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January 7, 2019 | Remaking the TPP Without the US: US Ag Exports to Japan Will Plunge

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
The US left the TPP when Trump took office. The world moved on. It’s now the CPTPP. Some call it the anti-Trump pact.

US farmers are about to take a big export hit as the Trans-Pacific Pact, TPP moves on without the US. It’s a new world order, and the US isn’t involved.

Eleven countries are pressing ahead with the Comprehensive Agreement for Trans-Pacific Partnership (CPTPP), defying barely-disguised efforts by the Trump Administration to kill the treaty.

A vanguard of Japan, Singapore, Mexico, Australia, Canada, and New Zealand activated the treaty over the weekend, ripping down barriers to trade in almost all goods. It eliminates 18,000 tariffs, and slashes others in stages over coming years.

The great irony is that the US itself drafted much of the original text under the Obama Administration, aiming to ensure that Washington writes the rules of global trade and commerce in the 21st Century, not Beijing.

The pact opens up trade in services on the basis of equal treatment. It cuts the costs of customs clearance, rules of origin, and compliance to a minor friction.

The White House assumed that the TPP would wither on the vine without US impetus. Instead, long-standing US allies across the Pacific have brushed off pressure from Washington and forged ahead regardless with what is now known as the “anti-Trump pact”.

“America is the biggest loser,” says the Peterson Institute in Washington. The fall in food tariffs under the CPTPP means that US farmers will be undercut by exporters from Australia, Canada, and New Zealand in the lucrative Japanese market. Wheat from Canada will be $70 cheaper per metric tonne by 2020.

The latest twist is that Chinese officials have begun to explore the possibility of joining the pact that was supposed to exclude them, prompting a polite though wary riposte from the founding members.

Beijing is alarmed by clauses in the revamped Nafta deal for North America that gives the US an effective veto if either Canada or Mexico wish to sign a future trade deal with a “non-market economy”, clearly meaning China. Membership of the CPTPP would help to circumvent this legal clause. Precisely for this reason the Trump Administration would fight Chinese accession tooth and nail.

U.S. Farmers Fear Lucrative Japanese Exports Will Wither

After seeing exports to China tumble, U.S. farmers and ranchers are now bracing for more losses in their next-biggest Asian market: Japan.

On Dec. 30, Tokyo will begin cutting tariffs and easing quotas on products sold by some of American agriculture’s biggest competitors—including Canada, Australia, New Zealand and Chile—as part of the new 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

The U.S. was originally part of that bloc, but President Trump pulled out last year, saying the agreement would have harmed American manufacturers and workers by loosening restrictions on U.S. imports of autos and auto parts, and intensifying competition with low-wage Asian nations.

Tokyo will follow up on Feb. 1 by implementing the European Union-Japan Economic Partnership Agreement offering similar breaks for the 28-country bloc’s agricultural products, aiding American rivals in France, Spain, Italy and the Netherlands.

Japan, unlike China, isn’t moving to block U.S. goods by retaliating for Trump administration tariffs. Instead, it’s doing the opposite, accelerating an ambitious market-opening agenda with more than three dozen countries spanning the globe—excluding the U.S.—that have unified to demonstrate to a skeptical Washington the advantages of free trade, and the costs of shunning it.

But the effect will be similar. Japan’s new free-trade push “threatens to cut into U.S. market share and depress profits for U.S. agricultural exporters by granting preferential access to … international competitors,” the Trump administration’s Agriculture Department warned in a May report.

By April 1, exporters from the EU and TPP will face a 26.6% Japanese tariff for chilled and frozen beef, compared with a 38.5% tariff for Americans, while paying a 13.3% duty on prepared pork, versus 20% for Americans.

Some producers say they’re already losing business as a result. Kevin Smith, a vice president at Seaboard Foods LP, a Kansas-based pork producer, said his company is “already seeing a decline” as longtime customers “develop new supply chains so they can be fully prepared to take advantage of the tariff reduction opportunities.”

Not a Free Trade Agreement

For starters, neither CPTPP nor TPP was a free trade agreement. It’s ludicrous to call it such. 26.6% tariffs are proof enough.

Yet, US agricultural exports will undoubtedly dive because the US will face 38.5% tariffs by Japan.

Trump will now have to execute bi-lateral trade agreements.

What might Japan want? How about lower tariffs on cars for starters.

Mike “Mish” Shedlock

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January 7th, 2019

Posted In: Mish Talk

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