Tariffs Overwhelm USMCA Gains

Study Highlights Prospective Trade Boosts, But Points to Losses if Trade Battles Continue

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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This chart show U.S. agricultural export revenues under various scenarios. (Chart courtesy of the Farm Foundation)

OMAHA (DTN) -- The new North American free trade agreement, once ratified, will provide a bump in U.S. agricultural exports. But an analysis released Wednesday by the Farm Foundation shows those trade gains are overwhelmed by lost exports due to retaliatory tariffs.

Farm Foundation contracted with economists at Purdue University to estimate the impacts on U.S. agriculture from the United States-Mexico-Canada Agreement (USMCA). The study contrasted USMCA with its predecessor, the North American Free Trade Agreement. The study also looked at the impact of retaliatory tariffs by Canada, Mexico and China against U.S. agricultural exports.

The USMCA is hindered by retaliatory tariffs Canada and Mexico initiated against U.S. farmers after the Trump administration raised tariffs on Canadian and Mexican steel and aluminum. Those tariffs will bring down U.S. ag exports by $1.8 billion. Once Chinese tariffs are added in, U.S. agricultural exports could fall $7.9 billion, "Thus overwhelming the small positive gains from USMCA." Oilseed exports show the sharpest decline at 21%, while meat products drop by 8.7%

As of now, there is no direction from the Trump administration on what may cause the U.S. to remove the steel and aluminum tariffs, called the Section 232 tariffs, or whether they would remain after the USMCA is ratified. Any talks with China would have to begin with President Donald Trump and Chinese President Xi Jinping first meeting. That is not expected to happen until the G-20 summit in Argentina at the end of November.

The Farm Foundation study marries up with USDA's trade aid to farmers. USDA released an initial tranche of $4.7 billion earlier this fall based on 50% of a farmer's production for the commodity. The majority of payments under the Market Facilitation Program are going to soybean producers who were expected to garner nearly $3.7 billion in payments. A second round of payments is expected to happen between now and the end of the year, but no announcement has been made.

Agriculture Secretary Sonny Perdue has also reiterated in recent days USDA is not expecting to issue later payments in 2019, but a USDA spokesperson said Wednesday that USDA will continue monitoring the trade situation and will determine the prospect of additional payments.

"I can confirm there will be a second tranche of payments and we are continuing to look at market conditions. Right now, we see no change in the payment amount that would change our minds for the second tranche," Perdue said. "Farmers are very resilient and will plan accordingly in 2019 without the expectations of a market facilitation program."

As of earlier this week, USDA had paid $292.8 million to farmers and had more than 125,000 applications for trade payments. Wheat, soybeans, corn, dairy and hogs have been the top five commodities for which payments were made.

Farm Foundation also held a forum on trade Wednesday in Washington, D.C., where Joe Glauber, former chief economist with USDA, talked about soybean trade between Brazil, China and the U.S. as Chinese officials remain determined not to buy from the U.S. Glauber said that, long term, the trade dispute risks affecting U.S. soybean trade to China.

"Brazil still has capacity to bring in more land," Glauber noted. "The quicker that land comes into production, the more losses there are for the U.S. This isn't going to affect current trade, but future trade."

The Farm Foundation report states that, once the USMCA is ratified, the new trade deal "should bring a sigh of relief to U.S. farmers." The report noted that NAFTA boosted U.S. export shares into Canada and Mexico from 14% roughly 25 years ago to 30% now. The new trade agreement maintains free-market access for agriculture while improving access to Canada for dairy and poultry exports. Dairy and poultry exports should combine to bump up exports to Canada by $450 million, the analysis stated.

Under the USMCA, U.S. dairy exports could more than double to Canada, but the increase still reflects an overall bump of dairy exports by 5%, the analysis stated. In dollar figures, dairy exports could increase to $280 million, while exports of some meat or livestock products, mainly poultry, could go up $210 million. Those are the major areas where market access will grow. Impacts on other agricultural sectors are relatively modest.

Despite potential long-term export growth to Canada, the National Milk Producers Federation on Wednesday called on President Donald Trump to "recognize the significant economic losses milk producers are suffering" because of tariffs. NMPF maintains dairy farmers have lost more than $1 billion income since tariffs came into effect in May, citing for different damage estimates. The first round of trade payments, though, was pegged at $127 million. The dairy producers' group, for the second time in a week, as the Trump Administration to change the calculations for payments to dairy farmers.

"Dairy farmers spoke strongly and clearly that the government needs to act to alleviate the hardship America's milk producers face as a result of the trade disputes," said Jim Mulhern, president and CEO of NMPF. "We look forward to working with USDA and White House on solutions that address the cost of the trade war that has exacerbated the economic struggle facing dairy producers and the cooperatives they own."

The U.S. 25% tariff on steel and 10% tariffs on aluminum, implemented relatively uniformly with trade partners, translated into retaliatory tariffs that largely hit meat, dairy, food products, fruit and vegetable products going to Mexico, as well as sugar and various food and meat products going to Canada. Combined, they hit various U.S. meat products with $931 million in export declines and processed food products by $836 million in lost exports.

Those lower exports in different sectors turn into slightly lower output in dairy and meat products as well. On aggregate, the tariffs offset gains from USMCA and resulted in about 8,900 agricultural and food sector jobs getting displaced, the Farm Foundation report stated.

The trade analysis was done for Farm Foundation by Maksym Chepeliev, Wally Tyner and Dominique van der Mensbrugghe at Purdue University's Department of Agricultural Economics.

Chris Clayton can be reached at Chris.Clayton@dtn.com

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Chris Clayton