Turning sour? US-EU “trade war” will bring dairy winners and losers, claims Rabobank report

20 May 2019 --- The makings of a “trade war” between the US and the EU are brewing after the Office of the United States Trade Representative (USTR) announced it is considering levying additional tariffs on European products, including dairy, valued at approximately US$21 billion. While butter, cheese and yogurt imports account for a small percentage of US supply, and EU exports to the US represent a small percentage of European output, additional tariffs on selected European dairy exports to the US will create winners and losers in the latest trade saga, a new Rabobank report claims.

The recent announcement pushes the more-than-a-decade-old dispute between the US and the EU, back into the spotlight. It also raises concerns that food and drink could be collateral damage as the proposed US levies would be retaliation for EU subsidies for Boeing rival, Airbus. 

“The EU and the US are two of the world’s largest dairy producing and consuming regions. Any type of trade disruption is likely to have a ripple effect around the world. The size of that ripple increases when considering the combined consequences of changing tariffs on EU dairy exports to the US and Brexit,” Mary Keough Ledman Global Strategist for Dairy, tells FoodIngredientsFirst. 

“Rabobank prepared an analysis and report following the USTR’s April 12 publication of HTS Codes that could be subject to additional tariffs on EU exports to the US and the EU’s April 17 announcement of HTS Codes that could be subject to additional tariffs on US exports to the EU,” she explains.

The report notes that the US list of 317 European products potentially facing additional levies includes 44 dairy tariff codes covering European butter, yogurt and cheese varieties with a 2018 import value near US$1 billion.

Of the more than 400 tariff codes on the EU preliminary list, representing approximately US$20 billion of US exports to the EU in 2018, just 11 include dairy products. Three of the tariff codes are for cheese and eight include high-protein dairy ingredients such as casein, whey protein concentrate and milk proteins.

In 2018, the EU imported 1,355 MT of cheese and 18,230 MT of high-protein dairy ingredients from the US, under the targeted tariff codes.

In general, specialty European cheeses are high value and not necessarily as price-sensitive at the retail level, Keough explains. However, a 100 percent surcharge on top of an already pricey product could have customers choosing a less-expensive domestic cheese or non-EU import.

Many imported European cheeses are marketed and distributed by specialty food companies, which also carry domestic specialty cheeses in their product lines. As a result, an additional 100 percent tariff on European cheeses is likely, the report notes, to reduce the competitiveness of European cheeses in the US market.

This would also decrease the promotional activity of European cheeses and encourage US consumers to explore less-costly domestic specialty cheeses as well as providing a competitive advantage to non-EU imported specialty cheeses.

Winners and losers
In this case, the winners would include the specialty dairy manufacturers across the US and in Australia, Canada, New Zealand, Norway, Switzerland and other non-EU countries, according to the report. 

Individually, the biggest loser is likely to be Ireland, it says, with almost 34,500 MT of annual dairy exports at risk of higher tariffs. 

“Based on 2018 US import data, Ireland has more product volume that would potentially be subjected to the additional tariff than any other EU country,” Keough adds.

In 2018, 28,021 MT was in the form of butter, with a customs value of US$181.5 million, while almost 6,350 MT was in the form of cheese, valued at over US$40 million.

The annual allocation of licensed EU butter is 9,616 MT, says the report, and as a result, the vast majority of imported Irish butter is subject to the non-licensed TRQ rate of US$ 1.541/kg or US$ 0.70/lb. 

Under the worst-case scenario, an additional tariff up to 100 percent would be added on top of the existing tariff, which would likely double the price of European butter for US consumers, it notes. 

“European branded butter sold at the retail level is already twice the price of the leading US branded butter. As a result, it is unlikely that European butter would retain its existing market share if prices escalate to four times the level of the leading domestic branded butter,” says the report. 

Meanwhile, collectively, the EU-28 can “ill afford” to lose the US as a market for more than 100,000 MT of cheese, especially with the uncertainty of Brexit and the looming prospect of a no-deal scenario, which would place the UK’s 400,000 MT cheese market “up for grabs”.

History of the dispute
The US case against the EU dates back to October 2004, when the US filed a World Trade Organization (WTO) dispute settlement case against the EU for subsidies provided to large civil aircraft manufacturers. 

In 2011, a WTO panel confirmed that the EU and certain member-state subsidies to Airbus breached the EU’s obligations under the General Agreement on Tariffs and Trade (GATT 1994) and the Agreement on Subsidies and Countervailing Measures (SCM Agreement). Since then, the US and EU have been embroiled in a settlement process that resulted in a request last July by the US for a WTO arbitrator to determine the level of countermeasures authorized as a result of the EU’s WTO inconsistencies. 

The USTR says it expects the WTO arbitrator’s report regarding the level of countermeasures this summer.

By Gaynor Selby