A Test For The U.S.

While the world’s attention has focused on trade disputes between the United States and the European Union – most notably the disputes over bananas and hormone-free beef – a smaller but very important dispute has been brewing between the United States and New Zealand and Australia over lamb.

During the last half-decade, lamb imports from New Zealand and Australia have doubled their share of the U.S. market for lamb. U.S. sheep ranchers complain about the hardships these lamb imports have imposed on the domestic lamb industry, and they also complain that the ranchers in New Zealand and Australia have been “dumping” lamb in the U.S.

An investigation was conducted and, in the end, President Clinton imposed tariffs on the imported lamb from New Zealand and Australia. This decision has now been appealed to the World Trade Organization by New Zealand and Australia.

The whole business doesn’t show President Clinton or America in very good light and points to the need for reform in dealing with agricultural commodities in international trade. Ultimately, the case may test America’s commitment to a free and open system of world trade.

The President comes across as a political coward. The lamb industry is a tiny one, and if one can’t resist its pressure, it is hard to imagine whose pressure one could resist. New Zealand has a generally open economy to U.S. exports, and there is really no credible allegation that New Zealand is somehow unfairly subsidizing its ranchers. The American ranchers’ argument is little more than that they are losing the competitive battle, particularly with New Zealand. A President with more backbone might well have simply told the U.S. ranchers to get competitive, that New Zealand is an open economy, and we are not going to pick on its successful lamb industry when they buy so many of our computers, airplanes and so forth.

But in fairness to President Clinton, the international standard for free and fair trade is quite hazy in this area. The concept of dumping simply makes no sense when applied to agricultural commodities. Dumping is defined as either selling a product beneath its cost of production or beneath its price in the home market. Both are illogical when thinking about agricultural commodities.

American farmers, as with farmers around the world, regularly sell product below their cost of production. This is because, once the product is grown or raised, the cost of production is irrelevant – only the cost of harvest or slaughter and processing matters. In some cases – as with apples destined to be sold as controlled atmosphere storage apples – the apples are grown, picked and placed in storage months before they are sold. The only thing that matters then is if the cost of packing can be covered. Even that is overstating it, because if the apples aren’t packed, they will have to be dumped, and that costs money as well.

The issue of whether an agricultural commodity is sold for less than the price it sells for in the home country is similarly irrelevant. New Zealand has more sheep than it has people. Chile grows more grapes than the total population of Chile could possibly eat. These products are produced to sell overseas. A Chilean grape exporter often allocates a whole season in advance: 40 percent to Europe, 60 percent to the U.S., etc. These plans might change a little as the year progresses, but there is no option to keep the grapes in Chile. If New Zealand has high domestic lamb prices, the answer is that U.S. ranchers should take advantage of such a lucrative market and start exporting lamb to the Kiwis.

As a matter of policy, the whole concept of dumping should be stricken from consideration when it affects agricultural commodities.

We’ll see what comes of the case filed against the United States at the WTO. Up till now, the United States has had loads of sanctimonious blow-hard politicians giving speeches about how horrible the Europeans are to have not followed the WTO decisions regarding bananas and beef. Well, the politicians are right, but it is easy for them to be right in these cases because the WTO ruled in favor of the U.S. position.

If the WTO finds no basis for the U.S. to restrict imports of lamb from New Zealand or Australia that means that the U.S. is honor-bound to drop its newly imposed tariffs. If it doesn’t do so, it may face retaliatory tariffs against U.S. products.

Of course, it is difficult for a small country like New Zealand to retaliate against a Superpower such as the United States. But if the U.S. loses at the WTO and doesn’t drop its tariffs, the U.S. will lose its claim to moral leadership on issues of expanding trade and freedom around the world.