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The US trade policy agenda – implications for Australian farmers

Ever since the US presidential campaign was in full swing, the world has watched and waited to see whether the stern rhetoric from then-candidate, now US President, Donald Trump would turn into harsh action and see the destruction of the rules-based economic order underpinned by the World Trade Organisation.

To complicate matters further, there are two divergent views on what direction the Trump administration should take.  The ‘America-first’, economic nationalist camp, led by chief strategist Steven Bannon and director of the National Trade Council, Peter Navarro, are seen to be close to President Trump and tend to reinforce his campaign rhetoric.  The other faction is ‘pro-trade’ and is led by ex-Goldman Sachs chief operating officer, Gary Cohn.

The first faction emphasises policies to turn around America’s bilateral trade deficits with China and Germany in particular, and support aggressive action to turn those deficits around.  The latter faction tends to concentrate on the more orthodox economic view on the mutually beneficial nature of international trade and that trade deficits are not ‘a problem to be solved’ per se.

The uncertainty within the administration is compounded by uncertainty over reactions from other countries, particularly China, given it has been singled out for particular attention in the President’s comments.

One of President Trump’s first actions as President was to withdraw the US from the Trans-Pacific Partnership (TPP), which has forced the other 11 countries (including Australia) to reconsider their approach to bilateral and regional trade agreements.

While we still don’t know exactly how things will play out, the release of the US trade policy agenda last week makes a few things clearer.  I will now cover three main aspects of the US trade policy agenda – the administration’s approach to:

  • the World Trade Organisation (WTO)
  • bilateral and regional agreements and
  • other related policies, such as the border tax adjustment policy proposal

The WTO

The US has always taken a fairly aggressive approach to the WTO, heavily engaging in the WTO dispute settlement processes, while asserting the sovereignty of the US when WTO decisions do not go in its favour. 

If anything, the trade policy agenda has signalled an intent to pursue this approach even more aggressively.  Part of the rationale for this stance is the view on the economic nationalist side of the administration that China has used its accession to the WTO as a vehicle to undercut American interests.  The agenda singles out two levers – section 201 and section 301 of the US Trade Act 1974. 

Section 201 or the safeguard provision, allows the US government to impose tariffs or duties on products where an investigation proves that a domestic industry is suffering serious injury as a result of imports.  Australia has the ability to impose similar duties on imports through the Anti-Dumping Commission.

Section 301 is a bit more vague in that it allows the US to impose trade sanctions on countries that ‘violate trade agreements’ or engage in ‘unfair practices’.

Bilateral and regional agreements

The Trump administration’s withdrawal from the TPP was always expected.  However, there was not much information on what, if anything would replace it.  The Trade Policy Agenda makes clear that there will be an increased focus on bilateral trade agreements and these will increasingly be used to leverage US interests – strategic and commercial.

On the approach to other TPP nations the agenda spells out:

…[the US Trade Representative] intends to continue building strong bilateral engagement with Asia-Pacific partners to maintain American influence in the region…bilateral discussions will present unique opportunities to engage Asia-Pacific partners in areas where TPP was unable to provide adequate market access of American-made goods and agricultural products.

The strategies to lock in the gains for Australian farmers negotiated under the TPP will vary substantially, depending on the commodity.

For beef, any bilateral agreement between the US and Japan would imply that Australia would need to reopen negotiations under the Japan-Australia Economic Partnership Agreement to ensure Australia’s preferential access to the Japanese market is not eroded.  For horticulture producers, the main strategy will be to negotiate bilaterals with Canada, Mexico and Peru.

For other commodities, it may be to pursue the Regional Comprehensive Economic Partnership or other agreements more vigorously.  Another more general priority for the agricultural sector will be to try and transfer ‘gold-standard’ provisions from the TPP into other agreements.

The US has also flagged a review into the AUSFTA agreement, although given the US has a bilateral trade surplus with Australia, it is unlikely to be a focal point for the Trump administration.

Other related policies

It is not just US trade policies that have the potential to affect the Australian agricultural sector.  The Trump administration’s proposed tax policy – a ‘destination-based cash flow tax’ (DBCFT) – has the potential to send ripples through the global trade landscape.

The Trump administration argues that a DBCFT will encourage US firms to ‘onshore’ their production by rewarding US firms that export and punishing firms that import and thereby reduce or eliminate the US trade deficit.

In contrast, economists argue that such a tax will be counterproductive because of the following effects:

  • a range of firms that import a lot of products, such as US retailers (which are also large employers), will face a large increased in tax liabilities;
  • prices for American consumers (particularly those on low-incomes) will rise;
  • the USD will rise, nullifying any gains; and
  • global supply chains will be disrupted.

Furthermore, it is likely to fall foul of WTO rules and might cause other countries to take retaliatory action.

Summary

In brief, there is much water to flow under the bridge, but it is clear that the Trump administration’s desire to reassert US dominance and pursue its own interests with little regard for other countries is likely to shake up the existing order.  The administration’s trade and tax policies could provoke retaliation from trading partners.  It could even lead to a fracturing of the global rules–based trading system.

Hopefully Australian agriculture will not get caught in the crossfire!

Scott Kompo-Harms is NFF's General Manager of Trade & Economics

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