A Hard Landing for Some: US Trade Tariffs on EU Agricultural Products

On Wednesday, October 2, the WTO ruled in favor of the US in a long running trade dispute over illegal government support to European aircraft builder Airbus. It allowed the US to impose tariffs on USD 7.5bn worth of products from the EU-28. The tariffs proposed are not a broad list focused on the whole European agricultural sector, rather it targets specific countries and product categories. For example, in 2018, almost 80% of US wine imports in value terms were imported from the EU-28. Not only do US consumers favor European wines, they also have a taste for whiskies, olive oil and dairy products from the region (see Figure 1).

Alcoholic Beverages: French and Spanish Wine Impacted Most, Followed by Scottish Single Malt Whiskies

The US accounts for around 18% of French and 12% of Spanish wine exports in value terms. Even if sparkling wines and those with over 14% alcohol content are excluded from the tariffs, as it seems to be the case, around 60% of the French and Spanish wine sales to the US by value will be affected by the tariffs. The impact of tariffs differs by product and price range. Premium wines may be able to transfer a part, or all of, the increase to consumers. For standard wines, this is more challenging as a price increase may trigger a shift in demand to other alternatives such as Italian wines or local, US wines.

Scottish single malt whisky will be the second-most affected category, as the US accounts for 20% to 25% of total single malt exports. Given the premium position of single malts, the market would expect these products to show some resilience but not to be immune to a rise in prices. Any consumer shift may benefit American whiskies.

Olive Oil: US Market an Important Outlet for EU-28 Olive Oil, Impact of Tariffs Limited to Spain

French and Spanish wines are not the only Southern European product for which the US is an important market. In value, around 75% of US olive oil imports originate from the EU-28. The US accounts for 11% of total Spanish olive oil exports in volume. The impact of the announced tariffs appears to be limited to packaged (18kg or less) virgin and olive oil imported from Spain. Bulk virgin and olive oil exports from Spain, and all olive oil exports from other EU countries are not affected.

Thus the tariff has a negative impact on US consumers, who will pay higher prices, and on food service and retailers, who can lose sales of branded/bottled Spanish olive oil. Spanish exporters of packaged olive oil lose exports to the US and will need to find other alternative markets in case of rationing by US consumers. Potential beneficiaries of the proposed tariffs are exporters from Italy, Greece, and Portugal, who can increase market share at the expenses of the Spanish exporters of packaged olive oil. Local US producers may also benefit from the higher prices.

Dairy Products: Italian Cheese and Irish Butter in the Spotlight

In total about 107,000 metric tons of EU dairy products fall into the 65 HTS codes subjected to an additional 25% ad valorem tariff from October 18. Cheese will be the hardest-hit by the additional import tariffs. Total US cheese imports totaled nearly 176,000 metric tons in 2018, with EU cheeses representing 134,000 metric tons. The cheeses subject to the additional tariff represent about 55% of US imports of European cheeses in 2018. Italian cheeses are the most vulnerable, with nearly 20,000 metric tons, or 60%, of their 2018 cheese exports under the impacted tariff codes subject to the additional tariff. The potential impact of the tariffs depends on a product’s price and category. Premium cheeses may be able to pass on a larger share of the tariffs to US consumers than commodity cheeses. Nonetheless, the proposed import tariffs might also provide an opportunity for US and non-EU producers of European-style specialty cheeses, to replace imports from targeted countries.

Ireland will feel the brunt of the additional tariffs on both butter and cheese exports. Combined, Irish cheese (20%) and butter (80%) exports to the US in 2018 totaled more than 35,000 metric tons, that would now be subjected to the additional tariff. Through July 2019, US imports of Irish butter and cheese are running ahead of the prior year by more than 30%, likely in anticipation of the potential for higher tariffs.

Tariff Consequences Appear to Be Limited For European Pork, and Fruit and Vegetables

Pork trade flows that are subject to US tariffs represent about 1% of total EU exports in value terms. The new tariffs mainly affect high-value specialty pork products, and alternative export destinations for such products may be limited. On the other hand, given the current global pork market situation, we expect EU exporters of commodity pork products that are affected by the new tariffs to be able to find new markets for this volume, mainly in Asia.

Trade flows that are subject to US tariffs represent less than 0.14% of total EU fruit and vegetable trade in value terms, limiting the consequences of tariffs for fruit and vegetables.

The impact of the proposed trade tariffs differs per product and country, with wine, cheese, butter, and olive oil to be impacted more than pork, fruit and vegetables. Depending on the sector, the impact of the tariffs consists of:

- US consumers to pay higher prices for targeted EU-28 agricultural products.
- Substitution effect: US consumers shift to other products in the same product category. This could benefit non-tariff countries and local US producers.
- EU-28 producers of targeted products may face lower margins if producers cannot transfer the tariffs directly to (US) consumers.
- Relocation of impacted EU-28 production to non-tariff EU-28 countries, which is currently being considered by European spirit producers. Another option is to use alternative shipping options. Producing in the country of origin, for example, shipping in bulk, and then bottling in-market, assuggested by our recent note on Foreign Beer in America

Looking Beyond the Impact on Food and Agriculture, What Effect Do the Tariffs Have on the Global Economy?

According to RaboResearch report ‘US raises tariffs against the EU’, the overall macroeconomic impact of the announced US protectionist package is very small. Although limited, Germany will face the biggest GDP losses (-0.004ppts). These losses are expected to occur in the country’s heavily-industrialized sectors like machinery and equipment, computers, electronic and optical equipment, and aerospace (Airbus). Some countries are likely to benefit due to export substitution effects – e.g. Austria, China and Brazil – but these effects are also very small.

Remains the million-dollar-question: are the announced tariffs the first step towards a transatlantic trade war? Although there has been some trade tension between the US and EU in the last couple of months, for now we do not expect a fully-fledged trade war between the EU and the US.

For a start, the tensions between the US and the EU are of a completely different nature than in the US-China trade war. As stated in several Rabobank reports, the US-China trade war is not just about the large deficit that China runs with the US, it is rather a geopolitical power struggle. Secondly, the Trump Administration understands that the US economy will be much worse off if it starts a trade war against Europe. Finally, President Trump may probably not want to upset financial markets much further.