US trade policy caught in a lobster trap

The United States is fighting a trade war it doesn’t want and can’t win. Worse still, the Trump administration is doubling down, threatening new tariffs on top of the older ones that got the U.S. into this mess in the first place. Welcome to the lobster wars.

There are a lot of moving parts in the lobster wars. The U.S. is battling the European Union (EU) and China, but Canada is the competition. Tariffs are central to the fight, but the lobster wars also feature non-tariff barriers, corporate inversions and even Boeing-Airbus retaliation at the World Trade Organization (WTO). But what is most interesting about the lobster wars is that the U.S. doesn’t accuse either the EU or China of having done anything wrong. How to make sense of all this?

Let’s start with Europe. Back in 2017, Canada and the EU signed a trade deal, known as the Comprehensive Economic and Trade Agreement (CETA). CETA ends most tariffs in Canada-EU trade, including on lobsters. This places the U.S. at a cost disadvantage because at the WTO, the EU tariff is 8 percent, not zero. But Brussels isn’t cheating the United States. It’s just that CETA is more generous on tariffs than the WTO. Until the U.S. gets its own version of CETA, its lobsters – and all other American exports, for that matter – can only enter the EU market on WTO terms.

The Trump administration had asked Brussels for a lobster deal to achieve parity with Canada. But Brussels declined, reasoning that this would violate the WTO. That’s because the WTO requires its members to give each other the same most-favored nation (MFN) treatment unless they share in a CETA-like deal that covers “substantially all trade,” not just lobsters. The EU proposed a more “comprehensive” deal, and President Trump says he’s interested. But this will take time.

On June 5, feeling pressure to do something soon, Trump told an audience in Maine that “[i]f the European Union doesn’t drop that tariff immediately, we’re going to put a tariff on their cars, which will be equivalent.” This is a difficult statement to interpret. First, the EU would have to reduce its 8 percent tariff for all WTO members, not just for the U.S.

Second, it’s not obvious that Trump has a tariff to use. He might repeat his threat to use national security tariffs on EU autos under Section 232, but Trump would have to start again, since time has expired on his last bid. Regardless, no tariff will work. Only a U.S. version of CETA can level the playing field.

Things are about to get worse. That’s because lobsters are on Europe’s WTO-authorized retaliation list over U.S. subsidies to Boeing. Since the U.S. is already retaliating for EU subsidies to Airbus, Europe vows to reciprocate. The U.S. demands that it is now compliant with the WTO and that, as a result, there is no longer any justification for EU retaliation. Europe doesn’t agree, and is almost certain to impose (at least) double-digit tariffs on U.S. lobsters. 

American vendors have their own work-around: They’re moving to Canada. There isn’t a mass exodus yet, but inversions are already happening. Moving from Maine to Nova Scotia, for example, means getting preferential market access to the EU, while still being able to sell duty-free back to the U.S. under the US-Mexico-Canada Agreement (USMCA), the update of the North American Free Trade Agreement (NAFTA). 

The bottom line is that Europe isn’t doing anything wrong. The EU is not erecting barriers to U.S. lobsters. The problem is that the U.S. isn’t keeping pace with Canada in signing free trade deals. CETA is just one of many examples. Of course, the retaliatory strikes over Boeing-Airbus aren’t helping things either. 

Then there’s China. 

China has developed an insatiable appetite for lobster. In 2015, China accounted for half of all U.S. exports, 80 percent of which shipped live. But the market has since collapsed. Why? Because of President Trump’s Section 301 tariffs. 

Spelled out in the 1974 Trade Act, Section 301 lay dormant since the late 1990s but was resurrected to compel China to stop its theft of U.S. intellectual property. Since 2018, U.S. Section 301 tariffs, which currently average almost 20 percent, have triggered retaliatory tariffs on the part of Beijing. Several of these are aimed at lobsters.

At first, China hit back with 25 percent tariffs on lobsters, but tariffs have gone as high as 40 percent. The result has been dramatic: U.S. lobster exports dropped by 64 percent in the first month after these tariffs took effect. Adding insult to injury, China lowered its MFN applied tariff to 7 percent, making it cheaper to import Canadian (and other) lobsters just as U.S. lobsters were losing market share. 

But China didn’t stop at tariffs. As it had warned Washington, Beijing escalated to non-tariffs. For lobsters, these non-tariffs have come in several forms. One is inspection. China has started dragging its feet inspecting each lobster from the U.S. This makes it more likely that the lobster languishes at its port of entry, and eventually dies. Yet, American vendors are not paid for dead lobsters. Foot-dragging on inspection isn’t WTO-legal, but it was a predictable move.

There are reports, moreover, of non-tariff gamesmanship with respect to the tariffs as well. China appears to be using reference prices on U.S. lobsters, basing their tariff calculations on these (artificially) higher prices, not the lower ones American vendors are charging. This is like using an antidumping duty without bothering to investigate whether U.S. lobsters are sold below cost. This makes exporting to China mere guesswork. It will also mask the value of any future Chinese tariff concessions on U.S. lobsters.

Phase 1 of the U.S.-China trade deal was supposed to bring some relief. But the pact does not require China to lower its retaliatory tariffs on U.S. lobster. Instead, it just asks Beijing to buy more. The jury is out on whether this and other Phase 1 promises will be kept, not least during the COVID-19 pandemic. But barter can’t substitute for the damage being done by these tariffs.

All of this can only further encourage American vendors to flee to Canada. Hitting China with more tariffs, as President Trump says he’ll do, will increase policy uncertainty, resulting in greater numbers of inversions.

The irony is thick. Washington is angry with the EU because Brussels got more free trade with Canada, not less free trade with the U.S. The U.S. is also duking it out with Beijing, the single most prized market for U.S. lobsters, but only because the two sides are engaged in a tit-for-tat exchange over countless other tariffs, all of which are probably WTO-illegal.

This is the lesson of the lobster wars: Tariffs don’t solve the problems that tariffs create. 

The U.S. can only get out of this lobster trap by pursuing free trade, not protectionism. To hit EU cars, and even more Chinese exports, with new tariffs will only trigger retaliation, as well as inversions. The U.S. needs a CETA-like deal of its own, and a deep trade agreement with China that isn’t built on barter.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, a nonresident senior fellow at the Atlantic Council, and host of the podcast TradeCraft