Trade Balancing

By Steve Kopperud, SLK Strategies

Those with skin in the agriculture export game continue to hope President Donald Trump’s ongoing threats – through tweets, speeches at political rallies, or off-the-cuff remarks – to “terminate” agriculture’s favorite and most lucrative trade treaties are simply a New York City-style negotiating strategy. Yet the White House is moving forward on reinventing the North American Free Trade Agreement (NAFTA) and then will review all trade treaties currently on the books.

The Trump White House campaign spoke loud and long about United States (US) trade relations. NAFTA is “the worst deal the US ever signed,” the president declared often. Very early in his tenure he pulled the United States out of the Trans-Pacific Partnership (TPP), saying he is not fond of multilateral treaties because the United States inevitably gives more than it gets. The ongoing talks between this country and the European Union (EU) over a bilateral free trade agreement have effectively been put on hold. Now Trump is taking dead aim at the Korean-US (KORUS) free trade agreement. US agriculture, which reaps billions in tariff-free cross-border trade with NAFTA, is understandably nervous.

Agriculture interests continue to seize every opportunity to remind the White House – noticeably short on agriculture experts – that exports represent the only positive component in the US balance of trade. Further, agriculture preaches to anyone who will listen that livestock and poultry production – and the industries that serve them – have hit pretty static domestic demand. This means animal agriculture only expands when there are new markets for ramped-up production, i.e., selling meat overseas to an emerging middle class who demand animal protein. This also means meat production input industries – including rendered feed ingredients, crop producers who sell to feed companies, and feed producers – work hard to expand export of their own products, acknowledging their efforts come down to just how successful farmers and ranchers are in getting meat on ships and moving it overseas to expanded and new markets.

The United States currently enjoys 14 free trade agreements with 20 countries that collectively account for 10 percent of the world’s gross domestic product and 43 percent of total US agriculture exports. On the books are treaties with Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore, and South Korea. Most of these treaties are bilateral deals, with the exceptions being NAFTA and the Dominican Republic-Central America-US Free Trade Agreement (DR-CAFTA). The oldest trade pact is with Israel, approved in 1985; the most recent treaties are KORUS and the Colombia and Panama free trade deals, all approved in 2012.

When it comes to value, the US Department of Agriculture (USDA) reports total free trade agreement partner imports of US “merchandise” hit about $710 billion last year. At nearly 47 percent, aggregate US market share in those partner countries is understandably much higher than in non-free trade agreement countries. As to the success of these treaties, the U.S. Chamber of Commerce, in a report used in its campaign to secure Trade Promotion Authority for President Barack Obama in 2013, cited the following USDA statistics about the various free trade agreements:

• Under the US‐Chile agreement, US agricultural exports grew more than 525 percent, increasing from less than $145 million in 2003 to more than $900 million in 2013.

• Under the US‐Peru agreement, US agricultural exports grew 230 percent, rising from under $215 million in 2005 to more than $700 million in 2013.

• Under DR-CAFTA, US agricultural exports doubled from $1.9 billion in 2005 to $3.8 billion in 2013.

• Under the US‐Australia agreement, US agricultural exports increased nearly 240 percent, from $410 million in 2004 to $1.4 billion in 2013.

These markets have only grown larger in the last four years.

Pro-traders, however, argue that US exporters generally remain at a disadvantage in key foreign markets as US goods face an average global tariff rate of 5.9 percent, according to the World Economic Forum’s Global Enabling Trade Report 2014. Another hurdle to US exporters is the sheer number of trade pacts among other nations. According to the World Trade Organization, 267 bilateral or multilateral free trade agreements are in force around the globe today. The United States is a party to just 20 of these deals, meaning US exporters are likely among a minority paying tariffs to sell their wares in key world markets.

The future of NAFTA talks at least was semi-assured when Secretary of Agriculture Sonny Perdue and chief White House economic advisor Gary Cohn, formerly of Goldman Sachs, sat down with the president this summer to explain “Trumpian” statements about killing off the tripartite treaty were not helpful to folks in this country or industries that rely on Mexico and/or Canada as markets and points of production. Perdue, stressing the importance of NAFTA to agriculture, brought along a map showing where the voters who elected Trump – mainly rural and blue collar voters – live and work. Trump tempered himself, if only temporarily.

The United States is now hip-deep in renegotiation of NAFTA and, agreeing with partners Canada and Mexico, aims to wrap up the rewrite – fingers crossed – by the end of 2017. US agriculture demands one commitment from the White House, namely to “do no harm” to the cross-border benefits currently enjoyed by agriculture, manufacturing, and other industries. That objective is shared by Canada and Mexico, both of which acknowledge the significant economic bounty NAFTA has brought them since it was signed.

As of this writing, negotiators are getting ready for the third round of talks, this time in Ottawa, Canada. During the first two sessions, the United States laid out its goals for NAFTA 2.0 in strong language; Canada and Mexico were more low-key.

Ambassador Robert Lighthizer, US Trade Representative (USTR), talked tough at a pre-meeting press conference in Washington, DC, just before round one in late August. He told his North American counterparts that despite the treaty’s benefits to agriculture, NAFTA has “fundamentally failed many, many Americans,” costing this country 700,000 jobs because of shifting trade movements over nearly 25 years.

“We cannot ignore the huge trade deficits, the lost manufacturing jobs, the businesses that have closed or moved because of incentives – intended or not – in the current agreement,” Lighthizer said. The United States, he noted, “is not interested in a mere tweaking of a few provisions and a couple of outdated chapters.”

For Canada, Minister of Foreign Affairs Chrystia Freeland rejected the US notion that “trade balance” translates to a successful treaty.

“Canada doesn’t view trade surpluses or deficits as a primary measure of whether a trading relationship works,” she stated, referring to Trump’s priority on reducing the $72 billion US trade deficit with Canada and Mexico. Freeland pointed out that when services trade is factored in, the United States actually enjoys an $8 billion surplus. The three nations, she said, should focus on maintaining a “powerful shared interest” in a strong NAFTA going forward. Freeland also reminded her counterparts that Canada’s purchases from the United States are more than China, Japan, and the United Kingdom combined, adding, “Strong economic fundamentals are a compelling argument for bolstering what works and improving what can be made better.”

Seeking a “more prosperous North America,” Ildefonso Guajardo, Mexico’s economic secretary, said, “Mexico comes to the talks to play a constructive and productive role…without risking what we have achieved as a region.” Guajardo said there is room for “modernization” of the treaty, but changes must benefit all three nations.

“Mexico is committed to obtaining a win, win, win for all three countries,” he stated. Guajardo led a team to Washington, DC, just before the second set of talks in Mexico City in early September.

After the Mexico City round, “progress was made,” said US, Canadian, and Mexican negotiators in a joint statement. Interestingly, just after the Mexico City round, Lighthizer floated an idea to be talked about at the Ottawa meeting to create a “sunset” provision that would automatically end NAFTA after five years unless all three countries formally act to renew it. Word is that when USTR shared the idea within the administration, USDA and the US Department of State strongly opposed the notion. Both departments said any type of “automatic termination” language included in the treaty “substantially increases its likelihood” the escape clause may be used.

When Trump tweets about terminating NAFTA, Mexico is quick to respond that it does not negotiate through social media, but Mexico’s trade minister has said his country will not stay at the negotiating table if the White House takes steps to terminate NAFTA. US industry is keenly aware Mexican officials continue to seek alternative suppliers, particularly out of South America, for a number of ag commodities now coming from the United States should NAFTA talks break down.

Canadian officials headed to China in September in part as an effort to explore ways to diversify that nation’s overseas customer base, but also to talk TPP implementation. A trade deal with China, given the ongoing nervousness about the future of NAFTA, is one way Canada can show it is not captive to the US market, said a Canadian source. However, a cozy trade deal with China may not sit well with Canadian voters, Lighthizer added.

Trump will visit Beijing, China, in November to follow up on an invitation from Chinese President Xi Jinping when he visited the United States in April. Secretary of Commerce Wilbur Ross, Trump’s lead on trade, is expected to be part of Trump’s trip to Asia to attend the Asia Pacific Economic Cooperation meeting in Hanoi, Vietnam. Ross was also expected to be in Beijing in late September.

NAFTA veterans say the trade experts purposely loaded the early sessions with relatively easy issues, leaving the tough issues for last. These tougher issues include labor conditions and wages; rules of origin on components, particularly in auto manufacturing; new sanitary/phytosanitary standards; a new chapter on the “digital economy”; dispute resolution mechanisms, as well as investor-state dispute settlement; currency manipulation; biotechnology approvals; a ban on geographic indicators on dairy and meat labels; and active reduction of the US trade deficit.

If a NAFTA rewrite was not enough, and in keeping true to his campaign promise to review all US bilateral trade deals, Trump made noises in mid-September about terminating KORUS before the second round of talks is held. Reportedly, the first set of talks in August went so badly Trump publicly restated his threat to terminate the treaty, offering to let Korea know six months in advance if the United States was going to pull out.

However, Perdue, Cohn, Secretary of State Rex Tillerson, and national security advisor H.R. McMaster strongly counseled the president on multiple economic, domestic, and foreign policy reasons to repair, not terminate, KORUS. Lighthizer said he was confident improvements in KORUS are forthcoming. He did not talk cancellation but, like NAFTA, criticized the deal for not helping enough US workers and contributing to a widening trade deficit with Korea. Several congressional lawmakers from both sides of the aisle sent word to the White House telling Trump that the administration should work on South Korea to improve compliance with treaty obligations. However, to even consider pulling out of the bilateral trade deal is a bad idea.

Senator Orrin Hatch (R-UT), chair of the Finance Committee, and ranking member Senator Ron Wyden (D-OR) joined Representative Kevin Brady (R-TX), chair of the Ways and Means Committee, and his ranking member, Representative Richard Neal (D-MA), in releasing a joint statement calling South Korea a “significant economic partner, our seventh largest export market, and a vital customer for US manufacturers, service providers, farmers, and ranchers.” Senator Chuck Grassley (R-IA) said a US withdrawal from KORUS would be “catastrophic.” Senator Joni Ernst (R-IA) stated the South Korean market is important for her state’s beef, corn, and pork exports, adding “terminating KORUS would leave our farmers at a competitive disadvantage.”

Korean Ambassador Ahn Ho-Young said it is too early to write the obituary for KORUS. There has been one round of talks and no date has been set for a second, he noted, adding the two nations have not agreed yet on how extensive a KORUS rewrite might be. Some contend the treaty can be “tweaked,” while others are calling for a NAFTA-like full renegotiation.

“Let’s go step by step, rather than just jumping the gun,” Ho-Young commented.

Observers willing to predict say both NAFTA and KORUS will survive, though in what form is difficult to pin down. That leaves only 12 other multilateral and bilateral trade deals to review and possibly rewrite.

October 2017 RENDER | back