(International economics) US's olive tariffs already hurting Spanish producers, says EU

The European commission has said the “simply unacceptable” imposition of high tariffs by the US on Spanish olives is already having a major effect on producers in southern Spain.

This week the US Department of Commerce announced that tariffs ranging from 7.52% to 27.02% would be needed to counteract Spanish olive prices, arguing that the fruits were being sold for 16.88% to 25.5% less than their real value.

On Wednesday, a commission spokesman told reporters in Brussels that the preliminary duties were already hitting producers in Andalusia, where olive production “has a very significant economic and social impact”.

He said: “We are also well aware of the possible wider implications of this process and that is why the commission got involved so actively in these proceedings and will continue to do so.”

The US has said its move covers Spanish olives of all colours, shapes, size, pitted and non-pitted, whole, sliced, minced, wedged or broken. Exports to the US were worth £50.3m in 2017.

Exports of black olives to the US fell 42.4% in the first quarter of this year compared with the same period in 2017, dropping from 6.9m kgs to 4m kgs, according to Spain’s association of table olive producers and exporters (Asemesa).

“The decision by the US Department of Commerce to impose unreasonably high and prohibitive anti-  subsidy and anti -dumping duties on Spanish olives is simply unacceptable,” said the commission spokesman. “This is a protectionist measure targeting a high-quality and successful EU product popular with US consumers.”

Spain’s agriculture minister, Luis Planas, called the tariffs unjust and said he would raise the matter at a meeting of EU agriculture ministers in Luxembourg on Monday.

“It’s an unfair measure because it has no economic or technical basis and it’s worrying as it could call into question the rules governing international trade,” Planas said on Wednesday.

He said the tariffs not only affected Spanish producers but could also challenge the common agricultural policy (CAP).

“A unilateral action of this nature cannot go unanswered,” said Planas, adding that Spain’s trade, industry and tourism minister would also be raising the issue with the EU trade commission.

Antonio de Mora, the secretary general of Asemesa, recently called on the EU commission to “defend the sector on the political stage as forcefully as it has defended steel and aluminium”, saying CAP rules were at stake.

He added: “This precedent could mean that any agricultural sector in any country that competes with EU products that receive CAP assistance could ask its government to act like the US is.”

The issue of US tariffs has been a cause of concern in Brussels for months, with the commissioners for both trade and agriculture, Cecilia Malmström and Phil Hogan, working behind the scenes to protect the Spanish industry.

Brussels claims that Spain’s support for producers is consistent with World Trade Organisation rules because they do not target a single industry or product.

The final US decision on the imposition of the tariffs is expected to be made on 24 July.

Tariffs are taxes on imported goods and are the most common form of protectionist measure. A reason for why the US imposed tariffs is explained in paragraph 2 - “tariffs [...] would be needed to counteract Spanish olive prices, [...] the fruits were being sold for 16.88% to 25.5% less than their real value.” This is an “anti-dumping” (paragraph 7) measure. Dumping is the selling of a good or service below its cost of production and is illegal in most countries.

The Spanish government is subsidising olives in Andalusia: there is a reference to “anti-subsidy [...] duties on Spanish olives” (paragraph 7). The Spanish government is offering payments to domestic firms to lower costs of production. Most domestic (US) olive producers would not be able to compete against the subsidised Spanish olives, therefore, to protect its olive industry, the US government has decided to impose a tariff on imported olives.

The main effect of the tariff, defined previously, is to decrease the foreign supply of olives from S_w to S_{w + t} (foreign producers export a smaller quantity because of a tax on the S_w curve). This leads the price of olives to shift upwards from Pw to P_{w + t}, causing domestic consumers to be worse off. Consequently, the demand of goods decreases from Q₄ to Q₃.

Firms in Spain become less competitive: “the preliminary duties were already hitting producers in Andalusia”. Indeed, imports of olives from Spain decrease from area Q₄ − Q₁ to Q₃ − Q₂: “Exports of black olives to the US fell 42.4%”. Conversely, the quantity of olives sold by the American industry increases from Q₁ to Q₂, hence domestic producers are better off. The advantages this brings are greater revenue, which increases from P_w Q₁ to P_w+t Q₂, and greater government revenues due to the tariff (Area A), which is a sum of money given by consumers to the government. The US government may want to use its greater revenue to increase employment or decrease its budget deficit.

However, there is a welfare loss (Areas B and C). This happens because of two changes: firstly, consumer surplus (the area under the demand curve and above the price paid by consumers) drops, and producer surplus (the area above the supply curve and below the price producers receive) increases. Area B therefore arises from a misallocation of resources due to greater production of inefficient producers (the American firms), and Area C is due to decreased consumer consumption.

The accusation of dumping put forward by the US may be an excuse for a protectionist policy such as a tariff: “It’s an unfair measure because it has no economic or technical basis” (paragraph 9). In the short run, for the US the tariff may be useful to contrast the illegal dumping of Spanish olives and to support its firms, but in the long run the global misallocation of resources resulting from increased inefficiency in production may damage both economies.

Effectively, the tariff may be a suitable economic move only if Spain really is practising dumping; otherwise, the tariff merely postpones the downfall of the US olive industry, which is less efficient than the Spanish one. This could be combated with the introduction of a production subsidy, which would maintain the same level of domestic consumption. Similarly, for Spain, the tariff is already demonstrating its disastrous effects: “[Exports] dropping from 6.9m kgs to 4m kgs” (paragraph 6). The tariff may also lead to a trade war between Spain and the US, in which both countries would impose some form of protectionism to retaliate and damage each other’s trade, leading to conflicts of interests.

From the article it emerges that several parties do not understand the need for such a measure: “Luis Planas called the tariffs unjust”. A better strategy for the US could be to impose administrative barriers. “Administrative barriers” refer to a variety of obstacles to imports. One such barrier is valuation, which is the determination of a good’s price. The US government could use valuation to determine the value of the olives and assess the degree of dumping carried out by Spanish producers. Another administrative barrier the US may use would require the olives to be packaged in specific ways, increasing the costs of exports for Spain, or check that they satisfy certain health and safety requirements: this would reduce the exports of olives. This is a milder form of protectionism; although it might not be very effective given the economic power of Spain and the US, it may not spark a trade war between the two.