Washington Insider -- Wednesday

New NAFTA Concerns

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

Focus Shifts to US Steel, Aluminum Import Duties

With the U.S.-Mexico-Canada Agreement (USMCA) now set, officials made clear in remarks in unveiling the pact that the U.S. steel and aluminum import duties applied to Canada and Mexico were not removed with the trade agreement.

Commerce Secretary Wilbur Ross described those as “separate issues,” and Mexico and Canada say they expect those tariffs to be worked out on a separate track.

President Donald Trump said the U.S. was talking with Mexico and Canada about potentially replacing them with quotas.

Also unresolved is whether Canada and Mexico will continue retaliatory tariffs on American products, including agricultural goods.

U.S. Trade Representative Robert Lighthizer indicated those talks were coming soon and Canadian Foreign Minister Chrystia Freeland also indicated that will be a focal point moving ahead. So far, no talks are scheduled as of yet, but the matter is being closely followed by several industries, including agriculture.


FDA Says Pesticide Testing Shows Little Worry for Consumers

Some 99% of domestic and 90% of imported foods tested by FDA in Fiscal Year (FY) 2016 were compliant with federal tolerances for pesticides, according to agency's latest residue monitoring report.

FDA Commissioner Scott Gottlieb hailed the findings and said the report shows that overall levels of pesticide chemical residues "don't pose a risk to consumers."

For the FY 2016 report, FDA tested 6,494 foods from 46 U.S. states and 98 countries for 711 pesticides and industrial chemicals.

Some 52.9% of the domestic and 50.7% of the import samples had no pesticide residues.

The violation rates of less than 1% for domestic foods and 10% for imported foods are consistent with past reports, as is the higher rate of violations for imported foods, according to FDA.

The 25 domestic samples found in violation included 21 pesticides that don't have an EPA tolerance and four that contained levels in excess of tolerances. Of the 418 import samples in violation, 289 had no tolerance violations and 64 were found to have residues above the EPA standard.

The bulk of the import violations were rice and rice products – some 19% of these products were found in violation. Some 10% of imported vegetables sampled were in violation and 7.8% of "other food products" – including nuts, seeds, oils, honey, candy, spices, multi-ingredient products and dietary supplements – had residues in violation of federal standards.


Washington Insider: New NAFTA Concerns

Well, there was a significant sigh of relief this week after the agreement with Canada on the new NAFTA was announced – and an earnest scurry among analysts regarding what it says and what it means. Most of the reactions range from “not much change” to outright “favorable.”

But, not everyone agrees with that view. For example, two analysts – Gustavo A. Flores-Macias, a professor of government at Cornell and Professor Mariano Sanchez-Talanquer, a scholar at the Harvard Academy for International and Area Studies and an assistant professor of political science at the Center for Research and Teaching in Economics in Mexico City wrote to the New York Times this week to comment on the deal.

They say before firms “break out the Champagne, they should look at the details.” They describe several concerns.

Although the revised deal brings much-needed modernization in areas such as e-commerce and intellectual property, the “media spotlight on Canada has obscured a bigger problem for the region.” Under the new terms, they say, North American trade is “headed off the rails and, perhaps along with it, political stability south of the border.”

A key goal of NAFTA, like all free trade agreements, is bringing certainty to the rules of the game to facilitate commercial exchanges. The new deal “undermines that certainty in two ways.”

First, it eliminates expert panels for resolving government-investor disputes in most industries, save for those covering energy and telecommunications.

Although it preserves panels for bilateral disputes regarding dumping and countervailing duties, it defers to domestic courts as the main mechanism for solving controversies should governments change the rules down the road. This measure puts a lot of faith in the transparency and competence of the legal systems of the member countries and opens the door to potential cronyism, unequal access to those systems and even corruption.

Second, the agreement sets up a mechanism for automatically reviewing its terms on a periodic basis. This and the automatic expiration after 16 years as the default option introduce significant uncertainty by making it less costly for governments to upend existing rules and threaten to exit the agreement. Establishing periodic reviews as natural breaking points for the rules of the game would certainly shorten investors’ time horizons.

Given the changes championed by the Trump administration, investors will be especially wary of governments seeking to move the goal posts in the future. Slowdowns in economic activity in both Canada and Mexico, as well as sharp declines in foreign direct investment, can already be traced to the uncertainty surrounding current negotiations.

Both of these changes point to a bigger problem: the potential deinstitutionalization of North American economic ties.

The certainty and centrality of NAFTA to United States-Mexican relations has proved integral to aligning the two countries’ economic and strategic interests. Before NAFTA, relations were far from harmonious, in part because Mexico’s interests were solidly on the side of the global south. Pointing to a history of invasions, occupations and the loss of half of its territory to the United States, Mexico long saw its northern neighbor as a threat to be contained.

Thanks to NAFTA, Mexico developed a stake in the economic success of the United States, which went from threat to partner. It has been directly responsible for Mexico’s dependence on trade with the United States for its own economic development.

As a result, Mexico veered away from the Latin American political orbit and turned decidedly toward North America. In 1994, NAFTA served as an important carrot for Mexico to gain membership in the Organization for Economic Cooperation and Development, a club of mostly developed nations.

NAFTA also imposed constraints on the Mexican government’s latitude to depart from the alignment with United States interests. Even if the government tried to depart from the pro-market orientation and respect for property rights NAFTA provides, it would be subject to a number of legal challenges.

The dependability of this partnership is undermined every time the agreement is up for renegotiation, whether scheduled or not. That’s what we mean by deinstitutionalization: If it is subject to political whims in the three countries, then it is no longer a settled agreement and its place as a foundation of cooperative United States-Mexican relations will quickly erode.

The administration’s rush to sign the agreement before Mexico’s pro-business president, Enrique Pena Nieto, leaves office on Nov. 30, suggests that the White House considers the more nationalist, leftist successor Andres Manuel Lopez Obrador a riskier proposition. If President Trump is concerned about future Mexican governments seeing NAFTA in a different light, this problem will be greatly magnified under the new terms.

Of course, the analysts say, it doesn’t have to be this way. President Trump must now send the deal to Congress for approval. It is up to Capitol Hill, then, to make sure that whatever deal emerges, it continues to provide a reliable, permanent basis for North America’s trade and political relationships. Although the up-or-down nature of the vote makes changes unlikely, this experience should serve as a valuable lesson as America redesigns its trade relations with the rest of the world, the article says.

So, we will see. Modern trade agreements are extremely complex, and the administration’s views are strongly held and seem to offer a low priority to the idea of “institution building” the writers believe to be important. Still, the writers’ advice to search the new agreement carefully is appropriate as the proposed deal moves to Congress for approval, Washington Insider believes.


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