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

Maksym Chepeliev, Wallace Tyner and Dominique van der Mensbrugghe

Center for Global Trade Analysis Department of Agricultural Economics, Purdue University

Farm Foundation Forum 31 October, 2018, National Press Club, Washington, DC

Introduction

• · 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
An Historical Perspective

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


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



Source: GTAP 9 bilateral merchadise trade data

Mexican exports have gained market share, but Canada less so



Source: GTAP 9 bilateral merchadise trade data

The United States-Canada-Mexico Agreement (USMCA)

What's in the agreement

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

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

Fluid milk: import tariffs, percent

Modest increases in U.S. agricultural exports


And modest impacts on agricultural incomes



n.e.s.

New trade policy environment

• a) Canada and Mexico react to U.S. tariffs on steel and aluminum
Canada and Mexico react, target agriculture & food

Canadian and Mexican retaliatory tariffs, percentage point increase

Canada

Mexico



Source: based on data provided in Li (2018)

decline in agricultural export revenue is $1.8 billion


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


New trade policy environment

• b) Full impact of current U.S. actions and retaliatory measures
Sharp decline in agricultural export revenue, total decline of $8 billion


Oil seed shock dominates the income effects

%



-16

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

NAFTA Dissolution

• · 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 has led to low agricultural tariffs, with some exceptions



Source : Ciuriak et al. 2017.

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

Canadian tariffs on U.S. imports

Dairy Products

Meat Products N.E.C.

Animal Products N.E.C.

Bovine Meat Prods

Food Products N.E.C.

Wearing Apparel

Beverages and Tobacco Products

Vegetable Oils and Fats

Leather Products

Textiles

Motor Vehicles and Parts

Vegetables, Fruits Nuts

Sugar

Manufactures N.E.C.

Wood Products

Chemical, Rubber, Plastic Products

Crops N.E.C.

Metal Products

Transport Equipment N.E.C.

Fishing



0

20

40

60

80

100

120

140

160

180

200

MFN

NAFTA

Significant drop in U.S. exports

Macroeconomic impacts of NAFTA dissolution, %

0



Ciuriak et al.

Walmsley and Minor

• · Results are subject to a number of assumptions, though likely to be robust
• · Results ignore adjustment costs
• · Results reflect long-term impacts after adjustment
• · Results assume standard investment behavior, however:
• · A volatile tariff environment could dampen the appetite for investment
• · A different tariff environment in NAFTA could impact investment and changes to the deep supply chains
• · USMCA consolidates the gains from NAFTA-1.0 and increases market access for some agricultural sectors
• · Lower agricultural exports
• · However, recent actions by the U.S. could end up harming farming interests that are targeted by retaliatory actions
• · Job losses and a reduction in land values

export losses, USMCA notwithstanding

And will lead to real income losses