Trade Issues and Tariffs – Are Agriculture’s Concerns Legitimate?

Overview

Since the enactment of the Tariff Act of 1789 (signed by President Washington) along with the Collection Act also enacted on the same day, the U.S. has been engaged in protecting trade.  Those two 1789 laws were not only designed to protect trade.  They were also enacted with the purpose of raising revenue for the federal government. As the soon-to-be first Secretary of the Treasury, Alexander Hamilton took the position that tariffs would encourage industry in the newly-formed country and pointed out that other countries subsidized their industries and that tariffs would protect U.S. businesses from the negative impacts of those subsidies.  Later on, the Tariff Act of 1816 addressed concerns about other countries “dumping” their goods in the U.S. at less than fair value to damage U.S. domestic production. 

This history points out that the federal government has imposed tariffs practically from the founding of the country.  Presently, massive trade deficits with various countries (particularly Mexico and China) and currency manipulation (by China) have posed a serious problem that a pragmatic President is determined to solve.

But, what are the potential implications of the Trump Administration’s recent trade measures on agriculture?  Are the recently announced tariffs part of a bigger overall picture?  Are they a bargaining chip in negotiating improvements to existing trade deals?  These are all important questions.

For today’s post, I have asked Prof. Amy Deen Westbrook, the Kurt M. Sager Memorial Distinguished Professor of International and Commercial Law at Washburn University School of Law, for her thoughts on the matter.  She graciously accepted my invitation and is today’s guest blogger.  As you will see, Prof. Westbrook is another example of the fine legal instruction that is provided at Washburn Law.  I will sum things up in the conclusion at the end.

Multiple Moving Parts – Trade Deals and Tariffs

Renegotiation of NAFTA.  Fulfilling one of President Trump’s campaign promises, the Administration launched a renegotiation process of the North American Free Trade Agreement (NAFTA) last August.  The United States is seeking a more favorable deal, and has threatened to withdraw from NAFTA if it cannot come to a satisfactory arrangement with Mexico and Canada. 

U.S. NAFTA negotiating priorities center on increased minimum regional content requirement for autos to qualify for NAFTA treatment, access to U.S. government procurement opportunities, revised dispute resolution options, an automatic five-year sunset provision for NAFTA, and more advantageous agriculture provisions.  In particular, the United States has requested that Canada dismantle its system of tariffs and quotas in the dairy sector.  The United States is also seeking authorization for stronger protections for seasonal U.S. produce against Mexican imports. 

U.S. agricultural demands reflect the current NAFTA agricultural trade deficit.  Although the deficit largely results from the weaker Mexican and Canadian currencies, it also reflects the increasing volume of imports of fruits and vegetables into the United States, particularly counter-seasonal imports of products like tomatoes, peppers and asparagus from Mexico. 

Note:  Negotiators from all three NAFTA parties wrapped up their seventh round of talks in early March of 2018 in Mexico City, and anticipate an eighth round in Washington, D.C. beginning in April.  However, it is unclear when, or even if, a revised agreement will be ironed out.

Use of trade remedies against U.S. trading partners.  The Trump Administration has various remedies at its disposal with respect to trade disputes.  Recently, for example, the Trump Administration has imposed several different measures on foreign imports.  U.S. law, the World Trade Organization (WTO) agreement, and other international obligations provide the United States with an array of remedies to protect U.S. producers from trade practices by other countries.  As noted below, the Administration has utilized each of these remedies to-date. 

    Dumping, subsidies, and other unfair trade practices.  In response to a petition by or on behalf of a U.S. industry, U.S. trade regulators can levy anti-dumping duties on foreign goods sold in the United States at unfairly low prices if the sale of those goods materially injures, or threatens to injure, or even retards the establishment of, the domestic industry.  Similarly, "countervailing duties" may be levied on foreign goods sold in the United States at unfairly low prices as a result of an impermissible subsidy by the exporting nation.  The United States currently has 164 antidumping and countervailing duty orders in effect for steel alone, with another 20 in the pipeline.

    Section 301.  Section 301 of the Trade Act of 1974 empowers the U.S. Trade Representative (USTR) to impose duties or suspend concessions against a foreign country that takes actions that are unjustifiable, unreasonable or discriminatory and burden or restrict U.S. commerce.  In 2017, the United States launched a Section 301 investigation into Chinese practices relating to forced technology transfer, unfair licensing and other intellectual property policies.

    Section 201.  In addition to remedies for unfair trade practices, the United States can also impose protections for domestic industries against fair trade practices by our trade partners.  On January 22, 2018, President Trump approved the imposition of safeguards under Section 201 of the Trade Act of 1974 against foreign solar panels and washing machines.  Section 201 relief, which was last granted by the United States 16 years ago, provides temporary protection to a U.S. industry that is being injured by a surge of foreign imports.  The measures are intended to last for a couple of years, and in fact the U.S. plan for solar panels is to start tariffs at 30% and let them gradually fall to 15% over four years.

    Section 232.  Perhaps more significant, at least to the financial markets, than the anti-dumping, anti-subsidy, Section 301 or Section 201 actions, however, was the announcement in early March of 2018 that the U.S. would take measures under Section 232 of the Trade Expansion Act of 1962.  An almost-never-used provision, Section 232 enables the President to restrict foreign trade in the interests of national security.  In April of 2017, President Trump requested the Secretary of Commerce to review the impact of imported steel and aluminum under Section 232.  The Department of Commerce produced its reports in January of 2018, and made them public in February.  Unlike the last time the Administration considered Section 232 measures with respect to steel (in 2001), this time the Department of Commerce recommended tariffs be imposed on foreign imports in order to safeguard national security.  Upon receipt of the report, the President had 90 days to decide whether to impose measures.  On March 8, the President imposed “flexible,” global tariffs (25 percent on steel and 10 percent on aluminum). It is important to note that the President announced the tariffs in the middle of the NAFTA negotiations.   

Note:  The Section 232 measures have resulted in substantial diplomacy and lobbying by U.S. industries that will be directly affected by the Section 232 measures - such as the auto industry.  U.S. industries indirectly affected by the measures, such as agriculture, have also voiced concern, as have U.S. foreign trading partners. 

The Section 232 tariffs are seen largely as a measure against China.  The United States is the world’s top steel importer.  China is the world’s largest producer of both steel and aluminum.  Although China accounts for just a fraction of U.S. steel imports, the United States believes that China has flooded the global market for steel and is dragging down prices as a result.  In addition, Canada (the largest U.S. source of foreign steel and aluminum) and Mexico (the fourth largest U.S. source of foreign steel and 11th largest aluminum source) are currently exempted from the tariffs, contingent upon successful completion of the NAFTA negotiations.  President Trump has also indicated that Australia may be exempted (by virtue of a pending security agreement) and the USTR met in early March of 2018 with representatives of the European Union and Japan about the possibility of exclusion from the tariffs. 

Normally, Section 232 tariffs take effect 15 days after the President’s official announcement.  That means that right now, and over the next few days, negotiations could occur with a number of U.S. trading partners as they argue for exemptions.  The negotiations may be made more dramatic by the fact that the Administration has pledged to block a certain volume of foreign steel from the market, meaning that each time a country is exempted from the tariffs, tariffs presumably must rise on the remaining/non-exempted countries.

Foreign Reactions To The Tariffs – Including Agricultural Impacts

U.S. Secretary of Agriculture Sonny Perdue has expressed concern that U.S. trading partners impacted by the U.S. trade measures, particularly the steel tariffs, will retaliate against U.S. agricultural exports.  As expected, foreign reactions to the U.S. measures have not been positive.  The European Union (EU) announced a list of $3.5 billion of U.S. products against which it will impose 25% retaliatory tariffs if the U.S. imposes the steel and aluminum measures on the EU.  The EU list targeted Harley Davidson motorcycles, jeans, and bourbon, as well as orange juice, corn, cranberries, peanut butter and a variety of other agricultural products.  The EU’s announcement echoes its reaction to U.S. Section 201 safeguard measures for steel in 2002, which the EU ultimately successfully challenged at the WTO, resulting in the U.S. removal of the measures before the EU retaliated. 

China has also reacted negatively to the Administration's announcement of new U.S. measures.  On February 4, 2018 (two weeks after the Section 201 measures on solar panels and washing machines were announced). China announced that it would launch anti-dumping and anti-subsidy investigations of U.S. sorghum exports.  U.S. grain sorghum exports to China have increased since 2013, and China currently accounts for approximately 80 percent of U.S. grain sorghum exports.  

In addition, on February 7, 2018, Chinese agricultural producers met to study the possibility of launching anti-dumping or anti-subsidy investigations into U.S. exports of soybeans.  U.S. soybean exports are particularly vulnerable to Chinese measures.  The 30 million tons of soybeans China purchases from the United States represent a third of U.S. production, and make China the largest market for U.S. soybeans.  With Brazilian (and, to a lesser extent, Argentinian) beans in plentiful, and relatively cheap, supply, there is concern that China could curb U.S. imports and replace them with South American soybeans (at least for 6-7 months).  Other concerns center on U.S. beef exports to China, which restarted only last year after a ban imposed in 2003 because of concerns over bovine spongiform encephalopathy.  

The WTO and Other Legal Actions

China, the EU, Japan and South Korea sought consultations with the United States at the WTO following the U.S. imposition of the Section 201 measures against solar panels and washing machines.  Canada also sought an injunction against the imposition of the Section 201 safeguards, but its request was rejected by the U.S. Court of International Trade on March 6, 2018.

However, it is unclear whether U.S. trading partners will challenge the Section 232 national security safeguards at the WTO.  The EU is reported to be considering a WTO challenge, pending the outcome of its request for an exemption from the Section 232 tariffs.  The WTO agreement includes an exception from members’ trade obligations for actions necessary for the protection of a member’s essential security interests.  However, key terms such as “necessary” and “essential security interests” are undefined.  Countries are reluctant to use and even more reluctant to second-guess their trading partners’ use of the exception for essential security interests.  Sovereign countries generally do not want to infringe on the national-security-based policy decisions of other sovereign countries.  In addition, there has been a tacit recognition that if the exception is indiscriminately invoked, it has the potential to undermine the entire WTO system.  If anything can be an essential security interest, then any country can use the exception at anytime. 

Conclusion

Currency manipulation, trade deficits, unfair trade practices, theft and misuse of intellectual property rights, and related issues are not problems that are unique to a particular political party or political ideology.  They are American problems that threaten the financial stability of the U.S. and the production of U.S. products and commodities.  The open borders trade agenda for at least the past 25 years has negatively impacted U.S. families.  For example, just from 2000-2010 (post-NAFTA) the U.S. lost 55,000 factories and 6,000,000 manufacturing jobs across numerous sectors, U.S. wages stagnated, and the associated ingenuity was lost.  These are problems that President Trump has identified that need to be fixed in a pragmatic way.  These are also problems that hit at the core of the United States as a country – as President Washington identified over 200 years ago.

Should the agricultural industry be concerned?  Of course.  However, there is a significant chance that the potential for tariffs and other sanctions on other countries is part of an overall attempt to renegotiate existing trade deals for the benefit of America, including agriculture.