Trump risks backlash in farm belt states if NAFTA gets scrapped
As efforts to renegotiate the North American Free Trade Agreement kick off this week, Donald Trump will have an opportunity to take action he's been promising since he started his campaign for President.
Ditching NAFTA without a replacement could be devastating to U.S. agriculture and end up costing Americans more for groceries, according to experts.
Mexico and Canada represent nearly one-third of total U.S. agricultural exports. Corn, soybeans, fresh fruits and vegetables as well as livestock and dairy are major U.S. exports to those countries.
President Donald Trump said in a speech late Tuesday that it's unlikely the U.S. will be able to renegotiate the North American Free Trade Agreement. Some believe Trump risks a backlash in the farm belt states where he's had political support if he does away with the trade deal.
"Scrapping NAFTA would have a huge impact on U.S. agriculture," said Joseph Glauber, a senior research fellow in the markets, trade and institutions division of the International Food Policy Research Institute in Washington. "I would hope this is just a trade ploy."
Glauber, a former chief economist at the U.S. Department of Agriculture, told CNBC in an interview that certain anti-dumping provisions sought by some U.S. fruit and vegetable producers would have a negative impact in the end on Americans. And he believes such provisions could end up be being used by Canada and Mexico against U.S. producers.
"Both consumers and producers would lose from scrapping NAFTA," Glauber said. "Consumers would lose cheaper access to fruits and vegetables and year-round access to fruits and vegetables."
At the same time, Glauber said the U.S. agriculture industry would lose without NAFTA because cross-border trade on the livestock side benefits all three countries, including U.S. consumers. For example, he said Mexico ships the U.S. cattle and Canada ships feeder pigs across the border.
Key differences remain
Three-way talks in Washington to update the 23-year-old trade pact have reportedly failed to bridge differences between the parties.
For the Trump administration, concerns about NAFTA go well beyond agriculture to industries such as auto manufacturing. But when it comes to agribusiness, the president has been very vocal about Canada's "unfair" dairy industry hurting U.S. producers, particularly dairies in border states such as Wisconsin.
A second round of renegotiations is scheduled in Mexico City in a few weeks and will be followed by round three in Canada. Leading the NAFTA modernization talks for the Trump administration is Robert Lighthizer, the United States trade representative.
"Personally, I don't think we can make a deal," Trump told a political rally in Phoenix. "Because we have been so badly taken advantage of. They have made such great deals — both of the countries, but in particular Mexico — that I don't think we can make a deal."
"So I think we'll end up probably terminating NAFTA at some point."
This isn't the first time Trump has vowed to end the trade agreement. Some also view the president's comments as part of a strategy of applying additional pressure on Mexico and Canada.
Trump risks alienating farm belt
"In general there's a disconnect between Trump on the campaign trail, which is the Trump we see at these rallies, and Trump in the Oval Office," said Cullen Hendrix, a nonresident senior fellow at the Peterson Institute for International Economics, a Washington-based think tank. "He tends to make pretty bold claims and then we see little in the way of follow-through on the policy side."
Hendrix added: "My guess is once he gets back to Washington, Agriculture Secretary Sonny Perdue or [Commerce Secretary] Wilbur Ross will reacquaint him with the electoral map, which shows that leaving NAFTA would put the hammer to many of his supporters and GOP strongholds in the Great Plains. He's going to need those senators to support any renegotiated NAFTA."
Mexican Foreign Minister Luis Videgaray reacted on Twitter to Trump's threat: "No surprises: we are already in a negotiation. Mexico will remain at the table with calmness, firmness and in the national interest."
Last year, Mexico ranked as the third-largest agricultural export market for the U.S., while Canada ranked as the second-largest ag customer after China.
Americans get fresh fruit and vegetables from Mexico, including avocados used to make guacamole. If Trump terminates NAFTA, it could make the price of avocados more expensive.
The Trump administration previously floated the idea of having a 20% border tax that could impact everything from avocados to Mexican beer such as Corona. Talk of the tax went away but it could return, particularly if the president wants to raise money to pay for his border wall.
"Presumably they would hit us with retaliatory tariffs, so that would affect us," said Glauber. "There would be a loss of trade, and that would hurt both producers and consumers."
The economist explained that retaliatory tariffs also could impact industries within the U.S. that import goods for further processing, including meat processors, livestock, and fruit and vegetable processors.
For Mexico, though, the country is already looking beyond the U.S. for agricultural trade and corn is one major commodity that could suffer.
Corn industry vulnerable
Overall, corn and corn products today account for more than 30 percent of U.S. farmer income, according to the National Corn Growers Association. Mexico was the top export market for corn last year, while Canada is also a major market for corn as well as ethanol.
For soybeans, about 45% of the U.S. crop is exported on average and Mexico is one of the major markets along with China.
The top U.S. trade negotiator says that the United States won't settle for cosmetic changes to the North American Free Trade Agreement as negotiations to rework terms of the pact began. (Aug. 16)
"If everybody decided to close their borders to U.S. products and protect their own farmers with high subsidies, we'd have no place to get rid of our soybeans," said Rick Ostlie, a soybean farmer in North Dakota and former president of the American Soybean Association.
Ostlie added: "It's easy to say we're going to improve NAFTA. But whether you're buying a car or negotiating a trade agreement, there's got to be give and take. You negotiate and get middle of the road ... and if it's to your best interest you do it. You're never going to get 100% of everything you want."
Another industry that has thrived under NAFTA is the poultry market. Mexico and Canada together account for almost 40% of the American broiler exports. U.S.-produced pork also is a major export to Mexico and Canada.
"NAFTA has been incredibly successful for our industry," said Jennifer Myers, a spokesperson for the National Corn Growers Association. "We are closely monitoring the negotiations and will continue to advocate for corn farmers' interests throughout this process."
Former Canadian diplomat Lawrence Herman, now a senior fellow at the Toronto think tank C.D. Howe Institute, wrote in an op-ed in Tuesday's Globe and Mail newspaper that "Canada should be considering a world without the NAFTA or, possibly, without even the Canada-U.S. free-trade agreement."
According to the California Farm Bureau Federation, not all sectors of agriculture in the state have benefited from NAFTA. Specifically, the group maintains that Mexican imports of asparagus, avocados, tomatoes and cut flowers have hurt growers in the state.
Nonetheless, the California farm group still believes the trade deal has on balance been a good thing for California, which produces more than one-quarter of the nation's fruits and vegetables and most of its tree nuts.
'Unfair competition' from Mexico
At a congressional hearing last month, it was highlighted how specialty crop producers see "unfair competition" from Mexico under the current trade pact. For example, the Florida Fruit & Vegetable Association accused Mexico of "dumping" certain specialty crops and wants the anti-dumping provisions included in a new NAFTA.
"Mexico's explosive growth in fruit and vegetable exports to the U.S. under NAFTA has had just a profoundly negative effect," FFVA spokesperson Lisa Lochridge told CNBC in an interview.
The Florida ag official added: "Mexican fruit and vegetable producers have only been able to see the kind of growth that they have seen over the last 10, 15, 20 years because of unfair subsidies of the industry there by the Mexico government. Our argument is we can successfully compete in a fair global marketplace."
A poll done in May of 400 farm producers found 83 percent of respondents in favor of modernizing NAFTA. The Purdue University poll also found that 62 percent are hopeful that a new trade pact will benefit American farmers.
US ag leader: 'do no harm' on NAFTA
Meantime, the head of the three largest farm organizations from the U.S., Canada and Mexico held a joint news conference last week in Washington and then signed a letter to the top trade officials of the three countries urging them not to harm NAFTA but to modernize the trade pact "in ways that preserve and expand upon the gains already achieved."
In the joint letter, the presidents of the American Farm Bureau Federation, Canadian Federation of Agriculture, and Consejo Nacional Agropecuario (Mexico's National Agricultural Council) said "agriculture in each NAFTA country would suffer greatly from disruptions to the trading relationships that have developed over the last 23 years."
"We have a vital interest in helping our negotiators make improvements but also to do no harm to the gains that we have gained in NAFTA." said Zippy Duvall, president of the American Farm Bureau Federation. "NAFTA continues to be a success story for North America farmers and ranchers."