New deal

Dairy industry is optimistic USMCA can deliver a boost

Posted on Sep 14, 2020 :: Global
Jessica Thiel
Posted by , Insight on Manufacturing Staff Writer

2020 was poised to be the year Wisconsin’s long-suffering dairy industry finally began to rebound, but just as the future was brightening, the pandemic hit.

“Everyone was very hopeful that 2020 was actually shaping up to be a good year the way futures prices were looking. It’s no secret dairy farms have experienced several years of depressed prices, so a lot of folks were looking forward to that,” says Aaron Stauffacher, associate director of government affairs for the Green Bay-based Edge Dairy Farmer Cooperative.

Much of Wisconsin milk is made into cheese. When the foodservice industry ground to a halt in March, the need for products decreased dramatically, leading to a steep decline in milk prices, Stauffacher says. “COVID threw a wrench into milk prices in March and April to levels we haven’t seen in a decade.”

While the picture for the rest of the summer initially looked bleak, Stauffacher says farmers began to see gains relatively quickly as the economy began to open back up. In addition, the U.S. Department of Agriculture’s Farmers to Families Food Box program helped boost milk prices and get products to those who needed them.

Milk prices have again dropped a bit as government purchases of cheese for the food box program have begun to decline. Farmers don’t want to rely on a government program and would rather see businesses open up and food channels continue to operate, says Stauffacher. However, with much uncertainty lingering about what the fall could bring, the remainder of 2020 could prove volatile, he says.

One bit of help for the dairy industry could come from the United States–Mexico–Canada Agreement, which went into effect July 1. Stauffacher says the agreement’s predecessor, the North American Free Trade Agreement, brought many successes to the dairy industry, but USMCA has made agriculture a priority.

In looking at what the industry stood to gain, Stauffacher says the first priority was to leave unharmed the benefits that already existed from NAFTA. The United States enjoys tariff-free access to Mexico, which is year-over-year the largest importer of U.S. dairy products.
“Securing that longstanding relationship that we have with customers in Mexico is a huge win for U.S. dairy,” Stauffacher says.

The United States hasn’t always had that same tariff-free relationship with Canada, which has an internal supply management system that’s protected by high tariff rates. USMCA provides the United States a 3.6 percent increase in additional market access to Canada. While that may sound modest, it could lead to hundreds of millions of dollars of additional dairy exports going to Canada, Stauffacher says.

Paul Schoofs, professor of economics emeritus at Ripon College, characterizes USMCA overall as a minor improvement to NAFTA but says the improved access to Canada for the dairy industry is a big win.

“That was one instance, the dairy industry, where Canada was highly restrictive on imports, and the barriers were significantly lowered,” he says.

Under the agreement, Canada is dismantling some policies it’s put in place over the past few years to protect its domestic market and supply management system. USMCA calls for Canada to commit to eliminating its Classes 6 and 7 pricing strategies, which artificially inflate Canadian domestic products’ prices and make it difficult for U.S. dairy exporters to compete in Canada.

Already, though, Canada is making moves to undermine dairy provisions. Shortly before USMCA went into effect,
it imposed tariff rate quotas (TRQs) that discouraged U.S. dairy retail products and high-value foodservice from entering Canada.

The TRQs run against the spirit of USMCA, and Congress is taking them seriously and working to ensure the agreement is implemented and enforced the way it was intended, Stauffacher says.

Possible benefits to auto industry

The other set of victories for the United States in the USMCA relate to the auto industry, Schoofs says. While that’s not a major part of the Wisconsin economy, the state does manufacture auto parts.

Under NAFTA, 62.5 percent of components of automobiles had to be sourced in North America to be free of tariffs. With USMCA, that’s increased to 75 percent.

“That will stimulate a lot more sourcing of automobile production, including through the supply chain, through parts,” Schoofs says.

USMCA also includes a provision that 40 percent of parts for cars and 45 percent for light trucks must be produced by workers earning at least $16 per hour. That’s especially targeted at Mexico, where the average auto worker makes much less than that, Schoofs says, adding the provision won’t be fully in place until 2023.

W. Alan Dixon, associate professor of business at Marian University, says USMCA was aimed at increasing the wages of American auto workers, but whether that will be effective remains to be seen.

“Canadian and Mexican car makers had their quotas increased from 1.8 million to 2.6 million vehicles, so those countries would certainly benefit. Add to that $32.4 billion in auto part imports from Canada and $108 billion from Mexico, so both countries would benefit,” Dixon says.

In August, the United States placed a 10 percent import tax on Canadian aluminum in retaliation for Canada flooding the market with cheap, raw unprocessed aluminum. Dixon says this will lead U.S. automakers to increase car prices, thus adversely affecting American automotive consumers.

Furthermore, the real beneficiary could be Swiss-based Century Aluminum, which purchased $16 billion of Russian aluminum, Dixon says. It will pay the current tariff, but that is less than the 10 percent Canadian manufacturers now have to pay.

“Tariffs, if imposed especially against Canada or Mexico, invalidate the agreement,” Dixon says. “If the U.S. imposes tariffs against other countries, then clearly the U.S., Mexico and Canada benefit. Yet, as we see from the Canadian situation, tariffs are harming aluminum production while foreign countries are, or could possibly, benefit by paying lower costs.”

Schoofs says the pandemic further hampers USMCA’s potential to positively impact the U.S. economy. An International Trade Commission model estimates the agreement will raise U.S. real GDP by $68.2 billion and create around 176,000 U.S. jobs.

“Our GDP has tumbled a lot more than ($68.2 billion) due to the pandemic,” he says. “The pandemic has been such a killer of demand for products. It’s put such a huge dent in the economy that I don’t think we can look to the USMCA in any way to overcome the negative effects of the pandemic.”