Trade Policy Insights: EU Agriculture - New US Trade War?

Author: Daniela Stratulativ, Head of Global Trade Analysis, IHS Markit Maritime & Trade

Key points:

• In 2018, the US deficit reached 879 billion USD, the largest in over 20 years. The US has to find alternative markets for agricultural products as there is no longer demand in China.
• On April 15, the EU and US agreed to launch trade talks, aiming to be finalized this year.
• The US wants the EU to open the market for agriculture products and threaten with 25% tariffs on cars.
• The EU agreed to review non-tariff barriers and discuss tariffs on industrial goods.
• We expect the US to impose 25% on cars unless the EU opens the agriculture market. The EU has to protect the farming and food industry of 44 million workers allocating support from the EU budget. This approach will prevent major job losses in the auto industry, and an increase in unrest and political volatility, as well as a negative economic impact.

The US is turning to the EU to find ways to decrease the trade deficit that reached 879 billion USD in 2018, the largest in over 20 years. On Monday April 15, the presidents of the US and the EU agreed to launch trade talks.

Despite President Trump's policy changes implemented to lower the trade deficit, in 2018 the trade gap increased to 879 billion USD due to a lower demand from China leading to a decrease in exports. In addition, imports from China increased in 2018, since companies purchased in advance to avoid the tariffs that took effect January 1, 2019.

The US agriculture sector has been significantly affected by the trade war with China, therefore the US has to find alternative markets for some of the agricultural products. In 2018, US exports of oil seeds, meat, dairy, and live animals reached 45 billion USD. Exports to China decreased significantly, due to newly imposed Chinese tariffs. The largest losses were in the oil seeds exports, down 71%, and replaced by China with imports from Brazil.

Is a trade war starting?

The US imposed tariffs on several EU products, and recently Airbus and Boeing subsidies have led to heated discussions and retaliation on both sides. According to EU trade chief Cecilia Malmström, the trade negotiations could allow the two sides "to avoid a potentially damaging trade war and end a self-defeating cycle of measures and countermeasures."

The EU stated it would suspend the trade talks should President Donald Trump impose new tariffs or refuse to withdraw existing steel and aluminum duties as part of the negotiations.

The US aims to remove trade barriers with the EU in several sectors, with the focus on gaining access to the EU's agricultural markets, since trade with China in the sector decreased significantly last year and the US has to find alternative markets.

The EU wants to eliminate tariffs on industrial goods, and to stop President Trump from imposing 25% tariffs on cars. In addition, it wants to keep agriculture, with the exception of fisheries, protected by tariffs.

However, the EU is open to review the non-tariff barriers currently in effect against US products. Both the EU and the US have agreed to reduce non-tariff barriers, specifically those related to food safety. The EU has rigorous regulation in place to protect public health and the environment. The US Agriculture Secretary Sonny Perdue expects a US - EU trade agreement to lift EU prohibitions on common practices in the US, such as using the growth-promoting drug ractopamine in pork production, or chlorine and other chemical rinses to disinfect chicken and vegetables, such as pesticides including RoundUp, which contains the endocrine-disrupting ingredient glyphosate. Mr. Perdue also expects the negotiations to include a review of the stringent oversight of gene editing and other new technologies. In addition, President Trump expects trade barriers on hormone-treated beef to be lifted.

Even if the EU maintains the non-tariff barriers, since the negotiators on both sides proposed to rely on each other's inspections and certifications procedures, it means the standards will be relaxed and the imported food will not comply with the regulations. Since the US relies on chemical treatments to kill contaminants, it will not be able to guarantee that US products meet the more rigorous food safety standards of the EU. The EU standards enforce food hygiene by ensuring that food businesses, from farms to restaurants, comply with EU law, and contaminants are kept away from food through monitoring. Trade would increase in spite of imported food not meeting the EU standards.

The largest companies who would benefit include food-processing JBS, Tyson Foods, Cargill, SYSCO, Smithfield and supermarket corporations Walmart, Carrefour, Tesco, Aldi, Schwartz Group, and Kroeger, amongst others. The recent mergers of agribusiness giants Bayer-Monsanto, Dow-DuPont and Syngenta-ChemChina could affect production since they set the prices for seeds and other products they supply to farmers.

The cost of opening the agriculture sector to the US would be very high and will have to be covered by the EU budget. Loss of jobs in the sector would lead to political volatility and affect the markets. EU farmers are supported by the EU's Common Agricultural Policy (CAP), launched in 1962. The CAP is managed and funded at European level from the EU budget. Last year, the EU support for farmers reached close to 60 billion EUR, of the total EU budget of 160 billion EUR. There are around 11 million farms in the EU and 22 million people work regularly in the sector. The farming and food sectors together provide nearly 44 million jobs in the EU.

However, we expect the US to put pressure on the EU to open the agriculture sector. It would not be the first time the US is using threats to persuade trading partners to make changes in policies. In 1971, President Nixon imposed tariffs of 10% on almost all commodities, until Japan and Germany adjusted their exchange rates. In 1985, President Reagan, faced with a growing trade deficit, persuaded Germany and Japan to revalue their currencies. In 2002, President George W. Bush imposed tariffs on European steel and the EU retaliated by imposing tariffs on cars and other products. US agriculture wars include the Chicken Tariff War of the 1960s with France and West Germany, and the 1993 Banana Wars with Europe which also involved Latin America.

What are the opportunities for US expansion into the EU agriculture market?

The US has to find new markets for the agricultural products no longer in demand from the Chinese market. The EU provides opportunities for the US to increase exports, if tariffs are lowered or removed, and even if the EU keeps the non-tariff barriers.

The charts below show the opportunities for the US to increase exports to the EU in oil seeds, meat, dairy and live animals. Higher exports of seeds and meat to the EU would lower the deficit considerably, since the EU imports from non-US trade partners reached over 13 billion USD in 2018.

The US could increase exports to the EU, most significantly in oil seeds up to 14 million tonnes and close to one million tonnes for meat products.

If the US - China talks reach a favourable outcome for the US, then the pressure on the EU is expected to be lower. However, in the absence of a US - China agreement, the EU would have to accept opening the agriculture sector. This will prevent the implementation of US planned 25% tariffs on cars and ensure the auto industry will not be affected. The job losses would have an impact on other sectors that provide inputs to the auto industry, as well as transport and logistics companies. The EU would have to allocate a higher percentage of its budget to increase support for farmers. The EU needs to ensure the 44 million jobs in farming and food sector will be protected and prevent the increase in political volatility in the region.

This column is based on data from IHS Markit Global Trade Atlas (GTA). Risks, opportunities, impact on supply chains and shipping industry can be identified for any products at 6-digit code level within GTA. Insights can be complemented with bill of lading data from PIERS and vessel movements via AIS.

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