World Economy

As Trump, Trudeau chat about bilateral trade issues, NAFTA looms large in the background

Key Points
  • President Trump, Canadian prime minister had brief trade chat at the G-7 summit.
  • NAFTA countdown continues with formal renegotiations further out.
  • Ag group warns disrupting NAFTA would have "devastating consequences."
President Donald Trump and Canadian Prime Minister Justin Trudeau walk from the Oval Office to the Residence of the White House in Washington, U.S. February 13, 2017.
Kevin Lamarque | Reuters

President Donald Trump and Canadian Prime Minister Justin Trudeau met on the sidelines of the G-7 summit's final day on Saturday. While bilateral trade issues were discussed, it appears the recent spat over Canadian dairy products didn't come up.

Regardless, the status of NAFTA looms large for both countries, with much bigger things than milk or lumber hanging in the balance. The Trump administration formally notified Congress May 18 that it would initiate negotiations with Canada and Mexico to modernize NAFTA. That sets into motion a 90-day countdown for the first formal round of negotiations, and the administration expects to hold the first such talks no earlier than Aug. 16.

U.S. agriculture leaders are closely watching efforts to change the 23-year-old agreement, which some claim is unfair to American producers of dairy as well as fresh produce growers. Others, however, disagree: They suggest the North American Free Trade Agreement's benefits include increasing overall trade and boosting demand for U.S. pork, corn and even California wine.

The Trump administration has accused Canada of essentially shutting out U.S. dairy producers in so-called ultrafiltered milk, which is used to make cheese, yogurt and ice cream. The president called the Canadian action "a disgrace" in April and also tweeted about it: "Canada has made business for our dairy farmers in Wisconsin and other border states very difficult."

Canadians reject claims the incentives they have to buy domestic milk concentrates are protectionism and argue they shouldn't be blamed for excess milk capacity by American dairy producers.

'A broad range of issues'—except dairy

Speaking to reporters Saturday at the G-7, Trudeau was pressed on NAFTA specifics he had discussed with Trump. The Canadian prime minister said they "talked about a broad range of issues," going on to list softwood lumber, aerospace and steel but he never mentioned dairy trade.

Agriculture is only a small part of NAFTA, with electronics, automotive and aerospace manufacturing also seen as critical elements of the renegotiation.

In a statement from Trudeau's office, the two "reaffirmed their commitment to the deepest economic partnership in the world. Trade between our countries supports job creation on both sides of the border and the growth of the middle class, and in 2016 was valued at nearly $882 billion."

Playing out in the background, however, are concerns about whether North America will remain a bastion of free trade. Last week, the National Pork Producers Council released a white paper on the benefits of NAFTA, and pointed out that Mexico is the second-largest export market for U.S. pork, and Canada is the fourth-largest market.

"Disrupting U.S. agricultural exports to Mexico and Canada would have devastating consequences for our farmers and the many American processing and transportation industries and workers supported by these exports," the white paper said.

Nonetheless, Trump has remained steadfast in its criticism of NAFTA.

"The fact is NAFTA, whether it's Mexico or Canada, is a disaster for our country," Trump said in April.

However, Canada and Mexico were the first- and second-largest foreign markets for U.S. goods in 2016. Exports to Canada totaled about $266 billion in 2016, while Mexico was $231 billion.

"Canada is by far and away the bigger partner," said Christopher Thornberg, founding partner of Beacon Economics in Los Angeles. "We actually import more from Mexico than we export."

The California connection

For California, agricultural exports to Canada have more than tripled in the past 15 years, and exports to Mexico have had similar results, according to state figures. California-produced nuts are the top export to Canada in dollar value followed by wine. Canada also is the top foreign market for many of California's popular fruits and vegetables.

The Wine Institute, a San Francisco-based trade group representing California wineries, said California wines are the most popular import table wine category in Canada and beat even French wines. Also, under NAFTA, wine exports to Mexico have grown sharply, but still remain small when compared with Canada.

Yet the Wine Institute said in a letter last month to the U.S. Commerce Department that there are several challenges it still faces when entering the Canadian market.

"Canada maintains discriminatory and burdensome nontariff trade barriers impeding U.S. wine exports," Tom LaFaille, vice president and international trade counsel for the wine group said in the letter commenting on trade deficits. For example, he pointed out that some provinces in Canada have "rules denying equal access for U.S. wines to grocery stores."

Meanwhile, Mexico — a frequent source of Trump's ire — is also taking some heat. Florida Agriculture Commissioner Adam Putnam in April called on the Trump administration to investigate "Mexico's unfair trade practices" as it relates to specialty crops.

"Unfortunately, the current trade environment created under NAFTA is anything but a fair and level playing field for Florida's producers," he said.

'Valued customers and trade partners'

Regardless of its flaws, most major U.S. ag groups support modernizing NAFTA and do not want to see it ditched.

"Mexico and Canada are two of our largest export markets for the commodities and products raised on U.S. farms and ranches," said American Farm Bureau Federation President Zippy Duvall in a statement released after Congress was notified of the NAFTA renegotiation. "America's farmers and ranchers value them as customers and trade partners."

Corn and corn product exports today account for just more than 30 percent of U.S. farmer income, and Mexico is the top export market for corn while Canada is also a major market for corn as well as ethanol, according to the National Corn Growers Association.

Some Mexico lawmakers have suggested the country should switch to buying corn from Argentina, a move that would be a blow to U.S. farmers in the Corn Belt states where Trump enjoyed strong support during the election.

Indeed, Mexico is looking to reduce its dependence on its northern neighbor, even though there is close proximity to the U.S. and easy access via rail, truck and ports.

"Our first strategy is to continue shipping to the U.S. market," said Ramon Paz, a strategic advisor for the Avocado Producers and Exporting Packers Association of Mexico. "Our second strategy is diversify — and we are working on that too."

Paz just spent a week in China and said that market is the "most attractive" from a future standpoint. He also said Mexican avocado producers are returning to the European market and also doing more promotions to push growth in Japan, the third-largest market after the U.S. and Canada.

According to Paz, nearly 40 percent of the avocado exports come from Mexico packinghouses that are subsidiaries of U.S. companies. He said these packing facilities provide benefits to U.S. investors, and keep avocados supplied year-round to U.S consumers.

"There is no harm for the California producers but benefits actually," Paz said. "Imports of avocados from Mexico have increased demand in such a way that nowadays California producers sell all they can produce."

Paz said avocado producers in California are "getting more money for their crop" given the strong demand today for the fruit.