Trading with Neighbors

Compared to the amount of attention paid by the national media, I really haven’t devoted much time in this newsletter to talking about all of the various trade talks going on. We talked about the steel and aluminum tariffs (Available HERE) and then we talked about why China’s proposed retaliation tariffs were not the primary reason for lower cattle prices in 2018 (Available HERE). My goal with this newsletter is to talk about things important to the beef industry. Trade certainly fits that bill – and trade is probably the most asked about topic during presentations. Perhaps two articles are too few in 2018.

However, certainty is hard to come by during trade negotiations. And even though trade talks dominate the headlines, the direct impact on beef has been mostly small and difficult to measure ripple effects. Even further, beef exports have been very strong in 2018. The overall uncertainty of how all of the trade negotiations will eventually workout has likely had a bigger impact than any specific action to this point. Uncertainty can lead to reluctance to develop new partnerships if one is unsure about what the future trade rules might be.

The deal that should raise the eyebrows of those in the cattle and beef industry is the North American Free Trade Agreement or NAFTA. Negotiations have been ongoing for a while now and there really hadn’t been any explicitly negative indications other than how long the negotiation process is taking. That seemed to change last week when the U.S. imposed steel and aluminum tariffs on our NAFTA member neighbors Canada and Mexico. These tariffs added concern to the status of the ongoing NAFTA negotiations. There was even some talk last week that the U.S. might have a preference for separate deals between Canada and Mexico which would mean abandoning NAFTA.

The steel and aluminum tariffs are the same as those levied on China. But NAFTA is very different than the ongoing China trade talks for beef. China is a new market with a relatively small amount of U.S. beef flowing to the mainland. It shows a lot of promise for the future, but the market is nowhere near fully devolved. On the other hand, NAFTA is a jewel for the U.S. beef industry. According to a report by the North American Meat Institute (available HERE), Mexico accounted for 20 percent of U.S. beef exports in 2016 and Canada accounted for approximately 10 percent. Those two countries alone imported 27 percent of all U.S. beef exports in 2016 at a value of around $1.73 billion. Put simply, NAFTA has been good for U.S. beef producers and there doesn’t seem to be a lot to reasonably gain for the beef sector through renegotiation. Tariffs are already zero for U.S. beef entering Canada and Mexico due to NAFTA.

To be clear, this perspective is specific to U.S. beef. These trade deals are amazingly complex and there may be gains to be had in other sectors of the economy by renegotiating NAFTA. But specific to beef, NAFTA provides zero-tariff paths to over one-quarter of U.S. beef exports.