Trade Dilemmas

By Steve Kopperud, SLK Strategies

Almost as much as it craves cheap feed and low energy prices, United States (US) animal agriculture covets robust, ever-expanding export markets. The ability to sell large quantities of domestic meat production overseas offsets relatively saturated domestic markets and provides farmers and ranchers a sure-fire formula for expansion. This animal production growth phenomenon conveys the same sales expansion benefit to farm and ranch input suppliers, providing the opportunity for feed companies, ingredient suppliers – including renderers – and others to grow sales as well. Simply put, the more livestock and poultry being grown, the better it is for all industries who call farmers and ranchers either “customer” or “supplier.”

Administrations of both political stripes have for decades proudly pointed to US agricultural trade as the lone bright spot in this country’s overall balance of trade. In nearly every State of the Union speech since he took office, President Barack Obama has singled out growing agricultural exports. Most recently, Secretary of Agriculture Tom Vilsack rolled out the US Department of Agriculture’s (USDA’s) relatively rosy export outlook, the headline being that fiscal year (FY) 2017 exports overall will hit $133 billion, a much-improved forecast from earlier this year.

USDA reports the $133-billion export forecast is $6 billion higher than expected based mainly on higher projected exports of livestock, dairy, poultry, oilseeds, horticultural goods, and cotton. The US ag trade surplus will hit $19.5 billion, up 40 percent from $13.9 billion in FY 2016. China will return as the biggest US customer, according to USDA, buying an expected $3.5 billion in ag products, particularly pork, soybeans, and tree nuts. Oilseeds and product exports will hit $31 billion on record soybean exports and higher values. Grain and feed exports at $29.3 billion are unchanged, while wheat exports at $5.1 billion are $100 million higher than FY 2016.

The export outlook is welcome news to an animal agriculture industry beset the last few years with both global overproduction, hitting US dairy exports particularly hard, and sudden non-tariff trade barriers. The latter includes Russia’s ongoing meat import ban in its vaunted pursuit of food self-sufficiency and China’s fiddle-faddle over the use of biotechnology in US pork and poultry production, even as it proudly announces it will build its beef industry using cloning.

The optimistic US export forecast should be the icing on the cake given two major trade deals are in the pipeline. The first, the Trans-Pacific Partnership (TPP), a 12-nation Pacific Rim treaty representing more than 40 percent of global gross domestic production, is much coveted by US livestock and poultry producers as it grants greatly-expanded access to Asian markets dominated by China and undercuts China’s sales domination in Asian markets. The second treaty is the Transatlantic Trade and Investment Partnership (TTIP), a historic attempt to forge a bilateral trade deal between the world’s largest economic entities, the United States and European Union (EU).

TPP is almost ready for prime time. The White House has begun the process of formally submitting the agreed-to trade pact to Congress for final approval on a straight up or down vote, hopefully before Obama leaves office. TTIP is in mid-gestation. While both are critical parts of Obama’s international policy and trade legacy, and potentially significant shots in the arm for the domestic economy, congressional leadership says TPP won’t be voted on this year. European leaders also say TTIP won’t be ready for consideration while Obama is in office. Both treaties face significant political danger of either being killed outright, allowed to die quiet deaths, or being significantly delayed. Any way you cut it, their individual or joint demise means the US economy could potentially lose billions in world trade.

TPP, worth hundreds of millions of dollars to US industry, particularly agriculture, began as an expansion of the Trans-Pacific Strategic Economic Partnership Agreement, originally signed in 2005 by Brunei, Chile, New Zealand, and Singapore. When the United States smelled economic and political advantages in late 2008, it joined the effort and over time brought in Australia, Canada, Japan, Malaysia, Mexico, Peru, and Vietnam. Given the final treaty includes new membership rules, Taiwan, the Philippines, Colombia, Thailand, Laos, Indonesia, Cambodia, Bangladesh, and India have expressed interest in joining the TPP club.

The final TPP negotiated deal was signed by the United States and other participating countries on February 4, 2016, four years later than planned and ending seven years of rough-and-tumble negotiations. The treaty’s 30 chapters are designed to lower non-tariff and tariff barriers and create an investor-state dispute settlement system. Overall, the treaty will “promote economic growth; support the creation and retention of jobs; enhance innovation, productivity, and competitiveness; raise living standards; reduce poverty in the signatories’ countries; and promote transparency, good governance, and enhanced labor and environmental protections.”

Lastly, existing trade deals among TPP countries, such as the North American Free Trade Agreement (NAFTA), are supposed to shrink to cover provisions not in conflict with TPP or parts that might provide greater trade liberalization than TPP. The United States, for one, considers TPP a companion agreement to TTIP.

However, unless you cared about boosting US exports of everything from pork chops to automobiles, TPP wasn’t on your political radar for most of the last seven years. That is until it appeared the treaty would actually be finalized. At that point, the Obama White House awoke to the reality it needed what is called trade promotion authority (TPA) to get the prospective treaty through Congress. TPA is authorized by Congress. The National Renderers Association, others in agriculture, and general business communities lobbied hard and successfully to get the president TPA authority, a perk enjoyed by every president since Ronald Reagan. TPA permits the administration to negotiate trade deals based on parameters and priorities set by Congress. In return, Congress surrenders its right to amend the final document, voting simply aye or nay when the deal comes up for ratification.

The White House was doubly shocked when shots off Capitol Hill aimed at TPP did not come from conservative Republicans eager to deny Obama a major trade and foreign policy victory. Rather, they came from Democrats who had their collective nose out of joint because the president did not consult with them adequately before signing off on the TPP deal. The president’s allies on all things political took him to the woodshed on TPP, contending publicly the treaty did not provide sufficient US jobs protection or protect the environment, assertions echoed by labor unions and environmental groups.

Adding insult to injury, TPP morphed into the poster child for emerging US anti-globalism. Both Democrat presidential candidate Hillary Clinton and GOP presidential contender Donald Trump regularly use TPP as a campaign punching bag. Clinton has not abandoned the deal – after all, she did, while Obama’s secretary of state, call TPP the “gold standard” of trade treaties – but now she says the treaty needs to be fixed. Trump simply does not trust multi-national trade deals (e.g., NAFTA), contending the United States always gives away more than it gets. For his part, he wants the United States to abandon TPP and renegotiate NAFTA.

Vilsack remains the treaty’s main political cheerleader, at least from the administration’s side of the debate. He reminds his Democrat colleagues the deal is key to Obama’s Asia/China foreign policy legacy. He also uses the new, more optimistic export projections as one more reason TPP must be ratified.

“The US has the opportunity to expand those [increased export] benefits even further through passage of new trade agreements…such agreements are key to a stable and prosperous farm economy,” Vilsack said. Unfortunately, that “reminder” is falling on deaf ears in an election year.

While agriculture and industry are working nonstop to try to convince congressional leadership TPP deserves its up or down vote during the post-election lame duck session, Senate Majority Leader Mitch McConnell (R-KY) and House Speaker Paul Ryan (R-WI) agree as of this writing that TPP is too controversial in an election year to bring to the floor. Labor unions and environmental groups are rapidly inserting increased job losses, prolonged global warming, and ultimate planetary ruination into the national campaign conversation on who should sit in Congress and the White House.

“The politics of trade have become rather toxic,” McConnell told the Kentucky Farm Bureau in September. “The current agreement, which has some serious flaws, will not be acted on this year but it will still be around. It can be massaged, changed, and worked on during the next administration.”

Ryan, who supports TPP, contends the Obama administration has provided too few details for Congress to vote to approve or reject TPP and time is running out. One thing McConnell and Ryan agree on: there will be no TPP vote during 2016. This means a new Congress – whatever that looks like – and a new president will need to figure out what the next steps should be.

If the United States simply delays TPP, there is hope for a final deal. However, if Congress and/or the White House decide the deal must be renegotiated, then the task of getting all 12 nations to agree to sit down and renegotiate falls to the United States. No nation has ratified TPP, waiting for the United States to signal its approval first.

Turning to the other side of the world, US-EU negotiations on a free trade agreement have entered their third year and, depending on to whom you speak to, have yielded “good progress” or “gone nowhere.” When informed by the Office of the US Trade Representative (USTR) that US trade talkers and their EU counterparts would hammer out a deal to lower and eliminate tariffs and non-tariff trade barriers, harmonize regulations, etc., most trade veterans in Washington, DC, all nod knowingly with some asking, “In what century do we expect to see such a deal?”

Their skepticism is rooted in the fundamental cultural and regulatory differences between the United States and EU, particularly Europe’s attitude toward technology – both existing and emerging – and its use. The cynics contend the gaps are simply too wide to bridge.

As in all international trade negotiations, one of the major sticking points between the two economic giants is agricultural trade. The use of biotechnology in plants and food crops – and the emergence of food animal biotech, including cloning and genetically engineered salmon – puts the European Parliament into a flutter, which immediately calls for – at worst – an outright ban, but at the least mandatory warning labels. The EU still bans the import of US beef if growth hormones have been administered and sets a quota on non-hormone beef, a situation US beef producers would like to see disappear.

On dairy, the EU is playing a hardball game of “geographic designations.” The National Milk Producers Federation (NMPF) is particularly irked – it has told USTR to abandon TTIP negotiations – by the EU’s insistence that only dairy products produced in certain cities and geographic areas of Europe can carry those place names on the label. The EU insists only cheese from Parma, Italy, could be called parmesan cheese, only pork from Denmark would be called a “Danish” ham, and so on. Any other nation could process and sell those products, but could only go so far as to label and sell them as “parmesan-like.” So dedicated to its position is the EU that it tried to get “geographic designators” inserted into TPP at the eleventh hour and failed. NMPF just got back from reinvigorating its relationship with industry counterparts in Mexico so that US NAFTA partners don’t embrace the EU position.

As to the overall pace of negotiations, USTR will indicate things are moving at a good clip while industry experts both here and in Europe say progress is almost indiscernible. Trade officials in France and Germany declared in mid-September that US-EU negotiations on TTIP are dead, and an analyst advising such declarations by the EU’s two economic powerhouses means TTIP “dies with a whimper.” After three years of talks, the German trade minister said TTIP has “de facto failed.” His French counterpart said there is no political support in France for TTIP and he wants a “clean” end to the formal trade talks.

“The Americans have given nothing, or just crumbs,” the French trade minister said. Belief in this statement is reflected in growing popular dissent over TTIP, with consumer activists taking to the streets of Paris, France, Rome, Italy, and Berlin, Germany, to protest the United States’ alleged attempt to rollback EU food safety protections. Whether the French and German statements reflect reality or are negotiating ploys with the United States remains to be seen. German Chancellor Angela Merkel and French President Francois Hollande continue to publicly support TTIP, at least in concept.

Further muddying the future of TTIP is the impact of the United Kingdom’s (UK’s) vote to exit the EU. Great Britain had been the greatest supporter of TTIP but with its positive Brexit vote, the UK is no longer a player. Rather, the UK will concentrate on renegotiating bilateral deals with the United States and other nations to replace or retain advantages it enjoyed while included in EU trade agreements.

US and EU officials, as expected, said reports of the death of TTIP talks are premature and greatly exaggerated. Per the European Commission: “The ball is rolling right now…talks are entering a crucial stage. We are ready to make submissions on all pending chapters.” The United States indicates the talks are making “steady progress.” Special Trade Representative Michael Froman, however, now regularly meets with his EU counterparts to “assess progress.”

As if the demise of two hard-fought multi-billion-dollar international trade treaties isn’t enough, the comity of North American trade is once again strained.

While the United States barely escaped about $3 billion in retaliatory tariffs threatened by Canada and Mexico over this nation’s country-of-origin labeling (COOL) law on fresh meats – the World Trade Organization three times said the US law was discriminatory – in mid-September, two senators wrote to Froman and Vilsack demanding they investigate Canada’s recently reinvented domestic dairy pricing system. They contend the new system is aimed at and discriminates against US producers.

Senators Charles Schumer (D-NY), set to become either Senate minority leader or the Democrats’ new majority leader depending on how the political winds blow on November 8, and Tammy Baldwin (D-WI) said Canada is exacerbating bilateral dairy trade tensions by setting limits on US milk imports while telegraphing it intends to impose more restrictions the senators say violate bilateral trade agreements (i.e., NAFTA). Schumer accused Canada of setting prices designed to “clamp down” on US dairy products and he wants Froman and Vilsack to investigate the current and prospective Canadian pricing schemes. Schumer and Baldwin say these “unfair” policies cost their constituents “tens of millions of dollars.”

Pricing changes expected this fall include Canada’s new National Ingredients Strategy, modeled on an Ontario provincial dairy pricing program. The program allegedly incentivizes Canadian processors to avoid buying US dairy imports, including New York and Wisconsin milk, and discourages use of US ultra-filtered milk, a product currently enjoying duty-free access to Canada under NAFTA.

NMPF praised the senators for “holding one of our largest trading partners to its international commitments.” The US Dairy Export Council said Canada has a long history of erecting “roadblocks” to American dairy imports.

House Agriculture Committee ranking member Representative Collin Peterson (D-MN), no fan of NAFTA over how it allowed Canada to skate on increased US dairy exports, said during TPP negotiations he would just as soon see no TPP deal if it allowed Canada to continue its protectionist domestic pricing regime. For that and a lot of other reasons – mostly political – he just may get his wish.

October 2016 RENDER | back