13th April 2018

Importance of Successful Negotiation of Trade Agreements Highlighted

The importance to Scotland’s red meat industry of trade agreements being successfully negotiated as part of the Brexit process, is being highlighted by Quality Meat Scotland (QMS).

Failure to build strong trading relationships could, according to Iain Macdonald, QMS Economics Analyst, result in significant trade volatility with agricultural products also facing knock-on effects from measures aimed at unrelated industries.

This uncertainty, said Mr Macdonald, can be clearly illustrated by the scenario which has emerged following US President Donald Trump’s introduction of new trade tariffs, targeted heavily towards China. Chinese retaliation, citing World Trade Organisation (WTO) rules, has led to concerns about a trade war. 

“Agricultural products have not been immune to this trade dispute and, with the US and China being such large players in global agricultural trade, there are potential spill-overs to consider for producers in Scotland,” said Mr Macdonald.

The first stage of the recent trade conflict began in February with President Trump using powers under Section 232 of the Trade Expansion Act of 1962 to impose tariffs on imports of steel and aluminium products to the US.  China was one of the major suppliers of steel and aluminium to the US that failed to gain an exemption to these new tariffs. 

In retaliation to this US action, Chinese authorities announced increased tariffs on a list of 128 US products with an annual import value similar to the value of US steel and aluminium imports from China.  Since April 2nd, 120 of these products have faced an additional 15% tariff on top of the current tariff, while 8 products are now subject to an additional 25% tariff. 

“US pork falls under the latter category, meaning that Chinese importers now have to pay a 37% or 45% tariff on top of the price charged by the US exporter, compared to 12% or 20% previously.  It should be noted that the 12% and 20% tariff rates apply to pork from all countries without a preferential access trade deal with China, including the UK,” he said.

Affected product lines include some fresh cuts of pork plus almost all frozen pork and frozen pig offal.  Latest available trade statistics from USMEF show that China was the US’ fifth largest pork export market in the first two months of 2018, accounting for 4.9% of US pork exports by volume and 7.1% by value. 

Based on the average value of US shipments in early 2018, and assuming that the majority of trade is likely to have taken place in products with a 12% tariff, to keep the price constant to the Chinese importer at a 37% tariff would require US exporters to lower their price by $350/t (18%).  Volumes delivered in early 2018 suggest that over a year, this could work out at a revenue reduction of around $50m – around $2 per pig processed in the US.

This context may help explain the 8% fall in US farmgate prices in the week that the tariff increase came into force, especially with US production rising 3% in the first quarter of 2018.

If the US finds it harder to sell pork into China as a result of the additional tariff, EU exporters will be well-placed to compete.  Whereas the US had increased its exports to China in early 2018 by 10%, EU shipments were down 10%; though they did still account for 37% of EU exports. 

“If EU exporters can regain market share in China from the US, this would be likely to place some upwards pressure on farmgate pig prices across the EU.  Given that the EU Commission has forecast EU pigmeat production will be 0.8% above 2017 levels and 2.6% ahead of its 2013-17 average, this trade dispute could come at a good time for EU pig producers,” observed Mr Macdonald.

In addition to the Section 232 dispute, President Trump had already begun proceedings under Section 301 of the Trade Act of 1974 last August, instructing the US Trade Representative to investigate the forced transfer of US intellectual property and technology to China through trade.  This investigation concluded recently, with the US proposing China-specific 25% tariffs on a much larger scale than under the 232 process, potentially impacting $50bn worth of US imports from China.  This has now gone out to consultation.

A swift response was made by the Chinese authorities at the beginning of April, announcing a second round of retaliatory tariffs on imports from the US, up to a value of around $50bn.  Beef was included in this round.  However, no date of implementation has been set.  Based on a similar calculation to that for pork, if these tariffs were to enter force, it could result in US beef exporters foregoing as much as $12m in revenue to remain competitive in the Chinese market.

However, more positively for the US beef industry, Japan’s special safeguard clause which had raised the tariff on imported frozen beef from countries lacking a trade partnership with Japan has come to an end.  After Japanese imports exceeded a threshold level in the first quarter of 2018, the tariff on frozen beef was automatically increased to 50% in August 2017.  At the beginning of April, it was lowered back to 38.5%. 

It should be noted here that the US’ major competitor in Japan – Australia – was exempt from the safeguard due to an Australia-Japan trade deal, which has also been phasing in a lower tariff on Australian beef.   One of President Trump’s first actions in office was to remove the US from the proposed Trans-Pacific Partnership (TPP) deal which would have lowered tariffs on US beef in line with the reductions granted to Australia.  This week has seen US Senators indicate that the President is reviewing his position on the TPP.

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