The newly agreed FTA agreement between the US and Japan now creates an even playing field between Australia and the US with both tariffs to be at 26.7% on January 1st, 2020 (three weeks away) and this further reduces to 26% on April 1, 2020 for both countries.
Australia has held a market advantage over the US into Japan since BSE was discovered in the US in 2003. This advantage has been disappearing gradually since 2010; but on December 30th, 2018 Australia regained a comparative advantage over the US under the CPTPP agreement which the US is not a part of - this gave Australia a 12% lower duty than the US - in reality a short lived advantage that sees both countries now on an even footing.
As stated, this strategic advantage that Australia once enjoyed of 12% tariff over the US now no longer exists. In the long term both countries will benefit from the gradual reduction of tariffs to 9% by 2034.
The twist in the tail of this deal is the low safeguard that the US has of 242,000 tonnes compared to Australia and other members of CPTPP of 590,000 tonnes. In the US/Japan FTA this safeguard increases to 290,000 tonnes over 13 years and this year US beef shipments will be close to the allocated 242,000 tonnes - meaning there is no provision for growth compared to members of CPTPP. The concern is that US beef exports will now trigger this safeguard each year over the next 13 years as exporters fill the quota early each year as they rush to the door.
I see some real concerns with the structure of the FTA for US exporters, in brief these are;
Chilled Beef - The real issue for the US is chilled beef and the ability to maintain regular customer supply should the safeguard be triggered. US frozen beef has the luxury of being held in a bonded warehouse and being released on day one of the new shipment year but chilled beef is too vulnerable for this option due to its limited shelf life.
For example, if the US beef safeguard was triggered in November it would mean US chilled beef would not be shipped for at least four months - March shipments would sail into the next shipment year but the disruption to regular US chilled exports would be significant. It should be noted that if November looked like the trigger month then chilled exporters would stop well before this period to avoid huge costs of either paying the duty or freezing down chilled beef into frozen - so in actuality the disruption to the market would be more like 5 months either way any US chilled beef program would become almost impossible to manage.
Stockpiling of beef and therefore triggering safeguard early - The concerns arise with any safeguard is that these agreements become 'a self-fulfilling prophecy', meaning that exporters and importers race for the entry door into Japan to avoid paying the higher duty and shipment tonnages become enormous thereby filling the trigger level quantity quickly which in turn would see US tariffs increase to 38.5%.
This problem will become a never ending cycle that is likely to get worse as yearly tariffs fall - The earlier this trigger occurs the bigger the stockpile becomes in bonded warehouses for the following year, waiting for the next safeguard year to begin when large frozen inventories would be released in the first month of the new shipping year - thereby creating a cycle of continuous triggering years.
This problem is likely to get worse for the US over the next 13 years as the differential between the regular tariff and 38.5% becomes even greater as yearly duties are reduced thereby incentivizing more US beef exporters to 'rush to the door' and enter beef at the ever lowering tariffs each year. The bigger the price spread of lower tariffs in latter years of the agreement the bigger the incentive to beat the tariff increase of 38.5% and therefore ship more.
In reality, with such a limited US safeguard threshold the decision to ship into a bonded warehouse or not becomes a numbers game, whereby US shippers will work out the 'cost of carry' and decide to either export to an alternate destination (or sell on the US domestic market) or pay the cost to have the product sit in a cold store in Japan until April 1st of the next shipment year - ultimately the premium of the Japan market over other markets will be the deciding factor.
Disadvantage for Australia - The first half of Japan's shipment year could see heavy US beef shipments which are likely to be very price competitive making it difficult for Australian exporters to compete with. Given the expected slow-down in production next year from Australia (my forecasts have Australia's exports to Japan down 34% for the year) this may not be a major concern but as Australia's exports get larger in future years, post the drought, this 'front end loaded' agreement will see heavy shipments of US beef and is likely to be problematic to competitors like Australia before the safeguard is triggered.
Several advantages for Australia - Firstly, the potential advantage for Australia is that Japanese customers may have a lot more confidence in Australian chilled beef programs due to the high safeguard threshold of 590,000 tonnes enjoyed by all CPTPP members which is unlikely to be triggered. Japan importers will know that Australian chilled product is likely to be shipped all year round in consistent volumes at a constant tariff level - there is potentially no guarantee US chilled beef will do the same.
Secondly, when the US beef safeguard is triggered this will create a price advantage for Australia on both chilled and frozen beef, most likely in the back half of the Japan shipment year - if this occurred today it would be 12% tariff advantage for Australia's beef but with time this advantage will balloon out to 29.5% by 2032 - so depending on what year is triggered, particularly the closer to the year 2033, then the bigger the price advantage for CPTPP members like Australia.
The newly ratified Japan/US FTA is a double edged sword - on the positive side for Australia (and other CPTPP countries), the likelihood of ongoing US triggering of Japans safeguard each year will create opportunities for most CPTPP members, though in Australia's case this is likely to be minor due to a fall in beef production and exports over the next few years due to drought, but as Australia's beef production and exports pick up and the US/Japan safeguard differential widens Australia will eventually enjoy these benefits in latter years.
Conversely, the US now has significantly lower tariffs and will be a lot more competitive into Japan - given the expected increase in US beef production next year of 2.7% and the genuine consumer interest by Japan in US grain fed cattle, the timing of this FTA could not be better for US beef exporters.
The advantages for US beef exporters is likely to be in the first half of the Japan shipment year with US beef exports being entered at now a competitive tariff level - it will be harder for CPTPP countries to compete against US exporters with what is now a level playing field. This playing field remains level until the safeguard is triggered - then it becomes potentially harder again for US exporters.
In summary, this Japan/US FTA is a double-edged sword for not only CPTPP members but equally for US beef exporters - US beef exporters are winners before the safeguard is triggered, CPTPP exporters are winners after the safeguard is triggered. It's the disruption to the US chilled trade beef trade that is probably the most troubling aspect of this agreement to US exporters.
Rgds Simon Quilty