Washington Insider - Tuesday

Impacts of US NAFTA Withdrawal

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

EPA's Pruitt Hints at Possibly Expanding Conventional Ethanol Mandate

Increased U.S. ethanol production could translate into a higher mark for conventional ethanol under the Renewable Fuel Standard (RFS) than the current 15 billion gallon level, according to Environmental Protection Agency (EPA) Administrator Scott Pruitt.

While some have criticized EPA for not increase its biofuel targets for biomass-based biodiesel and conventional ethanol, Pruitt said in a December 1 interview with KCCI TV in Des Moines that the agency sets the mandate targets "as objectively as possible." When the export of ethanol is put into the mix, Pruitt said he was "encouraged" that the industry could "break the cap." Should that happen, Pruitt said, "We can reset that number and go above the cap."

Mexico presents an opportunity, Pruitt observed as they are poised to implement an RFS-type program "where they will mandate a certain percentage of their fuel that will have ethanol. We have tremendous opportunities with conventional ethanol."

On biomass-based biodiesel, Pruitt said what those backing the biofuel have to remember is that "capacity is different than production. You might have the capacity to produce 2.6 billion gallons... but then you have to produce it." EPA set the biomass-based biodiesel mandate at 2.1 billion gallons for 2018, unchanged from 2017, he noted. "We imported 700 million gallons from Argentina to meet that 2.1 billion number. We should not be importing biodiesel to meet our obligation that we have set. That is a conversation I have had with senators and folks across the country."

Pruitt pointed to denial of petitions to shift the point of obligation on the RFS as a signal that the administration backs biofuels. "Many in the oil and gas sector wanted us to move that," he observed. "We denied that petition about a month ago. I think what the president has said to the people of Iowa is that he wants to support and is supporting ethanol. We want to export and will continue strengthening that."

Mexico Appeals WTO Compliance Decision on Tuna Dispute with US

Mexico has launched an appeal of the compliance decision issued by the World Trade Organization (WTO) on Mexico's challenge that the U.S. "dolphin safe" tuna labeling program has not been brought into compliance with world trade rules.

The appeal means that a special meeting of the WTO Dispute Settlement Body (DSB) set for December 4 to consider adoption of the panel's findings did not take place.

Mexico had signaled November 27 that it would appeal the DSB finding that changes made by the U.S. had brought its program into compliance with the WTO. The report overturned an earlier WTO ruling that found Mexico had the right to impose tariffs on up to $163 million in U.S. exports based on the view that the U.S. labeling requirements for "dolphin-safe" tuna had unfairly discriminated against Mexican tuna shipped to the U.S.

Washington Insider: Impacts of US NAFTA Withdrawal

The tax-reform bills that are being wrapped up in the next few days are drawing intense heat from many directions. One of the main points of criticism is the fact that the Trump Administration has claimed support from economists and others, but has not made study results from government institutions available to the press and others.

And, while there are calls from Congress and others to make official studies of NAFTA withdrawal available, the most recent analysis by the Congressional Research Service (CRS) that was released in late November doesn’t add much to that debate.

CRS does report background on NAFTA, noting it entered into force on January 1, 1994, establishing a free trade area as part of a comprehensive economic and trade agreement among the United States, Canada, and Mexico. Now, it says the United States is renegotiating the agreement and that “repeated threats by President Trump to abandon NAFTA and other actions by the administration as part of ongoing efforts to "modernize" NAFTA have raised concerns that the United States could withdraw from NAFTA.

Then CRS notes that although some U.S. agricultural sectors support NAFTA renegotiation and efforts to address certain outstanding trade disputes concerning milk and dairy products, potatoes, some fruits and vegetables, and wine which express strong support for NAFTA and oppose outright withdrawal.

And, CRS says that possible disruptions in U.S. export markets and general uncertainty in U.S. trade policy also continue to be a concern for U.S. food and agricultural producers. Similar concerns have been raised by lawmakers who have oversight authority on industry and trade activities and who continue to monitor and conduct hearings on the ongoing NAFTA renegotiations.

However, the report is not very specific, Bloomberg says. It agrees that “trade under NAFTA provides an important market for U.S. agricultural producers and a broader choice of food products for U.S. food processors and consumers.”

It reveals, as we know, that Canada and Mexico are the two largest U.S. agricultural trading partners (combining imports and exports), accounting for 28% of the total value of U.S. agricultural exports and 39% of U.S. imports in 2016. Also, it notes that under NAFTA, U.S. agricultural trade with Canada and Mexico has increased significantly.

Agricultural exports rose from $8.7 billion in 1992 to $38.1 billion in 2016, while imports rose from $6.5 billion to $44.5 billion over the same period. Adjusted for inflation, growth in the value of total U.S. agricultural exports and imports with its NAFTA partners has increased roughly threefold, growing at an average rate of 5%-6% annually.

But, here’s the catch – to date, comprehensive, official, quantitative analysis of a possible U.S. NAFTA withdrawal which focused exclusively on agricultural markets is not yet available. So, the new CRS report looks at the more general potential economic effects to agricultural markets of a possible U.S. NAFTA withdrawal, assuming the application of most-favored-nation (MFN) tariffs on traded agricultural products instead of the current zero tariff (i.e., duty-free trade) for selected agricultural products. MFN rates generally reflect the highest (most restrictive) rates that World Trade Organization (WTO) members can charge each other on imported goods and services.

In general, the application of MFN tariffs on U.S. agricultural imports would likely raise prices both to U.S. consumers and other end users, such as manufacturers of value-added food products. MFN tariffs on U.S. agricultural exports would, in turn, likely make U.S. products in those markets less price-competitive and more costly to foreign buyers, which could result in reduced quantities sold.

Given that certain agricultural products dominate U.S. trade with Canada and Mexico—such as meat products, grains and feed, and processed foods—these products could become more costly and less competitive as MFN tariffs are imposed and other trade preferences are removed under a NAFTA withdrawal. This could result in reduced market share for U.S. products in these markets.

Other potential trade impacts under a U.S. withdrawal from NAFTA could include (but are not limited to) higher prices for imported products from Canada and Mexico, reductions in agricultural imports that compete with U.S. products, disruption of integrated supply chains, general market disruption and uncertainty, economic impacts to some agricultural-producing states (both positive and negative), and a decrease of future negotiating leverage of the United States (e.g., to review and resolve disputes regarding a range of non-tariff barriers to trade).

There are private groups and public universities who have worked harder to specifically identify what the administrations proposed withdrawal might mean, and the implications they suggest are pretty scary — but not official.

Increasingly, ag groups are concerned about the persistent administration threats. Like the list of potential side-effects on even common drugs, that CRS “dose of reality” sometimes makes you wonder if the cure is better than the headache.

But, at least you know what to expect, sort of—and, sometimes are warned about taking the pill that was considered. So, this is an important debate for producers—one producers should follow closely to see how lawmakers follow up on their requests for “answers,” Washington Insider believes.

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