April 18 – Who’s Running The Show for US Free Trade?

Are we in? Are we out? Are we re-negotiating? These are the questions asked each day about U.S. trade deals under President Donald Trump.

Can Farmers Trust Trump’s Trade Policy?

Are we in? Are we out? Are we re-negotiating?

These are the questions asked each day about U.S. trade deals under President Donald Trump.

Since his famous June 2016 campaign speech outlining his trade positions, Trump has dramatically altered the status quo of U.S. trade relationships and the perception of America as a reliable trade partner.

The Trump administration is renegotiating NAFTA, but depending on the reports you’ve read, the talks have either stalled or are on the verge of a massive breakthrough.

Trump pulled the U.S. out of Trans-Pacific Partnership negotiations shortly after taking office. But new reports indicate that willingness to abandon a preference for bilateral trade for a seat at the 11-nation trade sessions. Is this the truth, or temporary posturing?

And on China, the trade spat between the U.S. and its economic rival hit new heights Tuesday.

China has slapped massive tariffs on U.S. sorghum shipments, which will make these products non-competitive. It was the latest step in an ongoing escalation toward a full-fledged trade war.

Every one of the Trump administration’s decisions will have a dramatic impact on the role of U.S. agriculture in 2018 and beyond. But with so much noise out there each day, it’s hard to get an accurate picture of trade developments in Washington and how things could change.

Today, we’re going to examine the status of U.S. trade agreements with a significant impact on agricultural trade that is currently in development in addition to the ongoing spats being reported around the globe.  

Let’s start with the one that directly affects the relationship between the United States and Canada.

 

The North American Free Trade Agreement

Since January 1994, the North American Free Trade Agreement has enabled free trade between the borders of the United States, Mexico, and Canada. That doesn’t mean that the deal has been popular.

The issue has remained a hot topic since the 1991 election season when outside independent candidate Ross Perot railed against the agreement and positioned it as a destroyer of U.S. manufacturing jobs.

While many people have accused trade agreements of being responsible for the loss of manufacturing, this is a massive misconception. The primary driver of outsourcing has actually been the declining cost of labor in foreign nations, which has been fueled by an underlying influence of currency manipulation. This has been a significant point of contention in almost every trade deal explored by the United States.

With regard to NAFTA, this trade deal is the longest string of trade negotiations happening right now for the Trump administration. It just happens to be a deal representing 24% of global GDP.

Trump believes that NAFTA is a net-negative on the U.S. economy, regardless of what evidence exists on benefits to the agricultural community and job development. Perhaps the biggest thing driving this opinion are the numbers. In 2017, the United States ran a $71.05 billion deficit with Mexico. The deficit with Canada sat at $17.5 billion.

However, farm groups have reminded Trump that walking away from the deal would be a disaster for agricultural communities. Mexico has been the nation’s largest buyer of corn. However, due to the uncertainty tied around this trade deal, the country has increasingly turned to South American producers to secure supply. Congressional leaders from ag-producing states have been pressing the President to strike a deal and protect U.S. farming interests.

Time is of the essence. Trade deals must be approved by Congress.

While the Republican Party currently holds both Chambers of Congress, the political winds suggest that Democrats will take back the House of Representatives in 2018.

Perhaps that is why trade officials were pushing for an agreement “in principle” to be announced at a recent summit. The problem is that it’s unclear how long it will take to merge the goals and principles of three nations at a negotiating table.

Then there are the potential points of delays.

Significant gaps exist on automobile shipments, labor standards, and points of origin.

Canada is pushing to changes on in e-commerce, a term that didn’t even exist back during the original 1992 negotiations.

Mexico will hold its Presidential election on July 1, and a protectionist, anti-NAFTA leftist is leading in the polls.

Mexico wants to ensure that it is not used to elude U.S. steel tariffs.

It is also election season in the United States, and trade deals are highly polarizing for both parties. The failed push of the Trans-Pacific Partnership gave Republicans a talking point during the Presidential election, one that succeeded with Rust Belt voters.

And Commerce Secretary Wilbur Ross is frequently in need of a nap. [2]

Right now, the biggest challenge is time. I read a fabulous piece by Phil Levy who covers international policy at Forbes. [3] He argued that a best-case scenario (due mainly to process rules and analysis by trade commissions) would put the implementation date by Congress at December 26.

That date is after the midterm elections — and after Congress shuts down for its December recess. By the time that Congress returns in January, there could new leadership and newer priorities.

Looking ahead, the road looks bumpy. While it’s unlikely that no nation tears up the deal, the prospect of trilateral trade will face continued pressures as we move toward the summer months.

 

The Comprehensive and Progressive Trans-Pacific Partnership (TPP)

The TPP was a classic example of why trade deals are dangerous during the election season.

At one point, Hillary Clinton called the TPP the “Gold Standard” of trade deals.

Then, during election season, she was contradicting herself and saying that the deal would cost America jobs. Trump had already come out against the deal. For Clinton, it looked like a massive flip-flop at best and pandering to Rust Belt voters at worst.

One of Trump’s first acts as president was to pull the U.S. out of TPP negotiations.

This certainly hurt the U.S. agricultural sector. The withdrawal put Americans at a competitive disadvantage. U.S. farmers wouldn’t have preferential duty treatments. As a result, farmers in Mexico, Canada, and Australia suddenly had advantages over the U.S.

We’ve certainly warned about this, particularly in the wheat business where the three other countries avoid a $65/tonne tax the moment their products arrive in CPTPP territory.

Now, heading into midterm election season, Trump has offered ‘confusing at best” and “contradictory at worst” statements on America’s possible role in the TPP.

Trump has turned the conversation in circles. Earlier this week, Trump pitched the possibility of reentering the Trans-Pacific Partnership. It was later reported that he had asked his top economic advisors if it were possible to negotiate a better deal, news that got many hopes up.

Then, Wednesday morning, his first trip to the Twitter feed centered on bashing the agreement and telling Americans that he doesn’t believe that the deal is right for the United States.

“While Japan and South Korea would like us to go back into TPP, I don’t like the deal for the United States,” he tweeted. “Too many contingencies and no way to get out if it doesn’t work. Bilateral deals are far more efficient, profitable and better for OUR workers. Look how bad WTO is to US.”

While reentry would be a boon for farmers, particularly wheat growers who can sleep better knowing that market share in Japan will be protected, context is key at these critical moments.

Many headlines will say that the re-entry into TPP will be very positive for farmers. And farmers are very well aware that selling agricultural commodities along the Pacific Rim will reduce the stress of ongoing trade uncertainty.

However, the other headlines will draw a comparison between the TPP countries and China. Already, soybean and corn farmers in Iowa have voiced their opinion on the matter.

This week, the Des Moines Register caught up with farmer Bill Shipley, who is also the President of the Iowa Soybean Association. Shipley’s commentary shows just how comparatively unenthusiastic he is about the U.S. rejoining the TPP.

“TPP would affect over 18,000 different tariffs in those countries,” Shipley told the newspaper. “It would have a huge impact.”

But he argued that TPP won’t do much for Iowa given that it exports such a large chunk of soybeans to China. “

“[Reentering TPP] won’t make up for the loss to China. There isn’t any one country that can make up for the loss to China.”

Rejoining the TPP would actually not be that complicated of a process.

The deal looks very similar to the agreement that the U.S walked away from back in 2017.

 

Dominican Republic-Central American Free Trade Agreement (CAFTA-DR)

CAFTA was implemented in January 2009 and ensures free trade between the United States and Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

And for the most part, President Donald Trump hasn’t brought it up. Perhaps that’s because not a lot of people in the world really understand the deal. There are no blogs talking about it being a threat to U.S. jobs, and there isn’t a lot of data spinning about U.S. exports to the countries.

In fact, the deal actually favors the United States on a wide level. That’s because U.S. subsidies in the agricultural complex allow America to sell its commodities in the region without the threat of retaliation. The United States ran a $7.077 billion surplus from these countries.

Its surplus over the first two months of 2018 alone was $1.175 billion.

There are a few issues at play, however. Some analysts blame the massive influx of migrants from Central America to the United States due to this free trade agreement. There is a real argument that this agreement has affected employment in those nations and fueled an uptick in migration north toward the United States border.

This could draw the attention of the Trump administration, but CAFTA-DR is definitely down the list of priorities. These countries are significant exporters of clothing to the United States. It’s hard to walk through Walmart or Target without finding clothing produced from this region.

Given that the U.S. is cracking down on intellectual property concerns regarding China, CAFTA-DR apparel producers could receive a boost in demand from the United States, particularly at a time that U.S. consumer spending is on the rise.

There are several other important issues that could be renegotiated if we were to revisit this bill. The most important is the issue of corruption among governments in the region. Three years ago, Guatemala’s President was swept up in a large customs fraud scheme. He was sent to prison.

Of course, the Guatemalan Vice President couldn’t replace him because she was also in on the scheme and went to prison as well.

CAFTA-DR also has issues that need to be addressed in customs corruption at entry points, customer officials’ training, processing, and concerns about intellectual property and digital commerce regulations.

But, as noted, it’s unlikely that the United States will aim to mess with its nice little $7 billion surplus.

 

Bilateral Trade Deals

The U.S. has bilateral deals with Australia, Bahrain, Chile, Colombia, Israel, Jordan, Morocco, Oman, Panama, Peru, Singapore and South Korea.

We won’t go into each of these deals. But we want to point out that recent developments (primarily driven by the Trump administration) have created a series of challenges to those agreements.

Let’s start at the front of the list.

The Trump administration’s decision to slap 25% tariffs on steel imports and 10% tariffs on aluminum immediately raised questions among leaders in Australia.

Australian officials were already upset with the Trump decision on TPP. Though the free trade agreement is not threatened, many people were left scratching their heads when Trump said that the tariffs would allow the U.S. to charge other nations “the same as they charge us.” AUSFTA (the agreement between Australia and the U.S.) had already eliminated tariffs on steel between the countries. Though Australia is now exempted from the tariffs, it is possible that the U.S. chooses to put quotas on Australian steel.

This will not derail relations, but it certainly draws concerns about bilateral relations in the short term.

Trump has expressed his desire to engage in bilateral trade agreements today and in the future.

Following Trump’s decision to place tariffs on steel imports, the U.S. and South Korea quickly amended their decade-old bilateral agreement. South Korea agreed to reduce its steel exports, while the U.S. made concessions on auto imports. With that in mind, the U.S. had held about an $18 billion trade deficit with South Korea, a statistic that has made Trump wary.

The U.S. may press for additional agreements in this manner. Trump has already expressed a desire to engage Japan on bilateral trade, although Japanese officials have resisted the idea.

 

Trade with China

Finally, we can take a few moments to explore the shade of the elephant in the room.

Sino-U.S. trade…

It has been a fascinating 16 months on the global trade front. While the United States has embraced a more protectionist view of the world, China has openly embraced free trade.

China’s Commerce Ministry recently said that it hopes to have a “bumper year” for new trade deals. Its focus on trade is part of a larger desire to build the Belt and Road Initiative, a massive network of trade and infrastructure links across Asia, Africa, and Europe.

And while China is not part of the TPP, it has pursued other multilateral deals like the Regional Comprehensive Economic Partnership, which would link the country to economic rivals like India, regional partners like Australia, and growing economies like Cambodia.

The United States does not have a trade deal with China.

And the last two months has been nothing but a process of tantrums over trade between the world’s largest and second-largest economies.

Things hit a new level on Tuesday when China slapped tariffs on sorghum that are so high that the crop will be uncompetitive in those markets. Given that China is overwhelmingly the largest importer of U.S sorghum, we can anticipate that a lot of this crop will end up in the ethanol supply chain.

China has also rushed to meet with other trade partners and ask them to stand with them against protectionism efforts by the United States. Trump has threatened to respond to recent tariff announcements by China by slapping up to (and an additional) $150 billion in tariffs.  

U.S. trade officials have also promised to escalate this situation to the World Trade Organization.

But China is playing a game of “carrot and stick.” The stick was the tariffs.

The carrot is that China has promised to open up its markets to American automobiles.

The United States has accused China of intellectual property violations, while President Trump has accused China of manipulating its currency over Twitter this week.

However, we have to separate the tough talk and threat of tariffs from the reality of trade.

In a trade war between the United States and China, there will be no winners.

There has been a lot of tough talk. But at the same time, there has also been concessions made by the Chinese government, and economic leaders like Larry Kudlow have attempted to be the voice of reason. A deal is likely at some point.

The problem is that the noise will drown out reports on the progress.

 

Conclusion

As I’ve noted in recent weeks, political noise has been the biggest problem around global trade.

Too many people in the press have focused on the hyperbolic statements of Trump and less on the progress and backroom dealings of diplomats.

Trade policy is remarkably complex, and it can’t be boiled down to 280 characters on Twitter.

That said, U.S. farmers would benefit immensely from deals that make their products competitive in the global markets. The departure from the TPP, NAFTA, and abandonment of trade with China would do significant damage to the farm economy.

My expectation is that deals will get done, but they will take time.

In the meantime, stay focused on what you can control. You control your farming operations, your grain marketing program, and your health, your wealth, and yourself.

Looking ahead, it’s critical that you stay informed and on top of the situation.

We’re not the people making the decisions. All we can do is anticipate and react.

About the Author
Garrett Baldwin

Garrett Baldwin is a content strategist and editor at FarmLead. He covers the global grain markets and public policy issues related to the agricultural industry. He is a graduate of the Medill School of Journalism at Northwestern University. He also holds a Master’s Degree in Economic Policy from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University, and an MBA in Finance from Indiana University.