November 20, 2020
Last Sunday, 15 Asia-Pacific nations signed the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement. RCEP extends other bilateral and multi-country agreements already in place. The countries involved make up 30% of the world’s population, with an estimated combined gross domestic product (GDP) of $26 trillion. The agreement simplifies supply chains and customs processes, while creating a common rule- of-origin certificate that makes it easier for member countries to trade with one another.
Signatories to the RCEP are both dairy exporters like New Zealand and Australia and key import markets such as China, Japan, South Korea, Malaysia, Singapore, the Philippines, Vietnam, Cambodia, Thailand, Indonesia, Brunei, Myanmar, and Laos. While RCEP will eliminate an estimated 92% of tariffs in the region, it is important to note that before RCEP, many countries in the region had agreements with each other, and these agreements were already factored into tariff rates on a number of dairy items. Trade relations between Australia and China have been particularly frosty in 2020, exacerbated by Australia’s call for an investigation into the origins of the novel coronavirus. Despite RCEP, Australia’s relations with China could remain tense— to the detriment of Australia’s agricultural exports to China.
The elephant in the room is that the United States and European Union are not part of the new agreement. With RCEP nations forming the world’s largest trading bloc, the United States and Europe are left to negotiate their own agreements. The European Union has agreements with some RCEP countries and has acknowledged that agreements like this are critical to trade. The United States, though, has fallen behind other developed nations in terms of trade, especially with its 2017 departure from the Trans-Pacific Partnership, which included several RCEP countries.
As U.S. allies sign trade agreements with China, rather than the United States, it signals these allies view China as a strategic trading partner. The RCEP region is rapidly growing and as income levels increase in this part of the world, opportunities exist for key exporters, particularly in the agricultural sector, to sell their goods. Without favorable trade terms, the United States could miss out on these markets.
For U.S. dairy, the effects are still being determined. While the United States has a trade agreement with Korea, it does not have one with other countries in Southeast Asia, and implementation of RCEP could cause U.S. exports to the region to falter, as New Zealand and Australia fill demand in these markets. On the other hand, Japan, a key U.S. dairy export market, already had a free trade agreement with Australia and New Zealand that contains tariffs on certain ag commodities, including dairy. Even under RCEP, Japan will maintain tariffs on dairy, meaning not much will change and U.S. exports to that country could be just as competitive as they were before RCEP.
Exports are a sizable piece of the U.S. milk puzzle; the country exported approximately $6 billion in dairy products, about 15% of its dairy production, in 2019. If the U.S. dairy industry wants to expand production beyond what’s needed to fill current demand, it will have to grow exports. By moving more slowly than its competitors on trade negotiations, the United States is eroding its advantage in the global marketplace. Despite a small bounce in spot cheese prices today, barrels fell 18.75¢ and blocks plunged 27.5¢ on the week. Spot butter closed at $1.345, 5.5¢ less than last Friday.