Center for Global Trade AnalysisDepartment of Agricultural Economics, Purdue University403 West State Street, West Lafayette, IN 47907-2056 USA

contactgtap@purdue.eduhttp://www.gtap.agecon.purdue.edu

Global Trade Analysis Project

The United States-Mexico-Canada Agreement (USMCA) and Impacts for U.S. Agriculture

Maksym Chepeliev, Wallace Tyner and Dominique van der MensbruggheCenter for Global Trade Analysis

Department of Agricultural Economics, Purdue University

Farm Foundation Forum31 October, 2018, National Press Club, Washington, DC

• USMCA consolidates gains of NAFTA-1.0 with modest improvements in market access

• Nonetheless, farmers are facing strong headwinds as U.S. trading partners react to rising U.S. tariffs

• Dissolution of NAFTA could be costly for U.S. agricultural interests

Introduction

2

An Historical Perspective

3

Since World War II, U.S. tariffs have been on a sharp downward trajectory

4

Canada and Mexico have doubled their share in U.S. agricultural exports

5

24.0%

8.6%

6.6%

5.6%4.7%4.1%

36.8%

Top 10 importers (1995)

Japan

Canada

Korea

Mexico

China

Taiwan

Netherlands

Hong Kong

Egypt

Germany

ROWSource: GTAP 9 bilateral merchadise trade data

17.1%

13.7%

12.7%

8.5%4.9%

32.1%

Top 10 importers (2017)Canada

China

Mexico

Japan

Korea

Hong Kong

Taiwan

Netherlands

Indonesia

Philippines

ROWSource: UN COMTRADE

Mexican exports have gained market share, but Canada less so

6

17.9%

11.7%

5.9%

4.1%

3.6%3.4%

41.6%

Top 10 sources (1995) Canada

Mexico

Thailand

Indonesia

France

Colombia

Brazil

Italy

Netherlands

Ecuador

ROWSource: GTAP 9 bilateral merchadise trade data

18.1%

16.7%

4.9%

3.8%3.5%3.4%

38.3%

Top 10 sources (2017)Mexico

Canada

China

France

Chile

Italy

India

Indonesia

Viet Nam

Brazil

ROWSource: UN COMTRADE

The United States-Canada-Mexico Agreement (USMCA)

7

• Consolidates NAFTA 1.0• Main market access changes

• Auto content for duty free access is raised to 75% from the existing 62.5%• 45% of the auto content must be produced in factories where workers are paid at least

$16/hour• Expanded import quotas in Canada for dairy and poultry products

• A variety of other changes not directly linked to market access, for example:

• Extension of copyright protection from 50 to 70 years• New measures for the digital economy: no duties on music and e-books, protection for

internet companies• Improved transparency in import and export licensing

What’s in the agreement

8

105.59

2.69

11.5

0.040

20

40

60

80

100

120

Dairy products Live poultry and pigs, eggs Poultry and pork meat Other food products

New market access measures in agriculture, estimated changes in quotas, percent

9Source: authors’ estimates based on USTA (2018a; 2018b)

Example of dairy product quota at the HS6 level: fluid milk

10

0

10000

20000

30000

40000

50000

60000

70000

Aggregate accesslevel (2014), MT

Actual imports fromU.S. (2014), MT

Additional USMCAquota (in year 19), MT

Fluid milk: market access, metric ton (MT)

Source: Global Affairs Canada; UN COMTRADE

0 7.5

241

0

50

100

150

200

250

300

In-quota tariff MFN tariff Out-quota tariff

Fluid milk: import tariffs, percent

Source: Canada Border Services Agency (Custom Tariffs)

Modest increases in U.S. agricultural exports

11

Dairyproducts

Meatproducts

n.e.s.

Foodproducts

n.e.s.

Animalproducts

n.e.s.

Otheragriculture

Other foodproducts

-1

0

1

2

3

4

5

6

Change in U.S. exports, %

Dairyproducts

Meatproducts

n.e.s.

Foodproducts

n.e.s.

Animalproducts

n.e.s.

Otheragriculture

Other foodproducts

-50

0

50

100

150

200

250

300

Change in U.S. exports, $ million

590

And modest impacts on agricultural incomes

12

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Dairy productsMeat productsn.e.s.

Food productsn.e.s.

Animalproducts

n.e.s.

Otheragriculture

Other foodproducts

Labor demand change, % (number of workers atop bars)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Raw milk Other agriculture

Land price change, %

590

610

New trade policy environmenta) Canada and Mexico react to U.S. tariffs on steel and aluminum

13

Canada and Mexico react, target agriculture & food

14

0

2

4

6

8

10

12

Vegetables, fruit, nuts Meat products n.e.s. Dairy products Sugar Food products n.e.s. Beverages and tobacco products

Canadian and Mexican retaliatory tariffs, percentage point increase

Canada Mexico

Source: based on data provided in Li (2018)

Significant hit for poultry & pig and other food, total decline in agricultural export revenue is $1.8 billion

15

Dairyproducts

Meatproducts

n.e.s.

Foodproducts

n.e.s.

Animalproducts

n.e.s.

Otheragriculture

Other foodproducts

-8

-7

-6

-5

-4

-3

-2

-1

0

1

U.S. exports change, %

Dairyproducts

Meatproducts

n.e.s.

Foodproducts

n.e.s.

Animalproducts

n.e.s.

Otheragriculture

Other foodproducts

-1000

-800

-600

-400

-200

0

200

U.S. exports change, $ million

Loss of 8,900 jobs in agriculture and food sectors, slumping land prices

16

-1.0

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0Dairy products

Meat productsn.e.s.

Food productsn.e.s.

Animalproducts n.e.s.

Otheragriculture

Other foodproducts

Labor demand change, %

2,600

2,100

-0.16

-0.14

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00Raw milk Other agriculture

Land price change, %

2,600

New trade policy environmentb) Full impact of current U.S. actions and retaliatory measures

17

Sharp decline in agricultural export revenue, total decline of $8 billion

18

Dairyproducts

Meatproducts

n.e.s.

Foodproducts

n.e.s.

Animalproducts

n.e.s.

Oil seeds Otheragriculture

Other foodproducts

-25

-20

-15

-10

-5

0

5

U.S. exports change, %

Dairyproducts

Meatproducts

n.e.s.

Foodproducts

n.e.s.

Animalproducts

n.e.s.

Oil seeds Otheragriculture

Other foodproducts

-6000

-5000

-4000

-3000

-2000

-1000

0

1000

U.S. exports change, mn USD

Oil seed shock dominates the income effects

19

-16

-14

-12

-10

-8

-6

-4

-2

0

2

Dairyproducts

Meatproducts

n.e.s.

Foodproducts

n.e.s.

Animalproducts

n.e.s. Oil seedsOther

agricultureOther foodproducts

%

Labor demand change, %

-18

-16

-14

-12

-10

-8

-6

-4

-2

0Raw milk Oil seeds Other agriculture

%

Land price change, %

Note: 45,000 jobs lost in agriculture and food sectors.

• Reversion to most favored nation (MFN) tariff rates• Uncertainty about special regimes such as dairy quotas• Findings reflect work by Ciuriak et al. 2017 and Walmsley and

Minor 2017

NAFTA Dissolution

20

NAFTA has led to low agricultural tariffs, with some exceptions

21

0 2 4 6 8 10 12 14 16

Beverages and Tobacco Products

Manufactures N.E.C.

Metals N.E.C.

Meat Products N.E.C.

Mineral Products N.E.C.

Metal Products

Motor Vehicles and Parts

Chemical, Rubber, Plastic Products

Vegetables, Fruits Nuts

Sugar

Vegetable Oils and Fats

Petroleum, Coal Products

Food Products N.E.C.

Processed Rice

Textiles

Bovine Meat Prods

Crops N.E.C.

Leather Products

Wearing Apparel

Dairy Products

U.S. tariffs on Canadian imports

MFN NAFTA

0 5 10 15 20 25 30

Machinery and Equipment N.E.C.

Metals N.E.C.

Crops N.E.C.

Meat Products N.E.C.

Metal Products

Manufactures N.E.C.

Chemical, Rubber, Plastic Products

Mineral Products N.E.C.

Vegetables, Fruits Nuts

Vegetable Oils and Fats

Processed Rice

Petroleum, Coal Products

Food Products N.E.C.

Motor Vehicles and Parts

Leather Products

Textiles

Bovine Meat Prods

Wearing Apparel

Dairy Products

Oil Seeds

U.S. tariffs on Mexican imports

MFN NAFTA

Source: Ciuriak et al. 2017.

U.S. exporters would face stronger headwinds if NAFTA dissolves

22

0 20 40 60 80 100 120 140 160 180 200

Fishing

Transport Equipment N.E.C.

Metal Products

Crops N.E.C.

Chemical, Rubber, Plastic Products

Wood Products

Manufactures N.E.C.

Sugar

Vegetables, Fruits Nuts

Motor Vehicles and Parts

Textiles

Leather Products

Vegetable Oils and Fats

Beverages and Tobacco Products

Wearing Apparel

Food Products N.E.C.

Bovine Meat Prods

Animal Products N.E.C.

Meat Products N.E.C.

Dairy Products

Canadian tariffs on U.S. imports

MFN NAFTA

0 10 20 30 40 50 60 70 80

Vegetable Oils and Fats

Mineral Products N.E.C.

Animal Products N.E.C.

Oil Seeds

Manufactures N.E.C.

Motor Vehicles and Parts

Cereal Grains

Wheat

Leather Products

Textiles

Crops N.E.C.

Forestry

Bovine Cattle, Sheep and Goats, Horses

Fishing

Beverages and Tobacco Products

Bovine Meat Prods

Wearing Apparel

Vegetables, Fruits Nuts

Dairy Products

Food Products N.E.C.

Meat Products N.E.C.

Mexican tariffs on U.S. imports

MFN NAFTA

Source: Ciuriak et al. 2017.

Significant drop in U.S. exports

23

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

GDP Total exports Exports to NAFTA partners Total imports Imports from NAFTA partners

Macroeconomic impacts of NAFTA dissolution, %

Ciuriak et al. Walmsley and Minor

• Results are subject to a number of assumptions, though likely to be robust

• Results reflect long-term impacts after adjustment• Results ignore adjustment costs• Results assume standard investment behavior, however:

• A different tariff environment in NAFTA could impact investment and changes to the deep supply chains

• A volatile tariff environment could dampen the appetite for investment

• USMCA consolidates the gains from NAFTA-1.0 and increases market access for some agricultural sectors

• However, recent actions by the U.S. could end up harming farming interests that are targeted by retaliatory actions

• Lower agricultural exports• Job losses and a reduction in land values

Concluding remarks

24

In summary: current policies will lead to agricultural export losses, USMCA notwithstanding

25

454

-1767

-7896

-9373

-10000

-8000

-6000

-4000

-2000

0

2000

USMCA USMCA+Ag retaliation byCanada and Mexico

USMCA+full suite of measuresand counter-measures

NAFTA withdrawal

Change in U.S. agricultural export revenues, $ million

And will lead to real income losses

26

188

-779

-27,772

-19,894

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

USMCA USMCA+Ag retaliation byCanada and Mexico

USMCA+full suite of measuresand counter-measures

NAFTA withdrawal

Change in U.S. real income, $ million

27