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NAFTA No More: Implications North and South of the Border

If you attended any of the summer’s agriculture shows, you know that discussions around the North America Free Trade Agreement (NAFTA) talks heated up like an Arizona heat wave. For agriculture, the stakes are high. Trade negotiations culminated in a new trade agreement earlier this month, called the United States-Mexico-Canada Agreement (USMCA).

For U.S. agriculture, the stakes for NAFTA 2.0 were clear. Trade under NAFTA provided an important market for U.S. agricultural producers. Since its adoption in 1972, exports of food and agricultural products to Mexico and Canada grew to more than $43 billion in 2016. Today, Canada and Mexico are our two largest agricultural trading partners, accounting for 28 percent of the total value of all U.S. ag trade exports and 39 percent of U.S. imports in 2016.

So far, the USMCA allows for the continuation of duty-free ag goods into Canada and Mexico. While the deal still needs to be approved by legislative bodies in Canada and Mexico, and also the U.S. Congress, we had been wondering about the implications of free trade for our neighbors to the north and south before the USMCA was reached. Three agriculture editor friends of Woodruff helped us out with their take, and what it all could mean. They were Chris Clayton, ag policy editor for DTN/The Progressive Farmer; Robert Arnason, reporter for the Western Producer; and Joe Dales, vice president, farms.com.

Q: With the new trade deal on the table, what is at stake for Mexico?

Clayton: The implications for Mexico are very real, and the country will want to think closely about the renegotiated agreement. While the United States looks to reduce the trade deficit with Mexico, there is a lot at stake for our neighbor to the south.

The northern half of Mexico really relies hand to mouth on grain from the United States. I did a tour a year ago where we followed grain from Texas to Mexico. You have Mexican companies that have built grain terminals on the U.S. side of the border, and they transfer the grain to Mexican trucks at the border. Within a three-hour drive of the border, all of them rely on U.S. grain that is largely trucked into the area. This is on a nonstop basis, and it’s all tariff-free. These producers have built their livestock industries on tariff-free grain, so it will be interesting to see the final agreement.

Q: Do the NAFTA renegotiations have that much potential impact on the ag industries in Mexico and Canada?

Dales: They could, but you have to keep it in perspective. Farmers across North America and Mexico don’t want to see any of these trade disruptions, but I don’t think the renegotiation of NAFTA will have as big an impact as, say, trade negotiations with China, which have a much bigger impact. Overall, it’s just the uncertainty of all trade that is worrisome. Grains will continue to go back and forth across the borders.

Everyone is watching China. Most farmers here in Canada are watching that very closely, along with the weather and agronomics and everything else they worry about. They know they don’t have any control over trade, so they focus on what they can. I think a lot of growers are more concerned about what is happening at the Chicago Board of Trade than they are NAFTA.

Q: Let’s talk about Canada. What is at stake for producers?

Arnason: The biggest concern is the beef market, because a lot of red meat is exported to the United States. Canola and canola oil, and of course wheat are also big exports — a lot goes across the border to the U.S. Pork is a little bit of an exception, because a lot of Canadian pork goes to Japan. But the U.S. is still a significant importer of pork.

Yes, we have to preserve the U.S. market, but we have to spend more time and energy finding other markets for our agriculture commodities. Canada is looking to Europe, Asia and even the Middle East to diversify. That is the general theme when it comes to NAFTA 2.0 and the impact a newly negotiated trade deal.

Q: Where does Canada go from here?

Arnason: Many experts in agriculture have been questioning what the next NAFTA agreement will look like, and what we’re trying to accomplish. There is a level of frustration, and questions about what will be gained by throwing instability and uncertainty into the agriculture and trade markets. I think the big story will be 10 to 15 years from now, when Canada may actually benefit from the current scenario and will be able to diversity and thrive with new global trade agreements.

The common phrase we hear is at some point the U.S. will come to its senses and realize that there are more benefits than drawbacks to NAFTA. But there are many who aren’t so sure about that. Will the new reality be trade tensions? We’ll have to wait and see.

Q: Canadian dairy farmers are protected by supply management in their country. The new deal offers U.S. access to the Canadian dairy industry. What are the implications?

Dales: Canada’s supply management system for the dairy industry means that we produce what we need for our markets. We don’t export or import any dairy. It’s in balance. Dairy farmers like it that way, and they’re lobbying for limitations on giving up too much in any deal with the United States. Recent surveys are showing that they’re overwhelmingly supportive of protecting the system. A change could be disruptive to their livelihoods, and even devastating to Canada dairy producers.

Clayton: It’s interesting that dairy trade with Canada has become the lighting rod with negotiations. The dairy farmers, but you have to remember that Canada’s total dairy production is less than the state of Wisconsin. They have supply management and their producers are profitable. But when you look at the whole trade picture between the U.S. and Canada, dairy is a very small fraction of the whole.

Q: Any final thoughts?

Clayton: Geographical indicators are a big deal in Europe and they have the potential to really impact the markets in the U.S. — particularly in marketing to Mexico. Any renegotiation should also prevent the European Union from prohibiting U.S. dairy exporters from using common cheese names on the label of its products when exporting to Mexico. For example, regulators in Europe don’t want us to use the word “Parmesan” to identify a type of cheese, because they claim it is proprietary to certain geographic areas of Europe. This is an issue that is not getting a lot of attention, and its impact on our trade with Mexico could be significant.

Dales: The trade situation — whether it’s NAFTA or China — creates risk, and farmers don’t need more risk right now. Farmers north and south of the U.S.-Canada border might cheer for different sports teams, but they drive the same colors of equipment, and they are all trying to make a living. I like to think that we have more similarities and common goals than differences.

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As our editor friends pointed out, there are far-reaching implications. For U.S. producers, USMCA is only one of several stressors at harvest that include the passing of a 2018 Farm Bill and the ongoing trade/tariff issues. For example, cheese exports to Mexico are still subjected to a 25 percent tariff in retaliation for tariffs on Mexican steel and aluminum imports. Farmers aren’t the only ones being impacted by these issues as tariffs are putting increasing pressure on input providers that work with China.

 

What are you facing in the marketplace in light of these uncertainties? Trade issues, the potential for more imposed tariffs on ag commodities and greater restrictions on overseas markets are factors that all agrimarketers are taking into consideration this fall, and certainly as we look to next year’s marketing initiatives.