Tariffs are bargaining chip when it comes to NAFTA
March 9, 2018
North American Free Trade Agreement (NAFTA) negotiations have been ripe with uncertainty following the seventh round at the table, this time in Mexico City, after President Donald Trump's announcement of plans to impose tariffs on Canadian and Mexican steel and aluminum.
On Thursday, Trump put the tariffs in place, exempting Mexico and Canada. An exemption will give the neighboring countries at least temporary relief from the 25 percent tariff on steel and 10 percent levy on aluminum.
During the signing ceremony at the White House, Trump's tone on NAFTA was positive. However, he reiterated the possibility of pulling out of NAFTA.
"I have a feeling we're going to make a deal on NAFTA," Trump said. "And if we're making the deal on NAFTA, this will figure into the deal and we won't have the tariffs on Canada or Mexico."
Tariffs on Canadian and Mexican steel have become a bargaining tool for whether or not a trade pact can be reached according to negotiators. In his twitter feed, Trump sent a message that the tariffs were a leverage tool in the negotiation. Trump tweeted that steel and aluminum tariffs would only come off if a new NAFTA is signed.
Both Canada and Mexico authorities rebuffed Trump's plan. Mexican Economy Minister Ildefonso Guajardo told Reuters, "Under no circumstance will we be subject to any type of pressure." And Canadian Trade Minister Francois-Phillippe Champagne told Reuters his country would not accept any duties or quotas from the United States.
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Canada, the European Union, and Mexico have hinted at retaliatory measures if the tariffs are imposed. And the World Trade Organization has expressed concern about an escalating tit-for-tat scenario, to the detriment of a number of countries.
Some trade consultants and experts are calling the leverage ploy illegal. But supporters say the threatened tariffs are based on a 1962 U.S. law that allows the president to invoke urgent measures in matters of national security. Trump views jobs in the steel industry as an economic-security issue, and therefore a national-security issue.
The plan has also not set well with some in the Republican party. Speaker of the House, Paul Ryan, issued a press release blaming the Trump tariff plans for dips in the stock market.
"We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan," Ryan said in a statement.
Some experts believe terminating NAFTA could cost up to 1.8 million American jobs.
U.S. Agriculture Secretary Sonny Perdue told Des Moines residents that Trump's plan to place tariffs on steel and aluminum imports may get the U.S. a better trade deal. But he added that farmers who are in fear of a trade war may need to start praying.
"He wants a good deal on NAFTA. I think he'll get one," Perdue told about 600 people at the Iowa Agriculture Leaders Dinner.
Some farmers fear that Canada, Mexico and China, large ag trade partners, will retaliate by putting tariffs on corn, soybeans, pork and beef, making farm goods less competitive and driving prices lower.
The uncertainty in the rural communities is strong. According to a Purdue survey, one-third of the producers they polled, believe it is likely the U.S. will withdraw from NAFTA. The barometer is based on monthly polling of 400 farmers and ranchers.
Producers were asked to rank, on a scale from 1 to 9, the likelihood of a U.S. withdrawal from NAFTA. A large portion of respondents, 39 percent, provided a neutral rating of 5, while 34 percent indicated they thought withdrawal was more likely (a rating of 6 or higher) and 29 percent thought a withdrawal unlikely (a rating of 4 or lower).
Despite the NAFTA concerns, producers remained optimistic about agriculture in general, in that U.S. ag exports will remain strong over the next five years with 87 percent of respondents expecting exports to either remain about the same or increase. Just 13 percent of farmers in the survey expressed concern that U.S. ag exports will decline over the next five years, which was virtually unchanged from a year ago when the same question was posed to producers. Exports are forecast at $139.5 billion this year, a marginal decline from 2017.
"Responses suggest there is a tremendous amount of uncertainty among producers regarding the future of NAFTA," wrote three Purdue economists in a summary. "Despite that uncertainty and notwithstanding the importance of U.S. exports to both Mexico and Canada, producers remain relatively optimistic about long-run prospects for U.S. ag exports."
The eighth round of NAFTA negotiations are slated for early April in Washington. Agriculture still remains one of the unresolved topics in the discussions. U.S. farm groups say the new NAFTA must preserve duty-free access to Canada and Mexico.
The U.S. Cattlemen's Association (USCA) wants meat labeling included in NAFTA. "No label, no deal," said Jess Peterson, Executive Vice President.
As far as the steel tariffs, Peterson said Trump and his Administration are standing up for domestic producers, which the group supports. "The problem lies in how other countries respond," Peterson added. "If this undercuts U.S. beef exports and cattle prices decline, it makes for a negative setting for the U.S. cattle industry."
Industry input is key, and Peterson said he hopes that the Trump Administration will work toward creating a better communication line with the U.S. cattle industry.
"The US Cattlemen's Association provided testimony and comments on various trade issues and received feedback from the Trump Administration. However, in this instance the U.S. Cattlemen's Association was not consulted. In order to ensure a stable, strong and vibrant U.S. cattle industry, the Trump Administration needs to create a more direct line of communication with cattle country to ensure there is better dialogue and understanding on these issues and the ramifications."
The American Soybean Association (ASA) said the potential of steel and aluminum tariffs would do nothing but hurt agriculture.
China, U.S. soy's largest customer, accounts for $14 billion in sales and uses more than a third of total U.S. soybean production. These tariffs could lead to retaliation from China and would significantly endanger the current trade relationship between the U.S. and China for soybeans, ASA's president, John Heisdorffer said.
"The tariffs announced … by the administration will put the interests of other domestic industries over farmers," said Heisdorffer. "Prior to [Trump's] announcement, China has indicated that it may retaliate against U.S. soybean imports, which would be devastating to U.S. soy growers. Our competitors in Brazil and Argentina are all too happy to pick up supplying the Chinese market."
Retaliation from China would add significant further injury to an already-hobbled farm economy, according to ASA. "Prices are down 40 percent and farm income is down 50 percent, and we simply can't afford for those numbers to get worse," Heisdorffer said.
National Cattlemen's Beef Association (NCBA) is finding positives in the NAFTA discussions with the progress on the sanitary and phytosanitary (SPS) portion.
"Strong SPS provisions are critical for U.S. beef producers because they ensure trade and market access is based on sound science, not arbitrary restrictions," said Kent Bacus, NCBA Director of International Trade and Market Access. "When SPS measures are in place, it allows U.S. beef exports to compete on a level playing field in global markets. It is a good sign that an updated NAFTA agreement will maintain provisions that facilitate science-based trade."
But one ag group is calling on Trump to up the tariff list to include agriculture.
R-CALF USA is asking Trump to add cattle, beef, sheep and lamb to his tariff list. According to R-CALF USA Board President Bryan Hanson, this action is necessary to preserve national food security interests that are threatened by a increasing quantity of underpriced and often undifferentiated imports.
"The growing tide of underpriced imports is displacing domestic cattle and sheep production and new tariffs are needed to offset the artificial price advantage that foreign countries gain through currency manipulation, cutting food safety corners, hidden subsidies, and lax environmental standards," Hanson said.
Hanson explained that just as in the steel industry, new tariffs on imported cattle, beef, sheep and lamb will help rebalance trade flows in the livestock industry, which will stop the alarming decline in the number of livestock operations and feedlots in the United States.
"Since the implementation of NAFTA, the largest segment of American agriculture, the U.S. cattle industry, has shrunk at an alarming rate: 20 percent of all U.S. cattle operations have exited the industry, the nation's cow herd shriveled to the smallest size in over 70 years, and in 2014 and 2015 U.S. beef production fell to the lowest level in over two decades," said R-CALF CEO, Bill Bullard.