Category: Trade

In 2021, beef and beef products were the third highest exports for the U.S. ($10.6 bill.), behind soybeans ($27.4 bill.) and corn ($18.7 bill.) (USDA, 2022a). A key trading partner for the U.S. beef sector is Japan ($2.4 bill. in 2021), which was the leading foreign market for U.S. beef by volume. Through existing trade agreements (e.g., U.S.-Japan Trade Agreement [USJTA], Comprehensive and Progressive Agreement for Trans-Pacific Partnership [CPTPP]), the U.S. and major competitors like Australia face lower beef tariffs in Japan relative to the Most Favored Nation (MFN) rate of 38.5%. The tariff rate for the U.S. and Australian beef in Japan (excluding offal and processed products) is currently 24.1% and is continually declining to 9% by 2033. However, both USJTA and CPTPP allow the Japanese government to increase tariffs on beef products when imports from the U.S. or CPTPP countries exceed a certain volume during a specified period. This specified volume is often referred to as a safeguard. In general, safeguard measures are used to limit excessive import growth by allowing governments to increase tariffs on a product when imports exceed a certain level during a specified period.

U.S. beef faced a particularly restrictive safeguard in Japan of 242,000 metric tons (MT) when USJTA was enforced in 2020 and in 2021 (Japanese fiscal years: April-March). Japan’s beef safeguard for CPTPP countries was 625,400 MT during this period. The CPTPP safeguard was predominantly applied to Australian beef given Japan’s limited beef imports from other CPTPP countries, and unlike the U.S. safeguard, significantly higher than actual imports from all non-U.S. countries, let alone Australia (See Figure 1). This safeguard difference put U.S. beef at a significant disadvantage relative to Australian beef in the Japanese market because U.S. exports to Japan averaged more than 245,000 MT per year between 2017–2021. Thus, it was no surprise that the safeguard was triggered after the first year of USJTA’s enforcement, leading Japan to raise tariffs on U.S. beef to 38.5% for one month. Consequently, the U.S. government was able to negotiate a new three-trigger safeguard mechanism for U.S. beef in Japan this year. Moving forward, the Japanese government can increase tariffs on U.S. beef only if all the following occur: 1) Imports of U.S. beef exceed the USJTA beef safeguard; 2) The total volume of beef from the U.S. and original CPTPP countries exceed the CPTPP beef safeguard; and 3) imports of U.S. beef exceed imports from the previous year (USDA 2022b). The most important aspect of this change is that the U.S. and Australia are now essentially sharing the CPTPP safeguard. That is, even if Japan’s imports of U.S. beef increase and exceed the USJTA 2022 safeguard (246,900 MT), the Japanese government can raise tariffs on U.S. beef only if total beef imports from the U.S. and CPTPP countries exceed 637,200 MT (CPTPP safeguard for 2022), which is not likely to occur.

Figure 1. Japan’s Beef Imports (2017 –2021) and Respective CPTPP and USJTA Safeguard Triggers for 2022

References

Muhammad, A., Griffith, A., Martinez, C., and Thompson, J. (2021). Safeguard Measures and US Beef Exports to Japan. UT Extension Publication W1023. https://ageconsearch.umn.edu/record/313523

Trade Data Monitor® (2022). https://www.tradedatamonitor.com/

U.S. Department of Agriculture (USDA), Foreign Agricultural Service (2022a). Global Agricultural Trade System. https://apps.fas.usda.gov/gats/default.aspx

U.S. Department of Agriculture (USDA), Foreign Agricultural Service (2022b). U.S., Japan Reach Deal on Beef Tariff Safeguard. FAS Press Release. https://www.fas.usda.gov/newsroom/us-japan-reach-deal-beef-tariff-safeguard

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Muhammad, Andrew, and Charley Martinez. “Understanding the New Safeguard Policy for U.S. Beef in Japan.” Southern Ag Today 2(27.4). June 30, 2022. Permalink

Under the USMCA, Canada established tariff rate quotas (TRQs) for 13 categories of U.S. dairy products.^[i] Up to the defined quota amount, these products were to receive tariff-free access to the Canadian market. However, last year, Canada reserved between 85 and 100% of the TRQs for many of the product categories exclusively for Canadian dairy processors. As a result, TRQs were substantially under-filled for many of the products (Figure 1a).^[ii]

In May 2021, the U.S. filed the first official grievance under the USMCA, claiming that Canadian dairy quota administration procedures were in violation of USMCA trade obligations. In a decision publicly released on January 4, 2022, the dispute settlement panel found that, “The current Canadian system, which sets aside significant TRQ volumes only for processors, does not pass muster under the Treaty.”^[iii] Canada is now required to reach agreements with the U.S. on the allocations process or face retaliatory trade sanctions.

In an upcoming working paper, Chris Wolf and I calculate the economic costs of these Canadian dairy quota restrictions for the U.S. dairy industry. We find that the effective trade barrier created by Canadian quota allocation practices was as much as 71% to 94% more restrictive than the negotiated quota for some products.

Figure 2 plots the total TRQ value versus actual imports under USMCA holding current prices and quota fill rates constant. The administrative trade barrier created by Canada dairy quota allocation practices equates to approximately $1.27B in lost trade, or 67% of the total TRQ value, between now and 2030. 

Figure 1: USMCA Dairy Quota Fill Rates (2021)

Figure 2: Total TRQ Value versus Actual Imports

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^[i] Canadian Dairy Quotas are defined in Chapter 2 “National Treatment and Market Access” of the United States-Mexico-Canada Agreement (USMCA). 

^[ii] Data for this figure are obtained from the Canadian Government Supply-Managed Tariff Rate Quota Utilization Tables (https://www.international.gc.ca/trade-commerce/controls-controles/supply_managed-gestion_offre.aspx?lang=eng&type=Utilization%20Tables#data)

^[iii] USMCA Arbitral Panel (2021). Final Report. Canada – Dairy TRQ Allocation Measures (CDA-USA-2021-31-010). 

Schaefer, K. Aleks. “The Economic Costs of Canadian Dairy Quota Restrictions under USMCA“. Southern Ag Today 2(25.4). June 16, 2022. Permalink

Animal disease outbreaks have severe economic consequences, especially for international trade. A recent example was the identification of two atypical cases of bovine spongiform encephalopathy (BSE) in Brazil in early September 2021. Although Brazil’s BSE status did not change within the World Organization for Animal Health, severe sanitary restrictions interrupted Brazilian beef trade. Egypt and Saudi Arabia halted beef imports from Brazil for two weeks. China and Hong Kong, which account for about 60% of Brazil’s beef exports, suspended beef imports from Brazil for more than three months. In the month following the notification of the BSE cases, international shipments of Brazilian beef were 49% lower compared to the same period in 2020. Consequently, domestic prices of live animals decreased by 8% in September, and 11.8% in October 2021, leading to the most unfavorable cattle market conditions in Brazil since 2000.

As in the case of Brazil, identification of animal disease is an imminent risk for the U.S., simply because diseases can be difficult to control and have widespread consequences. This risk is demonstrated by the current outbreak of avian influenza in the U.S., which has affected 24 states so far and led to restrictions on American poultry products imported by Canada, Mexico, and China. The extent of the economic damage from this current outbreak is still unknown.

Countries that are major exporters of animal products, such as the U.S., are substantially impaired by sanitary barriers when animal disease outbreaks occur. Trade diversion to other suppliers can cause significant export market losses, as observed during the 2000’s after the BSE outbreak in the U.S. Animal disease events in Brazil and the U.S. highlight the importance of understanding risks within agricultural systems in terms of the direct impact of disease on animal health and food safety, as well as the amplified international trade impacts.

Figure 1. Monthly Beef Exports and Cattle Price Index in Brazil in 2021

Menezes, Tais and Amanda Countryman. “The Imminent Menace of Sanitary Barriers in International Trade.” Southern Ag Today 2(23.4). June 2, 2022. Permalink

The U.S. has consistently ranked among the top-5 rice exporters in the world. However, since hitting a record 3.98 million metric tons (mmt) in 2002, U.S. rice exports have shown a downward trend, reaching 2.98 mmt in the marketing year 2020/21. The decrease in US exports contrasts with a growing global rice market and results in a significant drop in the US share in global rice exports in the last two decades. The decrease in U.S. exports is exclusively a result of a drop in long-grain rice exports since exports of medium- and short-grain rice have shown a positive trend. Long-grain rice is the main type of rice produced in the Mid-South, accounting for over 91% of the volume of production. 

In the last 20 years, exports of long-grain rice to North America and the Caribbean, the two largest market destinations, have grown marginally (less than 1% a year), while those to Central America and the Middle East have decreased moderately (between 1 and 2% a year on average). Exports to Europe have not recovered since the GM-contamination case in the mid-2000s. Exports to Mexico, the largest market for US long-grain rice accounting for a quarter of total exports in the period 2018-2020, show almost no growth since the early 2000s, and more recently are in a downward trend as competition from other suppliers, primarily Mercosur, grow. Haiti remains a core and growing market for US rice, but one plagued with risks and uncertainty. Competition in Central America, primarily from Mercosur, is eroding the market share of US rice despite its preferential access under DR-CAFTA. 

Efforts are being made to improve the competitiveness of US rice, particularly when it comes to rice quality. The US was once regarded as the golden standard for long-grain rice quality, but many will argue that is a thing of the past. The blame goes far and wide as to why the quality of US long-grain rice has diminished, but what matters is that the industry is taking steps to address the issue. The US exports around half of its rice crop every year, so working on regaining competitiveness in the global market is of utmost importance.   

Durand-Morat, Alvaro. “U.S. Long-Grain Rice Faces Growing Challenges Overseas“. Southern Ag Today 2(21.4). May 19, 2022. Permalink

Last month, 90 members of Congress sent a letter to the chair of the U.S. International Trade Commission (USITC) requesting suspension of the countervailing duties on phosphates from Morocco to help ease fertilizer prices for American farmers. These duties were imposed in March 2021 when the USITC ruled that fertilizer imports from Morocco and Russia were receiving illegal subsidies that were hurting the U.S. fertilizer industry. Farmers know the rest of the story—since the duties took effect, prices of phosphates have increased over 300% to record levels (See Figure 1). While inflation, China’s recent export ban, and other supply chain issues may be putting additional strain on the fertilizer industry, the USITC tariffs are certainly not helping. 

The USITC is not stuck between a (phosphate) rock and a hard place on this issue. The U.S. is the third largest phosphate producer in the world, behind China and Morocco. The Mosaic Company—the largest U.S. producer—was the original petitioner requesting the USITC to investigate Moroccan and Russian imports. After a recent acquisition of CF Industries’ phosphate mines in Florida, Mosaic’s market share was recently estimated at around 74% of the U.S. market. And, instead of being crowded out of the market by foreign competitors, Mosaic exports around half of its annual production, mostly to Canada and Mexico. In fact, Mosaic’s own statements suggest that it does not need tariff protection. Larry Stranhoener, former CFO of Mosaic, said in an interview in 2013, “[fertilizer] is a product that is freely traded and frequently traded across borders, so regional market share data should not matter.”

We agree with Mr. Stranhoener. The U.S. fertilizer industry will be fine if the USITC removes these duties. Doing so would alleviate at least some of the strain on U.S. fertilizer prices. On top of ongoing energy and food inflation pressure, global supply chain failures, and the ongoing agri-food consequences of the Russian invasion of Ukraine, U.S. farmers and consumers should not have to bear the costs of geopolitical posturing in the fertilizer market. 

Figure 1. Phosphate rock and diammonium phosphate (DAP) and triple superphosphate (TSP) prices ($/MT): January 2017 – December 2021  

Beeler, Ashley, and K. Aleks Schaefer. “Removing Fertilizer Tariffs is Not A (Phosphate) Rock and a Hard Place Issue.” Southern Ag Today 2(19.4). May 5, 2022. Permalink