Trade tariffs leading to billions in losses for US dairy as new US-Mexico deal negotiated

28 Aug 2018 --- The US and Mexico have reached a breakthrough in NAFTA (North America Free Trade Agreement) negotiations, coming to a bilateral agreement on a revamped trade deal which could pave the way for third-partner Canada to join soon. While the new agreement may signal US intentions to ease tensions between America and its allies, it comes as President Trump is ramping up pressure on China where the trade war between the two world economies is poised to intensify in the months ahead if neither world leader backs down.

But, as Canada’s Prime Minister Justin Trudeau has yet to further negotiate with the US Administration on a revamped NAFTA deal, it is not yet known if this will go ahead without Canada. 

One of the major issues of US trade conflicts with Mexico, Canada and China is the adverse impact it’s having on the US dairy industry, as well as multiple agricultural sectors like corn, soybean, wheat and more. 

However, it is not yet known what sort of impact the new NAFTA negotiations will have on the US dairy segment and other farming sectors that have been severely hit by trade conflicts over the last few months. 

The newly revamped NAFTA deal comes at the same time as a study commissioned by the US Dairy Export Council (USDEC) and conducted by Informa Agribusiness Consulting, which estimates the economic impact of ongoing trade disputes on the US dairy industry. It only examines current tariffs which means the damage would worsen if other proposed duties take hold, as China has threatened.

Chinese and Mexican tariffs will cost dairy industry billions if left unchecked
The study claims that retaliatory tariffs by China and Mexico could lower dairy exports by US$2.7 billion and depress dairy farmers’ revenues by US$16.6 billion over the next several years unless they are rolled back. Moreover, US economic output tied to the dairy industry would fall by more than US$8 billion and 8,200 US jobs would be imperiled through 2023.

In considering a shorter time horizon, during which the industry may be forced to endure the impact of the retaliatory tariffs, the study forecasts losses to dairy farmers at US$1.5 billion this year alone and at roughly US$3 billion in 2019. Those losses are the result of anticipated drops in exports due to the retaliatory tariffs of US$530 million by the end of next year.

“The damage is real, and it is being felt by dairy farmers, dairy businesses and dairy exporters every day,” says Tom Vilsack, president and CEO of USDEC. “Exports hold tremendous potential for our industry and the struggling rural economy, but we must address these tariffs immediately for that potential to be realized.”

The situation in China is particularly problematic, according to the study. Tariffs have now reached 45 percent on some US dairy products, which puts America at a great competitive disadvantage to suppliers from Europe, Australia and New Zealand that don’t face the same barriers and in some cases have free trade agreements with China. 

Lost sales in China are predicted to cost US dairy farmers US$12.2 billion by 2023 if retaliatory tariffs remain in place. In 2018 those impacts on dairy farmers due to lower exports to China are expected to tally US$1.1 billion and to total US$2.2 billion in 2019.

Prior to July’s tariff increase, Chinese sales were growing – up 49 percent from 2016 to 2017 – thanks to industry investments in education, customer development, partnerships and infrastructure improvements.

This is particularly disappointing for USDEC, claims Senior Vice President Jaime Castaneda, who says the organization has spent years cultivating overseas markets.

“Those investments are slowly eroding. We are losing market share and once it’s lost, it is very hard to reclaim. We need our government to bring these tariffs to an end immediately with Mexico and find solutions going forward with China,” he says.

Mexico announced duties of up to 25 percent on US dairy products in May in retaliation for US steel and aluminum tariffs. This meant that Europe, which had just concluded a trade deal with Mexico and was eager to absorb America’s lost dairy sales.

“The future is uncertain for US dairy farmers, making it difficult to plan any distance into the future with realistic expectations,” concluded the Informa report. “What is for certain, is the US dairy sector will continue to suffer under Chinese and Mexican retaliatory tariffs for as long as they are in place.” Castaneda recently spoke to FoodIngredientsFirst in a detailed interview about the current trade environment.

US multi-billion bailout for farmers 
The news comes as US farmers are to be given a multi-billion bailout from the US Agriculture to help them weather Trump’s trade war, as the US and China continue their standoff that is showing no signs of abating as the prolonged period of escalating tensions continues. 

Many believe that the situation between the US and China will likely worsen in the coming months as President Trump heads towards the US midterm elections. 

Just last week the leaders of the two countries met for tariff negotiations and a new round of US tariffs on US$16 billion worth of Chinese imports began. This then led to China further retaliating with its own equivalent levies on US goods. 

Yesterday (August 27), the US Department of Agriculture (USDA) announced it would assist farmers in response to trade damage from “unjustified retaliation by foreign nations.” US Secretary of Agriculture Sonny Perdue has crafted a short-term relief strategy to protect agricultural producers while the Administration works on “free, fair, and reciprocal trade deals” to open more markets, in the long run, to help American farmers compete globally.

These programs will assist agricultural producers to meet the costs of disrupted markets:

• USDA’s Farm Service Agency (FSA) will administer the Market Facilitation Program (MFP) to provide payments to corn, cotton, dairy, hog, sorghum, soybean, and wheat producers starting September 4, 2018.
• USDA’s Agricultural Marketing Service (AMS) will administer a Food Purchase and Distribution Program to purchase up to US$1.2 billion in commodities unfairly targeted by unjustified retaliation. USDA’s Food and Nutrition Service (FNS) will distribute these commodities through nutrition assistance programs such as The Emergency Food Assistance Program (TEFAP) and child nutrition programs.
• US$200 million will be made available to develop foreign markets for US agricultural products. The program will help US agricultural exporters identify and access new markets and help mitigate the adverse effects of other countries’ restrictions.

By Gaynor Selby