Trade & contract management

Got Too Much Steel? Too Much Milk?

While President Trump has just started commercial hostilities on steel and aluminum, drawing a parallel between the difficulties of the steel industry and those of the dairy sector may seem surprising at first glance. But as Steve Suppan, from the Institute for Agriculture and Trade Policy (IATP), describes in an article1 reproduced below, in both cases there is a problem of sector production overcapacity, which pushes “exporting companies to dump those goods at prices below the cost of production”.

This has not gone unnoticed on this side of the Atlantic, but Trump’s announcements are part of a process of discussion, particularly in the context of the G20, aimed at reducing global steel overcapacity. Experts estimate that, given the current demand for steel, production levels are 16.5% over their optimal level, and even tough on the Chinese side of things a reduction of the equivalent of 11% of the optimal capacity2 has already been made.

Steve Suppan draws two important conclusions: “the response of so-called ‘free traders’ to the tariff announcement has been to panic, rather than to analyze why the tariffs will be levied”, and that if the United States did not get what they wanted it was because of a lack of attractive counterparts offered to China, indeed “trade policy negotiations […] are not about morality, but about trade-offs”.

So the economist points a finger at his country’s unhelpful attitude to the WTO regarding agricultural and food issues, a very sensitive issue for China. Similarly, as the United States is plunging into a dairy crisis, he denounces the American attacks against the Canadian dairy policy which aims precisely at managing supply, the more direct lever to avoid problems of overcapacity. Steve Suppan calls on President Trump to rise up against a dairy overproduction crisis that is driving dairy processors to send suicide prevention notes3 with the checks farmers receive for their milk.

In the end, we can only join Steve Suppan in his conclusion of bringing back supply control tools for the next Farm Bill: as for any heavy industry, the adjustment by the price is not enough in agriculture as in the iron and steel industry

Frédéric Courleux, Directeur des études d’Agriculture Stratégies

President Donald Trump’s announcement that he will apply tariffs to U.S. steel and aluminum imports—while temporarily exempting Canada and Mexico, and maybe other trading partners—is a partial and short-term solution to a real problem. Global oversupply of steel, aluminum and other commodities enables exporting companies to dump those goods at prices below the cost of production.

In a New York Times op-ed, Josh Bivens called the tariffs an “ad hoc and insufficient ameliorative fix for continuing policy failures that have decimated American manufacturing employment for almost two decades.” He’s right, but the long-term, macroeconomic fixes Bivins identifies don’t address the immediate cause of the tariffs.

The response of so-called ‘free traders’ to the tariff announcement has been to panic, rather than to analyze why the tariffs will be levied. Agribusiness exporters and farm organizations, which fear tariff retaliation will damage a U.S. agricultural economy already imperiled by years of below cost-of-production prices paid to farmers by agribusiness—according to U.S. Department of Agriculture calculationshave joined the trade lobby against the tariffs.

U.S. free traders have championed World Trade Organization (WTO) rules for protection of intellectual property, investors and more than 150 service sectors. WTO dispute settlement panels can authorize tariffs for dumping of industrial goods. These tariffs are calculated to offset the unfair price advantage of the dumped goods.

However, the Trump administration has repudiated not only the WTO dispute settlement process as unfair to U.S. companies, but multilateralism generally. It’s not surprising then that U.S. Trade Representative Robert Lighthizer’s attempt to negotiate a global compact on steel production overcapacity to reduce supply and increase prices has floundered because the agreement’s main target, China, has been offered nothing in return. Trade policy negotiations, as former WTO Director General Pascal Lamy once observed, are not about morality, but about trade-offs. But, as the USTR said of the WTO negotiations on agricultural subsidies, the U.S. has nothing it will trade off.

If trade policy were about morality, President Trump and the U.S. Department of Agriculture would be outraged at the severe harm caused by oversupply of dairy and other farm goods. U.S. dairy processors are sending farmers suicide prevention notices with meager checks for raw milk and a warning about low future prices. U.S. farmers dumped 43 million gallons of milkin the first eight months of 2016, rather than pay to transport it to receive more below cost-of-production prices.

If trade policy were about morality, Secretary Perdue and Congressional agriculture leaders would respond publicly to a February 25 Wall Street Journal article reporting USDA research showing 82 percent of U.S. farm family income comes from off-farm jobs, compared to 53 percent in 1960, the beginning of the free-trade era. As agricultural oversupply, below cost-of-production prices and high debt levels crush most farmers and ranchers, non-farm jobs, together with taxpayer subsidies, compensate partly for Farm Bill policy failure and agribusiness failure to pay above cost-of-production prices.

But because trade policy is not about morality, President Trump, Secretary Perdue and USTR Lighthizer advocate eliminating Canada’s dairy supply management program, which seeks to balance supply and demand, as antithetical to free trade in the North American Free Trade Agreement negotiations. Indeed, President Trump linked exemptions for Canada from the steel and aluminum tariffs to the elimination of dairy supply management.

According to the Canadian Dairy Information Centre, the value of Canadian dairy exports was CA $235 million (about US $181 million) in 2017. According to the U.S. Dairy Export Council (USDEC), the value of U.S. exports in January 2018 alone was US $400 million.

On July 26, former USDA Secretary Tom Vilsack, now USDEC’s CEO, testified to Congress, “Canada’s increasingly protectionist policies are diverting trade with attendant global price-depressing impacts, and are in conflict with the principles of free markets and fair and transparent trade.” Comparing the trade weight of U.S. and Canadian dairy export sales, the argument that Canada’s supply management program depresses global prices is preposterous.

Tariffs are an ad hoc, short-term response to the dumping of steel and aluminum into the United States. If Ambassador Lighthizer succeeds in forging a global steel supply management agreement, it will be because the United States offered appealing trade-offs. Eliminating Canada’s successful dairy supply management program will not begin to resolve U.S. farmers’ problems. For U.S. agribusiness to stop export dumping, the best way to do no further harm to U.S. farmers is to begin building supply management measures into the Farm Bill.
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