Effects of potential EU-China foreign subsidy trade war in agri-food products

_ Yuri Kofner, research assistant, International Institute for Applied Systems Analysis (IIASA); non-residential research fellow, Skolkovo Institute for Emerging Market Studies; editor-in-chief analytical media “Eurasian Studies”. Munich, 16 July 2020.*

Key takeaways:

  • The European Commission’s new anti-foreign-subsidy proposal is a protectionist measure that will increase prices in affected sectors and lead to a welfare loss for the European consumers.
  • The EU itself is no stranger to state aid to producers. E.g., governmental support measures for farmers in the EU are relatively higher than in China, the US or the Eurasian Economic Union.
  • If implemented, the new anti-foreign-subsidy mechanism is likely to provoke retaliatory measures from the affected regions, e.g. as retaliatory tariffs, or even by using the EU’s logic – in the form of redressive measures against European firms, which have received EU state aid.
  • China and the EU would both lose from a trade war over foreign subsidies. E.g., respectively, by USD 2.9 billion and USD 2 billion from a trade war over foreign subsidies in the agri-food sector.

By 2021, the European Commission plans to implement a new legal instrument to effectively redress potential unfair competitive advantages on the European market, which foreign companies might have by receiving state subsidies from their governments.

The initiative came mainly over concerns that China, as the world’s largest illiberal and state-capitalist economy, would outcompete European businesses and thus could pose a threat to European economic sovereignty, values, and security.

However, instead of actually adhering to its values of free trade and free competition (of economic models), the new instrument could be misused as a protectionist tool. Moreover, the EU itself is no stranger to state aid. According to the EU state aid scoreboard for 2018, the union member states spent USD 142.8 billion (0.76% of GDP) on subsidies, excluding aid to agriculture, fisheries and railways. That year, the EU budget through the Common Agricultural Policy (GAP) officially supported European farmers with another USD 69.5 billion. According to the OECD, total non-financial and financial government support for European agriculture amounted to USD 93.2 billion in 2017. Thus, if the new initiative is executed, affected regions, such as China, Russia or even the USA, are likely to implement their own anti-foreign-subsidy mechanisms – this time directed against European companies. In the end, this will add unnecessary momentum to the already ongoing tit-for-tat protectionist spiral.

Research question and methodology

As with non-tariff barriers, it is very hard to find estimates on total financial subsidies and equivalent quantifications of non-financial state aid. Moreover, estimates that do exist vary widely depending on the object and the unit of measurement.

Fortunately, the OECD publishes an annual monitor of agricultural policy, including data on financial and non-financial state support for agricultural producers in selected countries.

Using this data and a partial equilibrium model, the purpose of this article is to estimate the potential effects on trade in agri-food products of two potential counterfactuals: 1. If the EU imposes redressive measures (payments) on Chinese agri-food imports. 2. If in retaliation the PRC imposes redressive measures (payments) on agri-food imports coming from the EU.

For simplicity of the argument it is assumed, that: a. the redressive measures cover all agri-food imports from the partner region coming into the reporter region; and b. that the redressive measures are equivalent to the 2015-2019 average state aid in relation to producer revenue (Tab 1).

Table 1. Producer Support Estimate for EU28, USA, CHN and EAEU (2015-2019, in percent of gross farm revenue)                     

EU28 USA CHN EAEU (RUS and KAZ average)
2015 18,9 8,9 16,1 12,4
2016 19,8 9,1 15,6 10,8
2017 18,9 8,4 15,0 10,2
2018 19,5 11,4 13,0 10,3
2019 19,0 12,1 12,1 8,5
Average 19,2 10,0 14,4 10,5

 Source: (OECD 2020) and author’s estimations.

For the simulation the author used the other following input data: 1. Bilateral data for trade in 13 agricultural product groups from 2018 for four parties (EU27, China, the EAEU and the “rest of the world”) taken from the WITS (UN COMTRADE). For the bilateral trade flows CIF recorded imports were preferred. 2. Aggregated simple most favoured nation (MFN) ad-valorem import tariffs from 2018 were taken from (WTO 2019) and the WITS (UNCTAD TRAINS). 3. Import elasticities taken from (Ghodsi et al. 2016). The export supply (1.5) and substitution (5) elasticities were taken as constants across all sectors and regions.

Results

Implementing redressive (punitive) measures issued by the European Union against exporters from the Chinese agri-food sector would lower agricultural exports from China to the EU by 59.8 percent (USD 5.7 billion) and increase sales by domestic European agricultural producers (only) by 0.4 percent (USD 1.8 billion). Total revenues for the European Union from the redressive payments would amount to USD 318.4 million; the welfare surplus of European producers would be USD 440.1 million; the welfare loss of European consumers would be USD 1.4 billion. Consequently, the EU’s total welfare loss would amount to USD 609.1 million. The revenue loss of Chinese agriculture producers would total USD 737.6 million.

In case the Peoples’ Republic of China was to implement retaliatory measures against European agri-food producers using the same logic as the EU’s anti-foreign-subsidy proposal, then European agri-food exports to China would decrease by 59.8 percent (USD 9.6 billion), from China to the EU by 50.5 percent (USD 4.7 billion) and sales by domestic European farmers would increase by 0.8 percent (USD 3.4 billion). Total revenues for the PRC from the retaliatory anti-subsidy measures would amount to USD 651.6 million, for the EU now only USD 224.2 billion. European agri-food producers would now lose USD 1.3 billion, Chinese farmers would now lose over USD 1.2 billion. From the anti-subsidy trade war European consumers would lose USD 948.2 million, Chinese consumers would lose USD 2.4 billion. As a cumulative result, the EU would incur a total annual welfare loss of 0.01 percent (USD 2 billion), China’s GDP would be less by 0.02 percent (USD 2.9 billion) each year.

The estimated results from a potential trade war over foreign subsidies in the agri-food sector can be used to infer more generally the likely outcomes if the European Commission decides to implement its proposal on screening  and redessing foreign subsidies.


*Disclaimer: Views expressed in the article belong solely to the author and not necessarily represent that of the author’s employers or organizations.

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