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Talking Trade blog

You can indeed lose what you never had

Published 10 August 2017

The start of a piece in yesterday’s TheStreet summarized a common viewpoint on the US withdrawal from the Trans-Pacific Partnership (TPP) trade agreement, when it said: “You can’t lose what you never had…”

In fact, you can. 

It is becoming increasingly obvious that American companies are losing ground.  The damage is two-fold—the United States has chosen to sit out from the TPP and it is also not benefiting from the range of trade deals that crisscross Asia, giving preferences to competitors in the region in key markets.

Adam Behsudi nicely showed this week in Politico how international trade agreements are directly affecting farmers from one county in Iowa. 

While many big American companies can adjust to shifting circumstances and restructure their supply chains to continue to take advantage of new trade benefits from upcoming agreements, pork producers in the United States cannot. 

Hog farmers trying to sell products into the lucrative Japanese market, for example, face a challenging set of circumstances.  First, to meet the exacting standards required to sell into the marketplace, farmers have to raise the animals differently, with additional costs.

Second, pork producers are increasingly battling headwinds caused by new trade agreements that lower the costs for competitors.  In 2016, the United States was the largest supplier of pork products to Japan with 36.5% of imports, but the European Union (EU) was right behind with 32% while Canada captured 18.5% of imports.  Mexico supplied 7.5% and Chile 3%.

These figures are likely to shift substantially against American farmers starting as soon as next year.

The EU and Japan have signed a framework agreement that could come into force by 2018.  The texts have not yet been released, but enough detail is available to indicate that pork producers in the United States will be a strong disadvantage in Japan’s market. 

For example, canned hams and ground seasoned pork products currently face 20% tariffs, but EU companies will pay 0 duties in 5 years.  Sausages will drop from 10% to 0 in five years.  The EU doesn’t even ship fresh and chilled pork products now, but the agreement is likely to spur new competition for these items.

Of the other key players in the Japanese pork markets, Canada, Mexico and Chile, are all TPP partners.  All three receive significant new benefits under the agreement into Japan, including lower tariffs and duty-free access in relatively short order as well as new quota access to some product categories. 

The damage is not simply limited to these suppliers, however, as the TPP also provides access to other players that might consider moving into the Japanese market like Australia and New Zealand.  Neither is currently a significant exporter, but changing incentives might make pork more lucrative than in the past.

The TPP also opened up new access into fast growing markets like Vietnam, where fresh or chilled pork hams can face tariffs of 27%.  These will be eliminated in steps over 10 years under the TPP.  Many other tariffs are being phased out more quickly.

Something similar is taking place in beef, where US producers are also losing things they never had. 

Beef ranchers had secured unprecedented access via the TPP to the other 11 markets.  This included tariff cuts and new quota access.  These tariff cuts were also substantial.

The rules of the TPP also prevent members from changing access.  Hence, when Japan just announced a new safeguard on beef imports, raising tariffs to 50%, it would not have applied to TPP members had the agreement been active. 

The rest of the world has not stood still while the United States decides what to do with its trade policy.  Australia, for example, has an existing agreement with Japan that already gives its beef products an advantage into Japan.  Australian farmers are currently receiving lower tariff rates, down to 27%, and also will not be hit with the safeguard action at all, as an existing FTA partner.

Another agreement with China gives Aussie farmers reductions from the existing 25% tariff on beef and the 20% tariff on wine.  Many such tariffs are set to fall to zero in the near term.

These types of regional and bilateral agreements can be found across Asia with more under negotiation, with older deals being upgraded.

The TPP itself continues to move ahead, with the 11 remaining parties meeting again in Australia in the coming weeks.  The benefits of TPP11 for food producers and growers are likely to remain intact, but can be used only by member states.

The damage to American business of sitting on the sidelines is not limited to agriculture, although much of the pain will be felt in this sector.  Free trade agreements (FTAs) generally do not care where a firm is headquartered or where a company pays taxes. 

Many larger companies can restructure their supply chains to use existing and future trade agreements to receive benefits (come see us at ATC for further details on how).

But Iowa pigs cannot be raised outside of Iowa.  Farmers that have invested in a 700,000 square foot processing plant in Eagle Grove cannot use the facility and get TPP benefits into TPP markets.

Nebraska is currently Japan’s number 1 export market for beef products.  Keeping this status is going to be increasingly difficult, as Governor Pete Ricketts noted.  Representative Adrian Smith said, "The longer we wait, the more market share we lose."

In short, while it might seem comforting to think that no harm can come from agreements that never happened, it seems increasingly clear that doing nothing actually is causing damage.  The rest of the world has not stopped moving.

Companies need to figure out now what mitigation steps they can take.

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).

Dr. Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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