Slow economic growth in the U.S. and the EU and no movement on the WTO Doha Round of trade policy negotiations have generated interest in proposals for zero tariffs on goods trade between the two partners. As is true throughout the world, agricultural tariffs are higher than industrial tariffs and the lower tariffs would likely cause some production adjustments. The U.S. already has zero tariffs on agricultural goods under NAFTA and is moving towards zero in fifteen other markets under various free trade agreements (FTA). As major agricultural importer and exporters, moving to zero tariffs may be easier than many expect, but other trade differences would become more important.

 

The EU imported $10.87 billion of agricultural products from the U.S. in calendar year 2010 led by soybeans and products at $1.52 billion followed by tree nuts at $1.47 billion. Fruits, vegetables and juices were third at $834 million, tobacco fourth at $441 million and wine and beer fifth at $438 million. Soybeans enter the EU at a zero tariff under an agreement first reached in the 1960s. Tree nuts also have low tariffs averaging about 5 percent. Fruits and vegetables have tariffs of about 15-20 percent with juice tariffs as high as 37 percent. Unmanufactured tobacco has tariffs of about 15 percent with manufactured product tariffs of 35 percent. Beer enters tariff free, while wines have an average ad valorem equivalent rate of 8.9 percent.

The U.S. imported $15.47 billion of agricultural products from the EU in 2010 led by wine and beer at $4.46 billion followed by essential oils at $1.96 billion. Fruits, vegetables and juices were third at $942 million, snack foods fourth at $854 million, and cheese fifth at $725 million. As in the EU, beer enters the U.S. tariff free, while wine has an average tariff of only 4.3 percent. Essential oils enter with low tariffs of 2-4 percent, with a few entering at zero. Snack foods cover a wide range of products, but they likely enter at tariffs of 5 percent or less with some products tariff free. Fruit and vegetable tariffs are generally 10-20 percent with higher rates for some seasonal imports. Some products are tariff free all year. Cheese has import tariffs of generally 10-16 percent with quantity restrictions on yearly imports.

Compared to the rest of the world, agricultural trade between the U.S. and the EU is already relatively free. Some of that is by historical precedent, like the EU soybean tariff set low when soybeans were much less important for livestock feed and human vegetable oil consumption than today. The U.S. needs access to essential oils and low tariffs are a logical choice. The fruit and vegetable category would be one where both countries would gain from more open markets. Any changes for products with higher tariffs will likely be opposed by domestic interests in those industries. Beer drinkers would see no change, while wine consumers would see small changes compared to much higher tariffs in the rest of the world. Zero tariffs could cause other markets to develop more fully and benefit consumers and efficient producers.

U.S. agriculture has a unique situation compared to other U.S. industries related to non-tariff barriers to trade. Issues of science on hormones in beef production, crops produced with biotechnology and pathogen controls in meat processing have become major barriers to trade. The U.S. has had a 15-year dispute with the EU about science-based import restrictions on beef produced with the use of growth-promoting hormones under the WTO Agreement on Sanitary and Phytosanitary Measures (SPS). The WTO ruled in favor of the U.S. on the science, but the EU has refused to allow imports. Two years ago the two countries reached a four years agreement on beef trade that left the underlying dispute unresolved.

The U.S. has had almost as long a disagreement over the use of biotechnology in developing new crop varieties. The U.S. has prevailed in WTO cases based on science, but the EU continues to retard the process of approving new corn and soybean varieties for importation and countries have prevented the planting of biotech crops. According to the International Service for the Acquisition of Agri-biotech Applications, only six countries in the EU grew a total of 91,000 acres of biotech corn last year, with Spain accounting for almost 77,000 acres of the total.

The U.S. has a thirteen-year disagreement with the EU on pathogen reduction treatments (PRTs) for poultry meat. The treatments are standard practices in the U.S. and the European Food Safety Authority found that risks were minimal from treating poultry. The science has increasingly sided with the U.S. on PRTs, but EU officials continue to reject their use.

According to the U.S. Chamber of Commerce, two-way trade for all products is $600 billion per year with another $2 trillion invested per year in each other’s markets. Combined GDP would increase by $180 billion in five years with no tariffs, more than the added growth expected from a successful completion of the Doha Round of negotiations. At a time of increased competition from developing countries, that kind of boost to economic growth could be good for the agricultural economies in both markets and make them more competitive in world markets.

The potential for economic growth in industrial markets in the EU may encourage the EU business community to become more involved in the science issues in agriculture that could be a stumbling block. The long-running unresolved issues show that winning WTO cases alone will not resolve them. The EU has the right to not change policies and accept higher tariffs on products sold into the U.S. market. The loss of potential gain from a tariff reduction agreement may finally be more costly than other EU businesses are willing to incur.

An immediate move to zero tariffs would be an FTA without all of the transition periods of 15-20 years that are common in FTAs. Those transitions usually exist for political reasons, not economic ones. Any agreement would need to address sanitary and phytosanitary market access issues for agriculture. A zero tariff agreement would also provide a good model for others to follow.

Ross Korves is the Economic Policy Analyst for Truth About Trade & Technology.