Four Times More Tariff Pain Than Financial Gain in ‘New NAFTA’
For the administration, the proposed United States-Mexico-Canada Agreement (USMCA) is a vindication of President Trump’s raw-muscled confrontation of trading partners. But although Trump declared that the USMCA “is a very, very big deal for our farmers,” a study released on Wednesday says U.S. farm exports will fall by $1.8 billion due to retaliatory tariffs by Mexico and Canada. That would be four times larger than the $450 million in gains that would be generated by “modest market access improvements” in the successor to NAFTA.
“The fact is, the new agreement has not changed 232. That’s where we are,” said Purdue University economist Dominique van der Mensbrugghe, referring to Section 232 of U.S. trade laws.
Trump invoked Section 232, which is about protecting national security, in imposing steep tariffs on steel and aluminum imports, prompting retaliation on U.S. products, including food and ag exports. The steel and aluminum tariffs stayed in place after the October 1 announcement of the USMCA. A trade war with China that began early this year shows no sign of relief.
Agriculture Secretary Sonny Perdue told farmers at the start of this week to expect another multibillion-dollar bailout by year’s end to offset “unfair” Chinese trade sanctions. The USDA began first-round payments of up to $4.7 billion to soybean, pork, corn, wheat, sorghum, cotton, and dairy farmers just after Labor Day.
When he took office, Trump pulled the U.S. out of the 12-nation Trans-Pacific Partnership trade pact, demanded the renegotiation of NAFTA, and announced an era of bilateral trade agreements. Tariffs were employed as a U.S. lever for concessions from other nations.
“The administration’s actions on trade are likely to have significant implications for U.S. farmers, as these actions target three of the largest markets for U.S. agricultural exports — Canada, China, and Mexico — accounting for 44% of U.S. agricultural exports representing an average of $63 billion from 2013 to 2015,” said van der Mensbrugghe and fellow Purdue economists Wallace Tyner and Maksym Chepeliev in a report commissioned by the nonpartisan Farm Foundation. The report, one of the first in-depth analyses of the USMCA, also looked at the impact of retaliatory tariffs.
“Two steps forward, three steps back,” tweeted House Agriculture Committee Democrats. “The gains our farmers would see from USMCA mean nothing if misguided tariffs remain in place.”
U.S. farm groups have quietly urged the removal of tariffs and a negotiated settlement of trade disputes. Joe Glauber, former USDA chief economist, said the Trump administration had raised important issues, such as piracy of U.S. intellectual property by Chinese companies, but that “there are better methods to do it.” He cited taking trade complaints to the WTO as an example.
The USMCA retains duty-free access for most U.S. farm exports to Canada and Mexico, a major feature of NAFTA. “It improves things a little bit for the dairy and poultry sectors,” said van der Mensbrugghe during a presentation at the National Press Club. Dairy exports could rise by 5% and would account for roughly $275 million of the trade pact’s total benefit of $450 million a year.
But according to the Farm Foundation report, retaliatory tariffs by Canada and Mexico “would reverse any potential gains that emerge from implementation of the USMCA, with export losses for the sector at roughly $1.8 billion.” While the USMCA’s provisions would allow dairy exports to Canada to increase, meat and dairy shipments to Canada and Mexico bear the brunt of the retaliatory tariffs.
High Chinese tariffs have hobbled U.S. soybean exports and could lead to a profound change in global trade of the oilseed, said Glauber. Until now, the U.S. has dominated soybean trade for six months of the year, following its harvest, and South America, led by Brazil, led exports for the six months following harvest in the Southern Hemisphere.
If China, which buys two thirds of the soybeans on the world market, continues to rely on Brazil for most of its soybeans, a new web of soy transport and storage will be needed for a year-long trade cycle in Brazil and the U.S. instead of the existing six-month cycle, said Glauber. “[U.S. growers] are getting hammered” and run the risk of larger soy production in Brazil. “These may be long-term losses.”
By a small margin, the U.S. is the world’s largest soybean producer, while Brazil, the No. 2 grower, is the longtime export leader.
To read the report, “How U.S. Agriculture Will Fare Under the USMCA and Retaliatory Tariffs,” click here.