Trade in 2019: high stakes amid high uncertainty

January 2019

One thing is certain about what trade brings to the EU agri-food sector in 2019 – high-stake issues and a high level of uncertainty on how they will unfold.

The two major trade issues that could have a large impact on the sector in 2019 are the EU-US trade relations and Brexit (Mercosur will likely linger on following the election of Bolsonaro in Brazil).

We have dwelt with Brexit at large in our previous analysis and in our Global Food Forum. The impact of a no-deal Brexit would be catastrophic to many, and anything else than the UK staying in the customs union would negatively impact EU exports and raise concerns on increased imports from third countries. Stakes are high and uncertainty even higher. The moment of truth is fast approaching with the Brexit date set for 29th March, and we will no doubt come back to it shortly.

The other major trade issue concerns the EU/US trade relations, and this will be the main focus of our comments today.

The trade relations deteriorated sharply with the unilateral application by the US of tariffs on steel and aluminum imports from the EU (and others). That was followed by threats from the US to target with additional tariffs imports of cars and auto-parts from the EU. The aim of the US is to rebalance the log on trade in goods with the EU, and it is applying pressure through threatening to resort to trade protectionist measures or stretching its ability to do so under WTO rules.

The negative turn in the trade relations came to a thaw mid last year, with a commitment to negotiate freer trade and tackle non-trade barriers, and an additional commitment by the EU to import more soybeans and natural gas. The scope of the agreement has been contested from the beginning, with the EU adamantly refusing to include agriculture in the free trade talks, and the US asking for the opposite. The European Commission has still to present its draft negotiation mandate, and the US its negotiation objectives, but the odds are that the scope will differ, which does not bode well for the future of the talks.

Why has the truce been agreed and why has it hold so far? The answer should be found in the state of another big trade dispute, even more acute, between the US and China. The US has applied additional tariffs on a large part of Chinese imports, and China retaliated in kind. The US has a number of claims against China’s practices that are largely shared in the US and around the world, including in the EU, and the current Administration seems determined to obtain significant changes from China.

What the US tactically cannot afford is to fight at the same time two big trade battles – one against China and the other against the EU. The US seems determined to address its main concern (China) first, which led to the truce currently holding with the EU.

Recently however there are signs that the US and China are making some progress in finding an agreement. Talks are on-going, and the Chinese have given signs of goodwill by re-opening imports of US soybeans and approving a number of GMO varieties for US exports. The fact that the Chinese economy is not in good shape, is more dependent on trade than the US economy, and the one-party regime stability hangs on the economic welfare of the country is certainly a factor pushing Beijing towards accommodation. The self-imposed deadline is the 1st March. The outcome is uncertain, and either an agreement is found or the US has threatened to ramp-up the duties against Chinese imports.

Meanwhile the US Department of Commerce is set to present the result of its investigation on cars and auto-parts imports by mid-February. The investigation will be assorted by proposals and it is expected that additional tariffs will be included.

Where do we stand in this high stake, high uncertainty, trade dispute?
If the US and China find an agreement, the US will be in good shape and have freer hands to engage with the EU. Although ramping-up pressure on the EU does not enjoy the wide level of support in the US as pressing China, it would most likely come in with a choice for the EU between negotiating a trade deal potentially favorable to the US or face additional tariffs on some imports (no doubt cars).

In this scenario the pressure on the EU to negotiate a TTIP-light, including agriculture but excluding a number of other contentious issues like investment and public procurement, would be very strong. And the pressure of Germany, the main loser if cars are targeted, on France and others to agree on those terms would be as strong.

If the EU does not blink and keeps its current position of rejecting the inclusion of agriculture in the negotiations, amongst other disagreements on the scope of the talks, the probability of tariffs being unilaterally imposed by the US on EU cars and auto-parts increases, and with it the likelihood of EU retaliatory measures. A trade war who no-one knows where it would stop would follow, and a second round of trade retaliation could target EU exports of agri-food products, like wine, cheese and other products.

If the US and China fail to find an agreement, the EU might enjoy the current truce further. The European Commission is adroitly joining the US and Japan in pressing China at WTO, which might help in avoiding more conflict and trying to bring back trade disputes to the multilateral WTO, rather than letting the bilateral power struggles decide.

The indirect impact of the US-China trade wars would still be felt in the EU, partly as an opportunity to increase exports to China, but partly negatively as the Chinese and world economies would suffer to a certain extent. But for the agri-food sector that is a relatively minor risk compared with a US-EU generalized trade conflict, or a TTIP-light heavy on agricultural concessions. Worth recalling that the US is the EU’s top destination representing 16% of the EU28 agri-food exports, 22bn euros in 2017 with an EU positive trade balance of 11bn euros.

Uncertain times. And high stakes.