After months of uncertainty, the United States reached a trade deal with Mexico and Canada on September 30, 2018. The news of this $1.2 trillion deal is met with favorable reaction from both commodity groups and farmers. In May 2017, President Trump announced his intent to renegotiate the North American Free Trade Agreement (NAFTA). On August 27, 2018, Mexico and the United States reached a bilateral agreement for the updated NAFTA. Canada entered into an agreement just before the midnight deadline on September 30. While additional time will be needed to understand the full economic impact of the new agreement, it is being supported by many in the agricultural industry.
NAFTA came into effect in 1994 with the goal of facilitating trade and investment between Mexico, Canada, and the United States. It phased out or eliminated many tariffs on goods between the three countries while encouraging investment and granting Most Favored Nation status. Although NAFTA has been viewed with mixed reactions, many agree that the agricultural sector has benefitted overall from the agreement. In 2017, Canada was the top destination for U.S. agricultural exports. Mexico was number three.
While many provisions will stay the same, the most noticeable change may be the name. The name NAFTA will no longer exist but the agreement will now be called the United States-Mexico-Canada Agreement (USMCA). USMCA impacts many sectors including agriculture, biotechnology, and geographic indicators.
One of the most controversial provisions of NAFTA was the treatment given to the Canadian dairy industry. Under NAFTA, Canada was allowed to restrict the amount of milk that came into the country. Now U.S dairy farmers will have access to 3.6% of the Canadian dairy market. Any dairy products sold to Canada over that amount will remain subject to steep tariffs. Under the Trans Pacific Partnership—which the U.S. pulled out of in 2017—the U.S. would only have access to 3.25% of the dairy market.
Canada will also eliminate Class 6 and Class 7 of its milk pricing schedule which includes milk powders, milk proteins, and infant formula. Not only will the United States get new tariff quotas, but there will also be changes to Canada’s milk class pricing system. American dairy producers are currently struggling with overproduction and low prices; these changes will hopefully add a needed market.
Dairy producers will continue to have access to the Mexican market. However, the U.S currently faces a 25% retaliation tariff on U.S. cheese for the tariffs placed on Mexican steel and aluminum.
Poultry, eggs, and wheat are expected to receive more favorable treatment under USMCA than the commodities did under NAFTA. Previously, U.S. wheat automatically received a lower price under the Canadian grading system because it was foreign and was classified as “feed grade.” Under USMCA, U.S. wheat will receive the same treatment as Canadian wheat. There will also be increased market access for U.S. poultry and eggs.
Pork would continue to receive zero-tariff access to Mexico and Canada under USMCA. At this point, Mexico continues to place a 20% tariff on U.S. pork in retaliation for the U.S. tariffs on Mexican steel and aluminum. Soybeans and corn will also continue to receive similar tariff-free treatment like it did under NAFTA.
With an agreement like USMCA, there will be more certainty for corn and soybean producers. Mexico is the biggest importer of U.S. corn. The U.S. sold $3.2 billion of corn and corn products to Mexico in 2017.
Canada and Mexico currently have agreements with the European Union for protections of certain geographic indicators (GI). USMCA will prevent Mexico from restricting certain products for using a common name. Standards have been created to determine whether a term is a common name or a GI.
USMCA has specific language to “enhance information exchange and cooperation on agricultural biotechnology trade-related matters.” The term biotechnology will include new technology such as gene editing rather than only the traditional rDNA technology.
The trade deal still needs to be signed by leaders from the three countries which may happen as soon as November. Congress would then vote on the agreement in early 2019. If approved, the agreement is expected to take effect on January 1, 2020. A USMCA provision states that it would need to be reviewed after six years. At that point, if the three countries agree to continue, the agreement would continue for another sixteen years until it would be reviewed again. Additionally, USMCA does not address the many retaliatory tariffs that remain on agricultural products.
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