How U.S. Agriculture Will Fare Under the USMCA and Retaliatory Tariffs

Abstract

A hallmark of the Trump Administration has been to reverse the post-World War II consensus on lowering of trade barriers and a commitment towards multilateral free trade, towards a more protectionist and perhaps mercantilist position vis-a-vis trade policy. One of the Administration’s first actions in this regard was the decision to leave the Trans-Pacific Partnership (TPP) agreement, followed thereafter by raising tariffs on steel and aluminum imports. President Trump left no doubt where he stood on the North American Free Trade Agreement (NAFTA), which he often stated was the “worst trade deal maybe ever signed anywhere.” The administration’s actions on trade are likely to have significant implications for U.S. farmers as these actions target three of the largest markets for U.S. agricultural exports — Canada, China and Mexico — accounting for some 44% of U.S. agricultural exports representing an average of $63 billion from 2013 to 2015. The recently signed, though yet to be ratified, United States-Mexico-Canada Agreement (USMCA) should bring a sigh of relief to U.S. farmers. It largely maintains the relatively free market access across the three countries, particularly in agriculture. It improves market access for U.S. dairy and poultry exports towards Canada, providing a modest positive export bump in these sectors. However, the new agreement, when implemented, is occurring in a new and volatile trade policy environment that is creating headwind for U.S. farmers. The steel and aluminum tariffs that have targeted most of the U.S. trading partners including Canada, China and Mexico, have been met with retaliatory measures that extend well beyond these two metals. Canada and Mexico have targeted a broad number of U.S. agricultural exports and China, notably, has increased its tariff on U.S. soybean exports by 25%. The modest market access improvements in the USMCA will lead to an expansion of U.S. agricultural exports by $450 million, mostly in the dairy and poultry sectors. However, the retaliatory measures taken by Canada and Mexico, in reaction to the U.S. decision to raise tariffs on their exports of steel and aluminum, will cause U.S. agricultural exports to decline by $1.8 billion, and by $1.9 billion to these key trading partners. In today’s broader context of reactive trade retaliation from countries around the world, the United States would see a decline in agricultural exports of $7.9 billion, thus overwhelming the small positive gains from USMCA. It could be worse. The USMCA may fail to be ratified. One plausible outcome of a failure to ratify the new agreement would be for the United States to withdraw from the original agreement, in which case all three countries could revert tariff rates to the so-called most favored nation (MFN) status, granted to all countries that are members of the World Trade Organization (WTO). MFN tariff levels would hit U.S. agricultural exports particularly hard. One study estimates that U.S. agricultural exports would decline by more than $9 billion, and lead to higher consumer prices for food.