proposed incentives would amount to a 34 percent tariff on EVs assembled in Canada. Canadian-assembled vehicles, they noted, contain about 50 percent U.S. content.
  • The EV tax credits are part of the Build Back Better Act, which passed the House last month. 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. The Senate is expected to vote on the bill as early as the week of Dec. 13, according to The Hill.
  • Mexico earlier indicated it was weighing retaliatory tariffs or other legal actions in response to proposed U.S. EV tax credits which Mexico considers “discriminatory.” Mexican Economy Minister Tatiana Clouthier said, “In the past we have imposed tariffs and we would have to do or propose something very important and strategic for those products, in those places where it hurts them … so that the consequences can be felt,” Clouthier said in a news conference. Clouthier said this was “not a desirable” course of action yet emphasized that Mexico would do everything in its power to safeguard its automotive industry, which directly employs around one million people. She noted in prepared press remarks that, “Additionally, we believe that this tax credit proposal would reduce the competitiveness of the North American automotive sector compared to other regions of the world and would go in the opposite direction to the efforts we have been making with the United States government …to strengthen regional [supply] chains…”. Clouthier, in previous comments characterized the proposed legislation as “totally contrary to free trade,” and noted that such protectionist policies would backfire, including igniting further immigration.

COVID-19

  • The U.S. trade deficit for goods and services decreased to $67.1 billion in October down $14.3 billion from $81.4 billion in September (revised), as imports decreased more than exports, according to the Commerce Department. October exports were $223.6 billion, $16.8 billion more than September exports. October imports were $290.7 billion, $2.5 billion more than September imports. The October decrease in the goods and services deficit reflected a decrease in the goods deficit of $14.0 billion to $83.9 billion and an increase in the services surplus of $0.3 billion to $16.8 billion. Year-to-date, the goods and services deficit increased $161.7 billion, or 29.7 percent, from the same period in 2020. Exports increased $315.1 billion or 17.9 percent. Imports increased $476.8 billion or 20.7 percent.

Section 232 Investigations

  • The U.K. and U.S. plan on ramping up negotiations in early 2022 to resolve the steel and aluminum dispute. Hanging over this plan to advance discussions is the threat of retaliation by the U.K. in the event a solution is not reached. 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.
  • According to U.K. trade minister Ms. Mordant, the rumors circulating that the U.S. is linking the elimination of steel and aluminum tariffs on Brexit and Northern Ireland resolutions is baseless and a false narrative. Earlier the Financial Times reported that issues surrounding the Irish Border and post-Brexit U.K.-EU relations were threatening talks to eliminate the U.S. steel and aluminum tariffs, something the U.S.  has already done for tariffs against the EU. Ms. Mordant said the Financial Times report “might be true in terms of how some people in the US feel, but it is a false narrative. These are two entirely separate issues.” International Trade Secretary Anne-Marie Trevelyan will hold talks with her American counterparts this week to discuss trade issues that involve the steel and aluminum tariffs, among other topics.
  • Earlier the Commerce Department reported that, “The United States and the United Kingdom are also consulting closely on bilateral and multilateral issues related to steel and aluminum, with a focus on the impacts of overcapacity on the global steel and aluminum markets; the need for like-minded countries to take collective action to address the root causes of the problem; and the climate impacts of the sectors,” the Commerce Department said in a statement.

Section 301 Investigations

  • Canada is pushing through with passing a digital service tax that stands to potentially worsen relations between it and the U.S. 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.
  • In addition to increased trade opportunities between India and the U.S. following the first U.S.-India Trade Policy Forum, the two countries have also come to an agreement on digital service taxes. The U.S. will agree to suspend its final outstanding Section 301 investigation into digital service taxes, which follows the suspension of investigations on five European countries as well as Turkey. India will agree to eliminate their digital service taxes, though unlike the other agreements the transition period given to India is longer. The transition period will begin April 1, 2022, and end March 31, 2024, compared to the other agreements where the transition period will begin January 1, 2023, and end December 31, 2023.

Biden Transition

  • Scheduling of the confirmation hearing for Elaine Trevino, Biden’s nominee for Chief Agriculture Negotiator at USTR remains in limbo. According to Politico, the Senate Finance Committee was “still processing [Elaine Trevino’s] paperwork and materials while it does its due diligence review,” a committee spokesperson said. President Biden announced his intent to nominate Elaine Trevino on September 13, 2021, nearly three months ago. Despite the delay, industry stakeholders remain hopeful the Senate could confirm Trevino sooner than it did Gregg Doud, the previous chief agricultural negotiator during the Trump administration. Doud’s Senate confirmation spanned nearly five months (March 1, 2018) after his nomination hearing.
  • Ms. Trevino presently serves as the president of the Almond Alliance of California, and a former deputy secretary at the California Department of Food and Agriculture, where she was responsible for the oversight of international export and trade programs. She is also a member of the USDA’s Agriculture Policy Advisory Committee.

CPTPP

  • The CPTPP features prominently in a recent analysis of new “Trade Agreements and U.S. Competitiveness,” developed by the Corn Refiners association. The analysis shows that China, Japan, the EU, Canada and other countries are surpassing the U.S. in their pursuit of trade agreements that open export opportunities, in part due to CPTPP, and other new multilateral trade arrangements not involving the U.S. The assessment notes that rival trading nations are forging ahead with new bilateral and multilateral trade arrangements and not waiting for U.S engagement. The assessment was released in conjunction with a virtual “roundtable” on the competitiveness of American agriculture exports and the need to regain lost ground to international competitors, hosted by Farmers for Free Trade. 
Hong Nam-ki, South Korea’s Finance Minister
  • South Korean Finance Minister Hong Nam-ki announced on Monday that the Korean government will begin the process to join the CPTPP. Hong made the announcement during a meeting of cabinet ministers on external economic affairs and said that after the formal applications to join the CPTPP by China and Taiwan, it “has become difficult to keep the matter to discussions within government offices.” Australian Prime Minister Scott Morrison expressed positivity, stating “We are important trading partners, and we welcome the prospect of Korea joining the CPTPP and we look forward, should they wish to take that decision and step, we look forward to being an encouraging partner,” at a news conference. Japan expressed a more pessimistic tone, stating that South Korea had to meet the high-standard free trade rules, and that concerns between the countries, such as wartime labor compensation and import restrictions could complicate a potential ascension by South Korea.
  • 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.
  • Both Secretary Raimondo and Ambassador Katherine Tai, in recent trips to Asia, raised the concept of an Indo-Pacific framework with government leaders in Japan, South Korea, and others. Raimondo rejected the notion that U.S. would consider joining CPTPP, highlighting the Biden administration is looking forward and not interested in joining the agreement as it “was conceived in 2016.”
  • Separately, a bipartisan bill in the House could serve as a “blueprint” for Congress and the Biden administration to enhance trade leadership in the Indo-Pacific region. The legislation calls for swift renewal of Trade Promotion Authority and negotiations to improve and potentially join the CPTPP. Representatives Darin LaHood (R-IL) and Carol Miller (R-WV) say their “U.S. Trade Leadership in the Indo-Pacific and China Act” (H.R.  6114) also would direct the Office of the U.S. Trade Representative to submit a report to Congress on its long-term trade plan for China and to share documents on its evolving Indo-Pacific strategy. The U.S. Trade Leadership in the Indo-Pacific and China Act would direct the administration to “consider the merits of negotiating entry” into CPTPP “with improved standards” or a “similar plurilateral agreement,” as well as other high-standard bilateral trade deals. The proposed legislation further outlines priority areas for future U.S. trade talks in the Asia-Pacific region: the free flow of commerce; enhanced market access; the elimination of tariff and non-tariff barriers; intellectual property rights; workers’ rights; the environment; digital trade; and state-owned enterprises.
  • As noted earlier, Thailand joined a growing list of countries with ambitions to join the Comprehensive Agreement for Trans-Pacific Partnership (CPTPP). Rachada Dhnadirek, Thailand’s Deputy Government Spokeswoman indicated that Thailand’s leadership considers pursuing efforts to join CPTPP is “in the best interest of Thai people,” according to Reuters. She added that Thailand’s government compiled public opinions and recommendations from its National Assembly and would “prepare counter measures” for those who would be affected by CPTPP membership. Dhnadirek noted that CPTPP “had both benefits and negative aspects that required careful consideration,” and that “some terms could be negotiated before joining.”
  • In recent months, the U.K., China, Taiwan, and South Korea expressed interest or formally notified their intent to join the CPTPP adding to pressure for the U.S. to reconsider its withdrawal from the then TPP  under President Trump in 2017. Singapore recently urged the Biden administration to pursue CPTPP membership or at a minimum ensure that the U.S. plans to forge an “Indo-Pacific economic framework” t be an “equally substantial alternative” to CPTPP. “The U.S. cannot afford to be absent from the region’s evolving economic architecture,” Singapore Deputy Prime Minister Heng Swee Keat said according to the report. “It is just as, if not more, important for the U.S. to be economically engaged,” he added. “If not through the CPTPP, then it must have an equally substantial alternative.” Heng expressed concern that substantially greater U.S. engagement in the region is required to achieve such a framework, activities the U.S. has only recently undertaken.

U.S. – EU

  • As reported earlier, according to EU trade chief and Executive Vice-President Valdis Dombrovskis, the EU has experienced a “breakthrough year” with the U.S. He points to the suspensions on a number of trade disputes such as aircraft subsidies and steel and aluminum tariffs, as well as increased cooperation in enhancing digital trade and technological growth and in combating non-market economies. While some trade irritants remain, such as the Biden Administration’s “Buy American” agenda to push federal agencies to buy from U.S. suppliers, Dombrovskis said “There are clearly things to watch, but what I can say is that we are now engaging constructively so I am confident we are able to address any issues or concerns that are coming.” The EU will continue discussions with U.S. counterparts, such as through European Commissioner Executive Vice-President Margrethe Vestager coming to the U.S. this week, as well as Dombrovskis planning a visit in half a year to take stock and decide next steps on trade.

U.S. – U.K. Trade

  • Negotiations on a bilateral free trade agreement with the U.S. remain paused yet the two countries remain engaged on trade, according to a recent statement by Ambassador Katherine Tai. “The FTA is on pause, but the conversations have not paused,” Tai said at a US Chamber of Commerce event. 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.K. Trade Secretary Anne-Marie Trevelyan earlier visited with Ambassador Tai to discuss trade issues, but no major announcements were reported. Prior to the meetings, Trevelyan said that Britain is seeking to build closer trade relationships with the U.S. while waiting for the Biden administration to restart negotiations on a bilateral free trade agreement. Britain “stands ready” to pick up those negotiations once the Administration is ready. In the meantime, the focus will be on boosting ties with states, which Ms. Trevelyan said will help to build support for an eventual comprehensive FTA. Trevelyan lauded the recent successes between the trade partners stating, “We’ve already made strong progress; from getting British beef and lamb back on US plates, to lowering the cost of Scotch Whisky exports by addressing the long-running Airbus-Boeing issue. Now is the time to hit the ground running and get on with boosting ties with our closest ally.”

WTO

  • The negotiation chasm over special and differential treatment in the harmful fisheries talks remains. The U.S., EU, Japan and other developed countries reiterated their positions on the duration of the special and differential treatment (S&DT) in the proposed fisheries subsidies agreement for developing countries. At a meeting of the Doha negotiating committee on fisheries subsidies on last week chair Ambassador Santiago Wills from Colombia focused the discussions on the provisions on S&DT in Article 5.4 of the chair’s draft agreement on fisheries subsidies.
  • India, a leading voice for the position of developing countries, stated firmly that it wants 25 years for the length of subsidy reductions. In response to India’s demand for 25 years, the EU said it could consider around 5 years for S&DT. Japan apparently indicated 5 to 7 years, while other big subsidizers also remained inflexible about the duration of the S&DT, said people preferring not to be quoted. The U.S. reportedly refrained from commenting on a specific number of years, that an noted a prior concession to developing countries on S&DT, (e.g.  the de minimis provision in the draft Agreement on Fisheries Subsidies that allows most of the Africa, Caribbean and Pacific countries to maintain or grant subsidies if its global share does not exceed 0.7 percent,) according to one report.
  • As reported earlier, WTO ministers are still assessing the best opportunity for rescheduling the 12th Ministerial (MC12) in 2022, though a group of countries have suggested early March of 2022. Trade ministers of Kazakhstan, Uganda, Australia and Barbados proposed holding the postponed 12th ministerial conference in the first week of March 2022, “if conditions allow.” 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 negotiations. WTO Director-General Ngozi Okonjo-Iweala implored members to press forward stating, “Let us aim to finish pandemic response and fisheries by end February. And let us agree that ministers should be able to finalise them without physical presence,” she said. “Seven billion people are waiting for us on TRIPS and pandemic response. And 260 million people are waiting for us on fisheries subsidies.” She encouraged members to work toward clean texts that could be finalized – or, ideally, merely approved – by ministers remotely if need be.
  • Despite the postponement members “pledged to continue working to narrow their differences on key topics like the WTO’s response to the pandemic and the negotiations to draft rules slashing harmful fisheries subsidies.” 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.

Ag Economy Barometer

  • The Ag Economy Barometer continued to weaken in November declining to a reading of 116, the lowest reading in 2021. Farmers’ increasing concerns with rising input costs and eroding confidence in the financial performance of farming operations continue to drive sentiment downward. In contrast to the weak overall sentiment producers hold an optimistic view of farmland values, in part due to historically low interest rates.  
  • Concerns surrounding rising input costs are weighing heavily on farmers’ sentiment, which climbed above 175 points early in 2021 before the recent reversal. In November 55% of producers reported they expect input prices to rise 12% or more in the upcoming year, up from 33% in October. While increasing input costs concerns are linked to the dramatic rise in fertilizer prices, virtually all other input costs ranging from farm machinery to seed, and fuel are also increasing.