The Emperor's new NAFTA

On Sep. 30, the United States and Canada—following a bilateral agreement between the U.S. and Mexico—announced that they had reached an accord in their renegotiation of the 25-year-old North American Free Trade Agreement (NAFTA).

The new treaty, known as the United States-Mexico-Canada Agreement (USMCA), if approved by Congress, will replace NAFTA, an agreement that President Trump had often derided as the “worst trade deal maybe ever signed anywhere.”

The best thing that can be said about the new USMCA is that, effectively, most of the key provisions of NAFTA will remain largely in place. While there are changes—some good, some bad—for the U.S. agricultural sector, the new USMCA leaves the bulk of the original agreement unchanged. This is a good outcome that likely minimizes market disruptions that hurt U.S. consumers or farmers. 

Crucially, all food and agricultural products that have zero tariffs under NAFTA will not be subject to new tariffs. Under the Canada-U.S. portion of NAFTA, a handful of agricultural commodities from each country were protected from competition: Canada maintained tariffs on dairy, poultry and egg imports from the U.S., while U.S. tariffs protected dairy, sugar and peanut producers from Canadian imports.

Under the USMCA, Canada will provide access to U.S. dairy, poultry and egg producers, while the United States will reciprocate by allowing Canadian dairy, peanuts, processed peanut products and a limited amount of sugar and sugar-containing goods.

Canada has also agreed to change their pricing system for dairy products in answer to a U.S. dairy industry request, which argued that U.S. exports were being hurt by Canadian prices.

Unfortunately, most of the increased access for U.S. exports to Canada and U.S. imports from Canada will be provided in the form of limited quotas, not tariff elimination, so prospects for liberalization of those sectors are modest.

Increased dairy access into the Canadian market will likely boost pressures to reform current supply control policies in Canada, but provide only a small increase in overall U.S. dairy exports.

Importantly, Mexico was successful in fending off U.S. demands on the part of Floridian and other Southeastern horticultural growers for new provisions that would have allowed the imposition of additional duties on seasonal imports of commodities like tomatoes and melons.

Those changes would have substantially affected U.S. consumers who currently enjoy year-round access to fresh fruits and vegetables from NAFTA partners at globally competitive prices.

Moreover, many U.S. fruit and vegetable producers were worried that they would be adversely affected if such provisions were used against their own seasonal exports to Canada and Mexico. In the end, the Trump administration relented and the demands were dropped.

No changes were made to what are known as Chapter 19 provisions. Those provisions allow NAFTA members to challenge another partner’s trade remedy actions (for example, the imposition of anti-dumping or countervailing duties) before an independent body if they feel the actions are without merit.

The Trump administration’s position was that USMCA sovereign member countries had the right to impose such remedies without facing challenges from the other two countries through dispute settlement procedures.

Canada argued that an independent body to resolve disputes was essential to any new agreement and, in the end, the United States relented. Ironically, over the past 25 years, U.S. agriculture has benefitted from the Chapter 19 provisions included in NAFTA.

For example, in 2005, the United States successfully challenged anti-dumping actions by Mexico against U.S. pork exports. 

The United States also insisted on a sunset clause provision that would have required that the new agreement either be renewed every five years or terminated, with termination as the default option.

That proposal was opposed by Canada, Mexico and many U.S. companies that argued that the clause would introduce too much uncertainty into long-term investment decisions. In the end, the parties agreed that the USMCA would only have to be renewed every 16 years.

So what is problematic in USMCA for U.S. agriculture? For U.S. producers, the most troubling parts of the new agreement affect sectors that provide key inputs to farmers.

The agreement does not include a resolution to the dispute over steel and aluminum tariffs, and U.S. producers and consumers will continue to pay higher prices for products that contain steel and aluminum.

For example, farmers will end up paying more for trucks and other machinery, which will raise production costs for farmers in both the United States and Canada.

In addition, U.S. farmers who face higher retaliatory tariffs for pork, selected fruits and vegetables and food products, will reap lower profits for their goods.

In the end, the new trade agreement between Canada, Mexico and the United States is much like the emperor’s new clothes. Despite the self-congratulatory tweets and pats on the back, the differences between the “new” USMCA and the “old” NAFTA are strikingly modest.

Farmers will benefit from the fact that potential costly changes to the originally agreement were, in the end, largely excluded from the new deal. Happily, for U.S. farmers and consumers alike, the new USMCA looks a lot like the old NAFTA, which should be viewed as a great victory for U.S. agriculture. 

Joseph Glauber is a Senior Research Fellow with IFPRI's Markets, Trade, and Institutions Division and a former Chief Economist for the U.S. Department of Agriculture. This post first appeared in The Hill.