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LONG-TERM CHALLENGES: The ongoing battle with China provides evidence that trade conflicts are difficult and can lead to protracted, long-term challenges.

The economics and politics of trade

Policy Report: Building relationships, increasing access and growing trade can be a challenging process.

International trade is an important and critical contributor to the strength of Nebraska agriculture. It also has been an increasingly volatile and unpredictable sector over the past couple of years.

Recent headlines of a trade agreement in principle with Japan and an agreement on expanded access for U.S. beef into Europe have been bright spots in what otherwise has been a deepening challenge of trade conflict with China and other trading partners.

The ongoing battle with China provides ample evidence that trade conflicts are difficult and can lead to protracted, long-term challenges, regardless of rhetoric to the contrary. However, it also is worth recognizing that the formal process of trade negotiations, agreements and resolution of disputes also can follow a long, cumbersome path.

Ultimately, trade policy is just difficult and time-consuming. While the economics of trade say the effort is worth it, the politics of trade demonstrate just how difficult it can be.

Economic theory explains the gains from trade through the concept of comparative advantage. Essentially, everyone is relatively better at producing something than everyone else and benefits from focusing on that advantage and trading with others.

That explains the U.S. advantage in producing agricultural products on a productive resource base, as well as the East and Southeast Asian advantage over time in labor-intensive manufacturing activities.

However, the same graphs and analysis that demonstrate the gains from trade also can demonstrate how some groups lose — namely, the resource owners and laborers in industries that face competition from new or increased imports under growing trade access. As those groups seek to protect their economic interests, they also seek to influence the political process and restrict trade growth to their benefit.

We see both the economics and politics of trade play out in every issue and can better understand why the process can be so difficult and time-consuming. We also can see why trade is so important and politically sensitive for agriculture.

U.S. ag exports have grown from about $51 billion in 2000 to more than $140 billion in recent years, before dropping off the past two years amid lower prices and trade conflicts. While those amounts are not adjusted for inflation, a real measure of the importance of trade is that the value of U.S. ag exports equaled about 24% of the total value of ag production in the early 2000s and grew to about 33% in the past few years.

Estimated ag exports from Nebraska show a similar pattern with growth from about $2.3 billion in 2000 to more than $7 billion in recent years, before falling back to about $6.3 billion in 2017 and similar lower projections in 2018 and 2019 as trade conflicts have hurt exports from commodity-intensive production states such as Nebraska.

The trade conflicts revolve around the ongoing battle with China and some other trading partners. As President Donald Trump implemented multiple rounds of punitive tariffs and protections for selected industries, agriculture faced the brunt of retaliation given its status as one of the U.S.'s primary sectors with a trade surplus and its political sensitivity and influence.

We have seen repeated cycles of tariffs and retaliatory tariffs followed by potential negotiating breakthroughs and promises to increase trade, only to be followed by a lack of progress and more tariffs, including another round of proposed tariffs to be implemented in September.

More than 18 months into the current trade conflict, it is difficult to see the end in sight. And even if a resolution could be negotiated quickly, removing tariffs and restoring market access would only be the first step on a long road to reestablish trade relationships and trust and get product moving again.

On the other hand, trade diplomacy is not easy or quick. The recent announcement of a trade agreement in principle with Japan has been hailed as a significant breakthrough and gain for agriculture, and it is. However, it also is the result of more than two years of talks to improve U.S. access into Japan that was first promised in the original Trans-Pacific Partnership before the U.S. withdrew from the agreement in January 2017.

The U.S.'s efforts to negotiate with Japan on a bilateral basis were difficult and challenging, resulting in an agreement that ultimately may deliver most but not all of the gains that could have resulted from staying in the TPP.

Even when trade agreements exist, resolving disputes can be difficult, time-consuming and costly. The celebrated agreement earlier this summer with the European Union to increase the share of access for U.S. exports of nonhormone-fed beef is the latest compromise to resolve a trade dispute that dates to the 1980s.

After the EU (then the European Commission) implemented restrictions on added hormones in livestock production and imports, the U.S. complained and ultimately filed a case through the World Trade Organization in 1996.

The U.S. won the WTO case but was not able to convince the EU to drop its ban. A decade of WTO-authorized retaliatory sanctions led to a decade of compromise and promises of increased access to EU markets for nonhormone-treated beef, but still fell short of full relief for U.S. beef exporters.

The current agreement promises a bigger share of the EU market for nonhormone-treated beef to the U.S. than what was realized in the past decade, but it is still technically a compromise on a dispute that started more than 30 years ago.

In short, building trade relationships, increasing access and growing trade can be a challenging and long-term process, even as disputes or events can all too easily destroy existing trade. Unfortunately, there are numerous other issues that also have hurt U.S. trade opportunities over time, whether it was the first U.S. case of BSE in 2003 that cut off beef trade, or the Starlink corn trait that was not fully approved globally and disrupted corn trade.

In the case of BSE, the U.S. lost access to global beef markets essentially overnight and had to work diligently to regain that access over time, with some markets opening only after more than 10 years of scientific and political negotiations.

While it is relatively straightforward to recognize the benefits of trade, it also is apparent that trade negotiations, agreements and disputes can take a long time to resolve before enjoying the full benefits of trade. The current trade conflict may bypass the lengthy WTO process, but it too appears to have a long and painful path ahead.

Federal, state and industry ag trade promotion efforts continually work on building and maintaining trade contacts and relationships, but it can take a long time to build or rebuild markets and market demand, putting a premium on strong principles and political will to stand for trade.

Lubben is an Extension policy specialist at the University of Nebraska-Lincoln.

TAGS: Management
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