I imagine many breathed a sigh of relief to finally have something finalized on a North American free trade pact, which has created so much uncertainty over the past 18 months. The uncertainty from the newly named U.S. Mexico Canada Agreement (USMCA) isn’t over yet as we wait to see if retaliatory tariffs get removed, final implementation details and whether it can secure passage in Congress.
Floyd Gaibler, U.S. Grains Council’s director of trade policy, said for grain producers the USMCA deal upholds the goals of U.S. agriculture in terms of doing no harm of maintaining zero tariffs and protecting market access.
In addition to keeping the favorable trade terms that helped build a deeply integrated and growing supply value chain for U.S. grains and livestock, the agreement adds positive measures related to rapid response for sanitary and phytosanitary (SPS) challenges, calls for increased transparency and science-based SPS measures in accordance international standards and specifically addresses agricultural biotechnology, including new breeding methods and gene editing. (Click here to view a USTR fact sheet on market access and dairy outcomes and here for an overview on all the aspects of agriculture addressed in USMCA.)
Under current policy, any U.S. wheat exported to Canada is graded as feed wheat. USMCA requires Canada and the U.S. to grade each other’s wheat as if it were produced domestically. “The U.S. exports very little wheat to Canada, but this could open an additional market to U.S. wheat producers close to the Canadian border in Montana, North Dakota, and Minnesota,” according to a CoBank report looking at the impacts of the deal.
NAFTA has been the most important trade agreement for U.S. agriculture and prompted development of the most successful trading bloc on the globe, benefiting the U.S. economy broadly. Over the past 20 years, U.S. agricultural exports to Canada and Mexico tripled and quintupled, respectively. One in every 10 acres on American farms is planted to feed hungry Canadian and Mexicans, according to the U.S. Grains Council.
Tariffs need lifted
CoBank said that the modest benefits that U.S. agriculture will gain from USMCA will be overshadowed by the remaining retaliatory tariffs imposed by Mexico and Canada. “Pending the removal of U.S. steel and aluminum tariffs, Canadian tariffs on prepared beef products, Mexican tariffs on pork, and Chinese tariffs on all three major proteins remain in place. As U.S. red meat and poultry production continues to rise, these tariffs are the most significant impediment to trade, and less directly, industry profitability,” the report said.
If prolonged, Mexico’s 25% retaliatory tariffs on U.S. cheese could hit the industry hard. CoBank reported Mexico is the No. 1 export destination for U.S. cheese and represented $391 million last year.
“If the tariffs are removed soon the market should remain intact, but a continuation would lead to an erosion of the 75% market share the U.S. currently holds, which could be picked up by the EU.”
U.S. pork is currently on three trade retaliation lists, placing 40% of total exports under punitive tariffs.
“The impact of Mexico’s tariffs on cheese and pork, and Canada’s tariffs on prepared beef, far outweigh the benefits laid out in USMCA. Therefore, an agreement on steel and aluminum trade, whenever it is struck, will offer much more for U.S. agriculture to celebrate,” CoBank said.
Gaibler said if the administration removes the steel and aluminum tariffs, he would expect Canada and Mexico to respond by dropping their retaliatory tariffs. However, if some other solution was executed by the Administration such as implementing unfriendly quotas on the amount of steel and aluminum the nations could export to the United States, it “could lead to a more tempered response that may or may not result in some levels of tariffs” to continue or be applied, he explained.
Roger Bernard, senior policy analyst for Informa Economics, said the Trump Administration, as well as the other nations' governments, have to ratify the deal, but that can’t come before Nov. 30 under the requirements to provide 60 days of public notice to Congress. Then, it's up to the Administration on when they choose to deliver the implementing legislation to Congress. “Once they do that, then the prospects of a vote on the package would really gel,” Bernard said.
He projects that Congress could possibly take up a vote during a lame-duck session post-election after a deal is signed, but it's more likely to drag on into the first quarter of 2019.
Senate Finance Committee ranking member Ron Wyden, D-Ore., has said there’s no need to ram the bill through during the lame-duck session.
Bernard also said trade weariness now is much more bipartisan than it previously has been. “I think as lawmakers look to the details on the agriculture side, most should be okay with what’s in the package,” he said.
The days of counting on Republicans to back trade agreements is also not the slam dunk it once was, which creates an uphill battle in obtaining the votes needed to secure congressional approval for USMCA.
Related: USMCA will replace NAFTA
CoBank said USMCA is likely to have little resistance gaining approval in Mexico or Canada. Both countries are expected to sign the deal before the end of 2018.
“The results of mid-term elections in November could determine how difficult the path will be in Congress. Democrats will not want to participate in a signature win for the White House, but there is upside for labor in the deal, which is likely to push the deal over the finish line regardless of who controls the House and the Senate. Congress may attempt to vote on the deal in the lame duck session at the end of 2018 if Republican majority is lost in the Senate or the House,” CoBank noted.
The Trump Administration may be able to offer some assurances to lawmakers as it drafts the implementing legislation. “Implementing legislation could come in the form of provisions that go further than the text of the deal. This could look like additional labor protection for U.S. workers or support for U.S. industries that would be hurt by the deal,” CoBank said.