June 30, 2015

TRADE OPPORTUNITIES: Elimination of Tariffs Should Enhance Export Shipments

As the Trans-Pacific Partnership (TPP) negotiations near their conclusion, producers and exporters of a host of fruits, vegetables and nuts can start eyeing some of those markets—most notably Japan—with renewed vigor.

The countries engaged in the TPP negotiations represent nearly 40 percent of global GDP and are the destination for 44 percent of U.S. exports.  There are 12 countries participating in the Trans-Pacific Partnership (TPP): the United States, Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.  While some are covered by other trade agreements, several of these nations offer great opportunities.  Maybe none more than the potential export opportunities that exist for Japan.  And maybe even more important for the long term, this TPP negotiation could offer a framework for similar agreements with other partners on both sides of the Pacific Ocean with China lurking as the largest fish in that sea.

The elimination or reduction in tariffs plays a key role in the ability for the United States to gain market access.  At present, Japan imposes tariffs ranging from 3 to 9 percent on fresh vegetables, 6 to 17 percent on fruit and 10 percent on tree nuts.  Malaysia assesses tariffs ranging from 5 to 15 percent on U.S. exports of fresh fruit.  Gaining greater market access to Vietnam is hampered by tariffs of 12 to 20 percent for fresh vegetables, 10 to 40 percent for fruit and 15 to 30 percent for tree nuts.  Without tariff cuts, the United States could face a substantial competitive disadvantage preventing greater market access and possible market loss.

The United States currently has free trade agreements with Australia, Canada, Chile, Mexico, Peru, and Singapore.  Hence, in this TPP negotiation, the U.S. focus has been on Brunei, Japan, Malaysia, New Zealand, and Vietnam.  Japan, in particular, is of significant importance to the produce industry, representing the third largest market for U.S. vegetable exports.

While TPP is an all-encompassing trade agreement, WG members stand to benefit from increased trade opportunities for fresh vegetables, fruit, and tree nuts.  The goal for our industry is to, if not completely eliminate, at least minimize trade barriers including tariffs and non-tariff barriers, such as phytosanitary (SPS) measures.  Several of the TPP countries are major markets for U.S. horticultural commodities, and it is crucial for the U.S. to not only expand current market access, but to remain competitive with other regional free trade agreements currently in play.

In addition to reductions in tariffs, important areas for which WG members could benefit include the establishment of science-based SPS measures and the creation of a mechanism for improved communication.

Dennis Johnston of Johnston Farms, Edison, CA, looks forward to a time in the future when tariffs on U.S. citrus to Japan and other TPP countries are relaxed or eliminated.  He said Japan is a study of two different times during the year.  When tariffs are low, lots of U.S. citrus is exported there.  But when they are protecting their local citrus production with high tariffs, shipments are much more scarce.  “Frankly we have looked elsewhere in recent years,” he said.  “We do a lot more to New Zealand, some to Australia, Vietnam is increasing and we’ve done quite a bit to Malaysia.  And today I was in a conversation with China discussing the protocol there for citrus.”

Johnston said the reduction and/or elimination of tariffs is important, but equally important, if not more so, are the knocking down of non-tariff barriers.  “We have to jump through a lot of hoops to get into Australia.  It seems like when you knock down one barrier, they erect another.  We have to worry about red scale or brown rot or whatever barriers they throw up.”

Fred LoBue of LoBue Bros. Inc., Lindsay, Calif., agreed that any drop in tariffs will make U.S. product more attractive and should increase sales.  He said the company already does a good amount of business with Japan, “any additional relief will help.”

He noted that sales do drop off significantly when the tariff is increased and that often there is a run on orders right before the high tariff period.  That certainly indicates that there is year-round demand for California fruit.

Joe LoBue of the same firm said LoBue Bros. exports 35-50 percent of its citrus volume each year, emphasizing just how import export sales are to the firm.  He said all of the countries that are the focus of these TPP talks are important trading partners to one degree or another.  He said a reduction in tariff is very important as it lowers to ultimate cost to the foreign consumer.  But LoBue repeated the comments of others in stating that the reduction of non-tariff trade barriers is equally important.

Dottie Massey, who is in sales with the International Produce Group LLC, Salinas, Calif., said opportunities will come out of the woodwork when tariffs are relaxed.  “Producers know better than I what items can’t be exported because of high tariffs.  We work a lot of different commodities, but we are working the ones that can get in.”

She noted that the relaxation of tariffs for South Korea resulted in a lot of new business.  “The phone was ringing off the hook for items that they were looking for.  I suspect the same thing will happen.”

IPG’s top fresh produce shipments to TPP countries are grapes, citrus and many different fresh vegetables.  Massey looks forward to expanding that list.

But she said of equal importance are other very important trading factors, such as the strength of the dollar against foreign currencies.  “A year ago, the yen was around 80 (to the dollar), then 115 and now it’s 125.  That makes it very expensive for them.”

As the dollar strengthens and the yen weakens, U.S. products go up in price and can become unaffordable.  On the other hand, Japanese car makers are finding a robust market for their cars in the United States.  Joe LoBue agreed that the decrease in value of the yen against the dollar has had somewhat of a chilling effect on sales.  It has declined more than 40 percent in the past year.  He said compare that to Korea where that currency has only experienced about a 10 percent decline in value against the dollar.

The TPP process began in 2005, initially known as the Trans-Pacific Strategic Economic Partnership Agreement consisting of Brunei, Chile, New Zealand, and Singapore.  The United States joined negotiations in 2008.  The plan was to complete the agreement by 2012, however, with new countries joining the proposed agreement, and with participating countries far apart on many issues, negotiations have continued.  One major hurdle for the United States in successfully completing an agreement is the need to pass fast track or Trade Promotion Authority, which expired in 2007.

As indicated in the accompanying chart, for calendar year 2014, the U.S. export value to the various TPP countries was in excess of $7 billion.

While the produce sector experiences an overall trade deficit, $15 billion in U.S. exports of fresh produce commodities compared to nearly $19 billion in imports, the expansion of foreign markets through agreements such as the TPP is critical to opening and expanding markets for the fresh produce industry.