TradeVistas | lobsters are at center of trade war

Lobsters are a Prawn in the Trade Wars

Lobster Trap

TradeVistas has named the lobster the “2020 person of the year” in international trade. It’s a well-deserved honor. The lobster is at the center of a trade war that will go down as one of the most compelling cases of the futility of tariff politics.

American lobster and lobster fishers got caught in a trade war being fought on multiple fronts. The United States is battling China on one major front and the European Union (EU) on another, but – as is typical in trade wars – it’s lobster production in another country that’s winning the war. In this case, Canada.

If that weren’t enough, tariffs are the root cause of the trade war, but not in the way you might think. China’s tariffs on U.S. lobsters are in retaliation for President Trump’s China tariffs over intellectual property. The EU didn’t raise its tariffs on U.S. lobster, but rather lowered them on Canadian ones as part of their free trade agreement. In other words, U.S. lobsters were never meant to be the target of either Chinese or EU protectionism.

Trade Person of the Year

Just a Prawn in the Trade Game

How the lobster trade war started isn’t nearly as interesting as the efforts to stop it. The Trump administration has tried to restore market access for American lobster but were outmaneuvered in part through a trade liberalizing measure by China.

Start with China, which hit American lobsters with a 25 percent tariff when President Trump rolled out his China tariffs under Section 301. This tariff hike hurt, but then China moved to lower its lobster tariff at the World Trade Organization (WTO), and this hurt even more. In particular, China slashed its most-favored nation (MFN) tariff to 7 percent while imposing retaliatory tariffs on U.S. lobster of as much as 40 percent. American lobsters were effectively priced out of the market.

President Trump responded with an Executive order instructing the United States Trade Representative to monitor Chinese imports of lobsters. China’s Phase 1 purchase commitments in the US-China trade deal were to be tracked and “appropriate action” to be taken if China fell short. But these purchase commitments are hard for China to deliver on given the extra import duties on American lobsters. The data speak for themselves: since 2018, U.S. lobster exports to China have fallen by nearly two-thirds.

The irony is that things would be worse were it not for China’s rising trade tensions with Australia, another key supplier of lobsters. Australian lobsters have enjoyed the benefits of zero tariffs under the China-Australia free trade agreement since 2015.

Lobster X to China

Shellfish Trade Liberalization

Then there’s Europe. This front of the lobster trade war is especially interesting because it defies convention. The EU didn’t wage a protectionist campaign against the United States. Instead, since 2017, it has had free trade with Canada. The Comprehensive Economic and Trade Agreement (CETA) zeroed out tariffs on Canadian lobsters, leaving their American seafood brethren 8 percent more costly, since U.S. exporters must pay Europe’s MFN rate. In other words, the penalty in the marketplace isn’t because Europe is cheating, but because the United States is falling behind in the race to sign preferential trade agreements.

Back in 2019, Washington had asked Brussels for a deal to offset Canada’s advantage in lobster tariffs. The EU said no, insisting this would violate MFN. Then, this past summer, the EU agreed to zero out it’s lobster tariffs on an MFN basis, retroactive to August 1, in exchange for the United States reducing its tariffs on certain items by 50 percent. This ad hoc approach to trade liberalization, touted as the first tariff cuts in US-EU trade in 20 years, looked like it had plugged the hole. But then came decisions in a longstanding WTO dispute between Boeing and Airbus.

Out of the Blue Sky into the Sea

After more than a decade of WTO litigation, the United States and Europe were both authorized to retaliate. The United States struck first, imposing 15-25 percent tariffs on European food and drink, among other items, up to a maximum of $US7.5 billion. Europe’s authorization was postponed due to COVID-19, but came through this fall, up to a maximum of $US4 billion.

The EU’s original hit list, drawn up to $US25 billion, had included six tariff lines covering frozen and live lobsters. But this week, to the surprise of many, Europe’s revised hit list, redrawn to $US4 billion, spared lobsters entirely. Other seafood was hit, including salmon. But the August deal to walk back the tariff differential caused by CETA had ironically shielded American exporters from WTO-authorized retaliation on civil aircraft. If that doesn’t say it all.

Lobster X to EU

Clawing Back to Normal?

Things may change. A failure to negotiate a US-EU deal on Boeing-Airbus could see Europe yet impose tariffs on American lobsters. But even if that doesn’t happen, the impact of the original 8 percent tariff differential, CETA versus MFN, has been shocking enough.

In 2016, a year before the debut of CETA, U.S. exports of lobsters to Europe were valued at US$152.2 million. In 2019, they stood at US$57.8 million. Through the first nine months of 2020, U.S. exports were valued at US$14.3 million. With these figures in mind, imagine what a 15-25 percent retaliatory tariff would do.

U.S. trade policy has punished the lobster industry for years. Lobster fishermen should be included in the agricultural relief programs enacted by Congress. The takeaway for politicians is that no one set out to wage the lobster trade wars and no one can solve them with more tariffs.

The lobster, as the “person of the year” for 2020, reminds us that freer trade always puts the lie to tariff politics.