Trade Barriers We Are Not Talking About

Non-Tariff Trade Barriers Influencing Ag Markets

Tariffs have been the hot topic for months. Dissected for their potential merits and negative side effects alike, they continue to be a major influencer of agricultural decision making. Yet, tariffs are one strategy among many when it comes to managing markets and building strategic trade relationships. With our eyes fixed on tariffs as a driving force are we missing the non-tariff trade barriers that could have just as significant of an effect on markets?

Caps, quotas, export licenses and voluntary export restraints are still at play. In fact, if tariffs are primarily a negotiation tool then a combination of the above list might be the reality we actually end up with as market influencers. Technical barriers and non-tariff barriers represent a far more complex trade dynamic and if they are left unaddressed could be problematic for agriculture in the United States.

Questioning Quotas

Typically used to protect domestic production of goods, quotas operate as a supply management tool. Done effectively they allow for a healthy flow of trade between nations while simultaneously reducing competition for domestic industries. In theory, markets are still accessible but the option to dump cheap products is removed. Industries that have suffered because foreign producers have dumped cheap goods into domestic markets are afforded a chance to build back. However, actual dynamics are typically far more nuanced. 

Quotas by nature act as a supply constraint mechanism. Minimal supply means price points can continue to rise relatively unchecked and end up costing consumers more than a fixed tariff rate could.  Minimal competition means minimal innovation, and in some cases, lower quality goods. And, even low quality goods under supply constraints tend to sell at higher prices which is less than ideal for the consumer. 

Because quotas don’t operate strictly in conjunction with regular fiscal years and can cover small increments of time, markets can experience detrimental stalls. If quota amounts change quarterly investors become wary of the complex and ever changing targets. Employers are forced to play the short game in their decision making rather than rely on long term projections.  The same complexity can make it feasibly impossible to prioritize innovation.

Examining Export Licenses

Food safety, public health regulations and environmental stewardship are noble endeavors and ones that the general public tends to hope trade negotiators consider as they secure contracts and build global relationships. Achieving these goals requires a predictable framework that is able to consistently track goods; a standard by which all suppliers adhere to. Acquiring export licenses that prove products are safe, healthy and environmentally friendly has become increasingly complex; or rather, technical.

Traceability for the sake of public health and environmental protection continues to create costly hoops for industries to jump through. Not only do companies need to pay for the precision technology or system overhaul that earns them the stamp of approval, they also need technology that allows for tracking goods across an entire supply chain as well as the licensing fees themselves. Aside from financial costs, the process of securing an export license can be time consuming and lead to delays in shipments. Delays that cause supply constraints raise prices for consumers and can create volatile markets. Like quotas, highly regulated export licensing structures can deter investors, stall growth and increase uncertainty for employers. The cost to comply isn’t always worth potential gains.

Unchecked, an export licensing dynamic is a sliding scale. A healthy licensing framework can move towards free or increasingly efficient trade relationships which are better equipped to support public health, environmental stewardship and economic development. The opposite fosters corrupt trade practices and the manipulation of markets. And, in the middle, any number of variables including country to country relationships and goods specific dynamics that contribute to the ever changing structure of export licensing regulations.

In theory, more framework should yield more predictability, but the same framework can also distort market perspectives. A product might be presented as being in short supply when really a company is jumping through paper obstacles to be granted market access. In the meantime consumers experience price hikes and the desired predictability goes out the window.

(In) - Voluntary Export Restraints

If tariffs are a negotiating tool then voluntary export restraints could become more common. Rather than subject themselves to high tariff rates or absorb the costs of securing export licenses, countries can opt to take a loss by voluntarily reducing their exports. Striking a bargain such as this can be a strategic move to protect domestic production or even prioritize safety standards much like licenses without fixing export quantities indefinitely.

Like both quotas and export licensing, voluntarily reducing exports can effectively address dumping issues. Choosing to export fewer goods has the potential to create a supply constraint that, in some cases, allows for products to be sold at higher prices. Japanese cars are a perfect example of voluntary restraints. Japan chose to export fewer cars to the United States rather than face steep tariff percentages. The limited supply of cars sold at high prices. American’s absorbed the higher cost until other models became cheaper. When they did, Japan moved some of its manufacturing to the United States to stay competitive.  Japan couldn’t dump cheap goods into the United States, but they were not completely cut off from American markets either. They were not bound by caps and quotas forever and managed to maintain a healthy manufacturing industry and create new avenues of growth.

Predictably Unpredictable

At the end of the day, is a flat rate tariff more predictable than the complex and increasingly nuanced dynamics that quotas, licenses and voluntary restraints offer U.S. trade relationships? In agriculture uncertainty has a long term impact. Already farmers and ranchers are leery of over investing in crop production this year without the guarantee of global market access. Decisions made now could create constraints or surpluses in a few months and these decisions are largely considering tariffs over quotas, technical barriers or voluntary restraints.