The U.S. midterms are over and that bit of uncertainty has passed. The results were neither catastrophic nor overwhelming for either party. Rather, it seems that an equilibrium and balance of sorts was reached. The hope is that the same can be said eventually when talking about trade and tariff issues. And the sooner the better for agriculture.
A New Trade Regime
From the outset of the Trump administration, trade has played a central role. After stating his intention to tear up NAFTA on his first day in office, President Trump put the rest of the world on notice the status quo would be shaken – or downright thrown out the window. While the U.S. did not literally terminate its trade relationships with Mexico and Canada on the first day, or even the first year, steps were quickly taken to change the trajectory of U.S. trade relationships with its neighbors and foreign trading partners alike.
To revisit quickly the course change that occurred, let’s look at a couple of the major turning points in the past two years. First, within a month of President Trump’s inauguration, an executive memorandum was signed withdrawing the United States’ signature from the Trans Pacific Partnership, killing an already slim chance of ratification by the Senate. Simultaneously, the president signed an executive order directing the renegotiation of NAFTA. Fast forward one year, Trump imposed tariffs on solar panels and washing machines, a move clearly aimed at China in what eventually became tariffs on over $250 billion worth of Chinese imports. The president then announced on March 1, 2018, worldwide steel tariffs of 25 percent and a 10 percent tariff on aluminum imports with several countries and economic zones exempted. Three months later, Trump extended the steel and aluminum tariffs to Canada, Mexico and EU imports.
Agriculture Caught in the Middle
That is a lot to digest. But why is it relevant to equipment dealers? Because throughout the past two years of attention-grabbing headlines about trade deals and tariffs, mainstream media has underreported the economic consequences of these policy shifts that have largely fallen on agriculture. Whether in the shape of increasing steel prices or retaliatory tariffs, agriculture has primarily felt the brunt of reciprocal actions taken by countries in response to ongoing trade negotiations.
Unfortunately, the economic impact of the retaliatory actions coincides with one of the longest and deepest declines in net farm income. With the rest of the economy revving at all-time highs, the lack of attention given to fundamental problems in the agriculture sector from trade is also a testament to the decreasing percentage of the population employed in the industry.
This all begs the question, how important is trade to overall agriculture production? A recent study conducted by agriculture economists at Purdue University looked into that question and what effect trade negotiations have had on U.S. agriculture. The study found that in the 25 years since NAFTA, U.S. agriculture exports to Canada and Mexico increased from 14 percent to nearly 30 percent.
Breaking it down to the state level, trade becomes increasingly more important for Midwest states, e.g., nearly 70 percent of Missouri’s agriculture exports go to Canada or Mexico. The effect of trade in areas from which the president’s support derived during the election was all the more reason to reach a trade deal before the recent midterms.
The USMCA and China
After a protracted negotiation process that seemed to be all but dead at times, a trilateral agreement between Canada, the U.S. and Mexico has finally been reached. While hailed as a completely new agreement, the reality of the United States–Mexico–Canada Agreement, known as USMCA, is that it’s largely a rewrite of NAFTA. With the exception of dairy, some poultry and grading of American grain, the USMCA maintains the status quo for agriculture imports and exports.
Underlying retaliatory tariffs on agriculture were not part of the USMCA final agreement. Even though the USMCA was agreed to, U.S. steel and aluminum import tariffs were not part of the trade deal and remain in place. Therefore, the countervailing retaliatory tariffs on agriculture remain in place as well, negating any gains made for agriculture in the USMCA. In the same study mentioned earlier, researchers found that market access improvements in the USMCA will lead to expansion of U.S. agriculture exports by $450 million. However, retaliatory tariffs on agriculture imposed by Canada and Mexico resulting from steel and aluminum duties equal roughly $1.8 billion. That leaves U.S. agriculture $1.35 billion in the hole.
The USMCA did contain one crucial aspect that may have an outsized role in negotiations with China. Now known as the “Trump Veto,” Clause 32, Section 10 of the USMCA allows signatory countries to terminate the agreement on six months’ notice if another signatory country enters into a trade agreement with a “non-market” country. In essence, this provision prevents Canada and Mexico from reaching unilateral side deals with China that the U.S. disapproves of. This key detail of the USMCA gives the U.S. much greater bargaining strength in negotiations with China going forward.
Agriculture needs the administration to resolve Chinese trade more that it needed the USMCA. While agriculture suffered from the NAFTA rewrite, it is getting mauled by the increasing trade war with China. Retaliatory tariffs on U.S. agricultural exports are nearing $8 billion. As evidence of the tariff affect, soybean exports to China are down 94 percent in 2018.
Another issue is the loss of markets even if trade agreements are reached. The threat is twofold for U.S. producers. First, if tariffs are removed, those markets may already be lost to foreign competitors. Second, necessity is a great motivator and China’s government has already begun to pour resources into modernizing its agricultural industry. If drawn out long enough, American farmers may find themselves replaced by domestic production.
Trade Assistance and a Path Forward
When it became apparent that retaliatory tariffs imposed by trading partners were targeting agriculture, the administration took a somewhat unprecedented step to provide relief. Relying on executive authority created under the New Deal, the U.S. Department of Agriculture revived the dormant Market Facilitation Program to announce $12 billion worth of aid without congressional approval.
The success of the program is yet to be determined. The aid comes in the form of direct payments based on a formula comprised of previous yields and benchmark payments by commodity type. Soybeans by far account for the majority of money allocated to direct payments. The payments will be made in tranches, with the initial tranche of $4.7 billion to be dispersed before the end of the year. As of this writing, only $300 million has been paid with 125,000 applications received by FSA.
Net farm income estimates do not currently include the MFP payments. The economic research service of the USDA will be updating its forecasts to include the trade aid by the end of the year with the second tranche of payments to be dispersed beginning in December. However, Agriculture Secretary Perdue has already stated that no trade assistance will be made available in 2019 and farmers should plan accordingly.
That means the administration better hustle. While the U.S. may be at loggerheads with China for some time, the administration is already heading in the right direction. Despite pulling out of the Trans Pacific Partnership that included a dozen Pacific Rim countries, the Trump administration is moving forward with bilateral agreements with each country. Success has already been found with South Korea, and a bilateral trade agreement was reached with that country earlier this year without much fanfare. Duplicating these types of trade agreements and removing retaliatory tariffs against agriculture as part of those deals is the best path forward for agriculture.
Agriculture has prospered under the free trade framework developed and promoted since the end of WWII. While serious trade issues exist and need to be resolved, agriculture has been unfairly thrust into the predicament of being the target for retaliatory tariffs at a time when agriculture is in the midst of a prolonged downturn.
If the administration and the country are okay with these retaliatory tariffs levied at agriculture because it creates an environment where a better bargain can be struck, then this administration and the country should help carry that burden until the deal is done.
Podcast By Eric Wareham
ERIC WAREHAM is the vice president of government affairs for the Western Equipment Dealers Association. He is a graduate of the Willamette University College of Law and Augusta State University. Eric may be reached by writing to email@example.com.