While most of the national media focus in recent weeks in Washington, DC has been on the ongoing impeachment hearings, there has been a compromise reached on a very important trade agreement for the U.S. agriculture industry. The leadership of the U.S. House of Representatives has reached an agreement with leaders from the Trump Administration on the United States-Mexico-Canada (USMCA) trade agreement. The U.S. House is scheduled to vote on USMCA yet in December, followed by the U.S. Senate in early January. All indications are that the USMCA agreement will now pass both the House and Senate, and ultimately be signed by President Trump.
USMCA is the new trilateral trade agreement between the United States, Canada and Mexico, which was originally agreed upon by the three counties in the Fall of 2018. USMCA will replace the current North American Free Trade Agreement (NAFTA), which was originally set up in 1994 to eliminate many tariffs and other trade barriers among the participating countries. Beginning in 2017, the Trump administration challenged some of the trade provisions under NAFTA and began working on a new trade agreement among the three countries. USMCA requires approval by all three participating countries, including the need for Congressional approval in the United States, in order to be implemented. Mexico had already given approval to USMCA, and all indications are that Canada is likely to follow, once the U.S. finalizes approval. However, Mexico is now questioning some of the labor changes in the revised USMCA agreement, which may delay final approval.
Most experts agree that the biggest impact of the new USMCA trade agreement will probably be for the U.S. auto industry, as well as for steel and aluminum trade among the three countries. However, there are also provisions related to digital trade, financial services, intellectual property, telecommunications, energy, and environmental issues that do not exist under the current NAFTA agreement. The USMCA agreement also contains key provisions for some segments of the agriculture industry, including dairy, hogs, poultry, and wheat.
Details of the New USMCA Trade Agreement for the Agriculture Industry:
- As part of this new agreement, all food and agricultural products traded between the U.S., Canada and Mexico that had a zero tariff under NAFTA would continue to have a zero tariff under USMCA. Similar to NAFTA, the USMCA agreement will not eliminate tariffs on all ag products. One important aspect of USMCA is that it will provide more access to the Canadian market for U.S. dairy products, poultry and eggs.
- Much of the focus in the USMCA negotiations related to agriculture was on dairy provisions between the U.S. and Canada. USMCA will increase the access to ship U.S. dairy products into Canada to 3.59 percent of the annual Canadian production. This is higher than the 3.25 percent level that was proposed under the Trans-Pacific Partnership (TPP) trade agreement that the U.S. chose to withdraw from in 2017. USMCA provides for specific increases in tariff-free quotas of U.S. dairy products into Canada for fluid milk, cheese, butter, ice cream, and other products. The USMCA pact also would eliminate Canada’s class 6 and class 7 milk pricing programs, which were limiting U.S. dairy exports to Canadian markets. It is estimated that the USMCA agreement will allow U.S. dairy exports to Canada to increase by nearly $300 million.
- USMCA increases the tariff-free quotas for eggs and egg products, as well as chicken and turkey products, that can be shipped from the U.S. into Canada. The initial quotas will be allowed to increase by one percent per year for an additional ten years.
- As part of the USMCA deal, Canada agreed to grade U.S. wheat imports in a manner similar to Canadian wheat, and not to require a country of origin statement on the inspection certificate, both of which have been issues in the past. The two countries also agreed to collaborate on items related to seed quality and grading systems, as well as other seed regulatory issues.
- The biggest win for pork producers under the USMCA agreement is the continuation of tariff-free trading of pork products with Mexico and Canada, both of which are major export markets for U.S. pork. In 2018, U.S. pork exports to Mexico totaled $1.3 billion and to Canada totaled $765 million, accounting for over 40 percent of total U.S. pork exports.
- The pork industry will also benefit from the strong sanitary-phytosanitary (SPS) provisions that are contained in the USMCA pact, which go beyond those contained in the current NAFTA agreement or in World Trade Organization (WTO) agreements. The SPS provisions will allow for more transparency and sharing of scientific data, compliance measures, and other information among the three countries. This part of the agreement could be very important if African Swine Fever (AFS) disease were ever to be confirmed in the Western Hemisphere.
- Even though there is not an immediate trade benefit for corn and soybeans, USMCA does free up easier access to Canada and Mexico for the export of those products. Enhancing the livestock export markets also helps maintain domestic corn and soybean demand in the U.S. Mexico is actually the number two export market for U.S. soybeans, trailing only China. During the years of the NAFTA agreement, U.S. soybean exports to Mexico were four times greater than before NAFTA, and U.S. soybean sales to Canada doubled during that time-frame.
U.S. agriculture exports to Canada and Mexico grew under the first 23 years of the NAFTA agreement from below $9 billion per year before NAFTA to over $38 billion per year by 2016. Trade with Canada and Mexico accounts for about 28 percent of the total annual U.S. ag exports. In 2016, U.S. ag exports to Canada were valued at just over $20 billion, with leading export products being grains and feed, animal products, fruits and vegetables, oil seeds, and horticulture products. U.S. ag exports to Mexico in 2016 totaled nearly $18 billion, with the top export products being animal products, grain and feed, and horticulture products. Mexico is either the largest or second largest export destination for U.S. beef, pork, poultry, wheat, corn, soybeans, and dairy products.
As usual, not everyone is in total agreement with the new USMCA agreement. However, many experts feel that USMCA is a step in the right direction to address the trade issues that have been affecting sales and profitability in some industries, especially certain segments of the U.S. agriculture industry. Many of the labor and environmental issues that were holding up approval of USMCA in Congress were worked out in the final agreement. Most segments of the agriculture industry are pleased with the USMCA agreement; however, they also realize that trade agreements are very complex and many times take years to fully develop.
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);