September market report: What does NAFTA 2.0 look like?Back
The news late last month that American and Mexican trade authorities reached a tentative trade agreement has lifted spirits in the dairy industry.
It’s a full 180 from June’s panic over Mexican tariffs placed on fresh American cheeses that seemed to put $1.2 billion in annual dairy export value in jeopardy. Removing barriers to that market (either real or perceived, which we’ll discuss below) is a good thing.
But let’s not put the cart before the horse. There can be no new NAFTA without Canada, and if Canadian trade authorities don’t buy in, there’s no easy return to the status quo vis-à-vis exports to Mexico.
What it means for dairy exports to Mexico
Under the terms of the tentative deal first announced on Aug. 27, the status of dairy exports to Mexico would revert to the way things were before the two nations began swapping tariffs this spring. Levies on all manner of dairy products roll back to zero across the board.
For the sake of context, these new tariffs put us on equal footing with the other global dairy producing regions (namely the European Union and New Zealand) where Mexican buyers would source their products. Only Chile enjoyed tariff-free movement of its dairy products into Mexico, and it lacks any meaningful export capability. With tariffs in force, we expected the inevitable rise in prices that would make its way down to Mexican consumers.
But consider the situation from a 30,000-foot view. The practical impacts of these tariffs would not amount to much. Equilibrium of tariffs across the board isn’t enough to make Mexican buyers abandon American sellers. Truckloads of fresh cheese can get from Wisconsin to Mexico in less than a week. That’s much faster (and a lot cheaper) than having anything hauled 6,000 miles on a container ship from the Port of Marseille.
Yes, the price to Mexican consumers would go up —and even then, not by much and probably not for long— but that’s all that was going to happen.
Practical impacts notwithstanding, we acknowledge the psychological boost this news provides: The lucrative Mexican dairy market will remain wide open to the production powerhouse best suited to supply it. And Mexican dairy suppliers can rest easy knowing they can continue providing the products their buyers want at prices they can afford.
Barrier-free trade is the best trade, as far as we’re concerned.
But let’s not count our chickens before they hatch. Assuming President Donald Trump and his administration remain committed to a three-nation “NAFTA 2.0,” a return to the status quo with our best dairy trading partner is impossible unless our second-best dairy trading partner also gets on board.
How Canada fits in
We discuss our quarrel with Canada in this market report from late last year. In summary, their creation of a new class of dairy product lets producers slip through a loophole in their own quota system. In the process, it unfairly prices American dairy farmers out of the market.
It’s certain to be a central sticking point as American and Canadian authorities negotiate. They have their work cut out for them because it seems unlikely that either side will budge: Trump apparently remarked on Aug. 31 that a new NAFTA would only come on American terms; Canadian leaders say they won’t sign on to any agreement that isn’t good for Canada.
Plus, we assume Canada’s powerful dairy lobby won’t be willing to forego the entrenched government support policies it’s enjoyed for over 40 years.
However, there is considerable opposition to the dairy program in Canada, and we’ve noticed that support for those programs has begun to waver among Canadian producers. Canada’s dairy industry is growing at a rapid clip. It might be rapid enough to convince their larger, more efficient producers that the price-protective intent behind quotas is getting in the way now.
Is isolated disaffection toward dairy quotas enough to get Canadian negotiators to agree to end the system? It’s hard to say. But decades of watching governments attempt to solve problems has taught us that at moments of impasse they often choose to do nothing.
Indeed, this is the same fight we agreed not to resolve when NAFTA was born.
Time is of the essence. Trump had wanted all parties to reach an agreement with enough time to spare so that Mexican President Enrique Peña Nieto could sign the deal on his way out the door. It’s not likely that Andrés Manuel López Obrador —the incoming president who scored a landslide victory on July 1— will be as keen to sign a deal after he assumes office Dec. 1.
Meanwhile, Trump has indicated that if Canada won’t budge, his administration would make a deal with Mexico only. That may seem like the logical solution, but it won’t be easy. Currently, Trump is authorized to negotiate a deal with Mexico and Canada in pursuit of a trilateral agreement. Congress has not extended that authorization to cover bilateral deals.
If Trump wants to do a deal with Mexico only, Congress needs to change the law. And the chances they can do it before November’s key midterm elections get slimmer every day.