Threats to U.S. Agriculture from U.S. Trade Policies
Robert M. La Follette School, University of Wisconsin-Madison
The Issue:The agriculture sector in the United States depends upon exports for its vitality. Sales of U.S. agricultural products abroad are responsible for 20 percent of U.S. farm income, supporting more than one million American jobs on and off the farm, according to the U.S. Department of Agriculture. The three biggest buyers of American agricultural products are China, Canada, and Mexico. Yet trade with these three countries faces heightened uncertainty. The Trump Administration initiated a process of renegotiating the North American Free Trade Agreement (NAFTA) with Canada and Mexico, which includes the option of exiting the deal altogether. In addition, the United States has started a series of investigations of unfair practices leveled against China, some of which have already resulted in the imposition of new tariffs. These trade policy initiatives threaten agricultural exports both because of the potential increase of tariffs on exports to Canada and Mexico that would result from a withdrawal from NAFTA as well as the very real threat of retaliation in response to other proposed policies.
The potential of withdrawal from NAFTA as well as the very real threat of retaliation in response to other trade policies threaten U.S. agricultural exports.
- Exports are important to the U.S. agricultural sector and China, Canada, and Mexico are major destinations for U.S. agricultural exports. The United States has traditionally seen itself as the world's breadbasket, habitually running an agricultural trade surplus. The exports of agricultural products (crops, livestock and processed food) from the United States to the rest of the world was $131 billion in 2016; $20.5 billion was exported to Canada, $17.3 billion to Mexico, and $20.7 billion to China, according to Bureau of the Census data. In 2016, $14.2 billion alone was accounted for by soybeans exports to China. Agricultural exports of grains and livestock represented almost 40 percent of the $177.6 billion total value added of agriculture in that year. These exports were 4.8 percent of the 2016 value of $1.451 trillion in merchandise exports. Adding in processed food raises the ratio to 9 percent. Top U.S. agricultural exports to Mexico include corn, soybean, pork and dairy products. In contrast, prepared food and fresh and processed fruits and vegetables are top agricultural exports to Canada.
- Withdrawal from NAFTA could result in tariffs on United States agricultural exports to Mexico and Canada. Renegotiation of the North American Free Trade Agreement (NAFTA) is underway, with the threat of withdrawal on the table. Under NAFTA, most agricultural products are currently traded duty-free (i.e., zero tariff) among the three NAFTA nations, with a few exempted products (such as dairy, poultry, and eggs for Canada, for instance). Outright withdrawal from NAFTA would cause Mexican and Canadian tariff rates on agricultural commodities to rise, most likely to the levels established under the World Trade Organization (WTO) for most-favored-nation status (MFN). The value of MFN tariffs varies greatly by product. For instance, in the event of NAFTA withdrawal, the maximum MFN tariff that Mexico can apply to corn is 20 percent while the maximum tariff for some meat products can be 75 percent (see here page 8.). If both Canada and Mexico were to exit NAFTA, U.S. agricultural exports to the two countries would become less competitive, as the tariffs would result in higher prices in those markets, and export quantities would decline — potentially between 4.7 and 6.6 percent, depending on the specific circumstances, according to one estimate (see here pg. 32).
- The effects of increased tariffs on agricultural exports from the United States to Canada and Mexico would likely be quite uneven across states. The map depicts the exposure of each state to agricultural trade with Canada and Mexico as a percentage of the states' total agricultural exports (which differs from the pattern of effects of a withdrawal from NAFTA across other sectors of the economy). The Farm Bureau lists Vermont, North Dakota, South Dakota, Delaware and Missouri as the states whose agricultural exports are most at risk from a NAFTA withdrawal.
- Other aggressive trade policies could spark retaliation. The U.S. has placed tariffs on washing machines and solar panels, arguing that imports have caused injury to domestic producers. Aluminum and steel imports are the targets of Section 232 investigations based on national security concerns. China is potentially affected by both sets of measures. In addition, the Administration is pursuing a Section 301 investigation of intellectual property violations by China. If the U.S. undertakes measures deemed to be in violation of WTO procedures, then China would be entitled to retaliation. On the potential hit list would be agricultural exports to China. Tariffs on U.S. agricultural exports have figured prominently in past trade disputes (see here). In general, retaliatory tariffs tend to target sectors where exports comprise a large portion of total production and where producers are politically influential.
- Many American farmers are already facing reduced prices and lower incomes, relative to earlier in the decade. Prices for wheat, soybean and corn — which are listed among the top 10 U.S. commodities by cash receipts — have fallen by 54, 57 and 80 percent respectively since their peaks in 2012, and stayed roughly stable throughout 2017. Largely as a result of lower commodity prices, net farm income decreased dramatically from a record high of $123.8 billion in 2013 to $63.4 billion in 2017. These already depressed agricultural export prices would experience downward pressure if trade barriers were erected against U.S. agricultural exports. Since the United States is a net exporter of these commodities, tariff barriers will depress domestic prices as well.
What this Means:
Policies under consideration by the Administration threaten to spark moves to restrict imports from the United States. Tariffs have just been implemented on goods originating from Korea and China, with further action possible. Retaliation could be aimed at U.S. agricultural exports to those countries. Withdrawal from NAFTA would result in reduced agricultural exports to Mexico and Canada. Neither of these outcomes would help the farm sector. And, while neither of these actions has resulted in tariffs against U.S. exports thus far, the uncertainty that they have introduced has, according to anecdotal evidence, spurred Mexico to diversify their suppliers (at the expense of American exports), and Canada to pursue alternative free trade agreements.