World Economy

American farmers brace for more pain as Pacific trade deal kicks in without the US

Key Points
  • An historic 11-country trade deal known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership was ratified by seven of its members on Sunday.
  • The agreement will slash tariffs among the 11 nations, making the goods of non-CPTPP members such as the U.S. less competitive in those markets.
  • American beef and wheat exports, in particular, are expected to suffer.
Soybean farmer Raymond Schexnayder Jr. overlooks his farm outside Baton Rouge, in Erwinville, Louisiana, July 9, 2018. 
Aleksandra Michalska | Reuters

American farmers, already hit by low commodity prices and China's punitive trade tariffs, are poised to endure further pain in 2019 now that a major Pacific trade deal has come into effect.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, was ratified by seven of its member countries on Sunday. Now that the massive free trade pact is a reality for Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam, the remaining four members — Brunei, Chile, Malaysia and Peru — are soon expected to follow suit.

The milestone agreement, a refurbished version of the Trans-Pacific Partnership, will slash tariffs among the 11 nations that cover 14 percent of global growth, making their exports cheaper in each other's markets. Around 90 percent of planned tariff cuts will be immediately take place, HSBC said in a note on Sunday, adding that businesses will benefit from reduced administrative costs thanks to other benefits such as pre-arrival customs clearance.

A threat to American goods

The goods of non-CPTPP members such as the United States are now expected to be pricier and less competitive in the 11 CPTPP countries.

The world's largest economy was initially one of the countries negotiating the wide-ranging deal under former U.S. President Barack Obama but the U.S. withdraw under President Donald Trump's administration in early 2017. American meat and agricultural products are particularly expected to suffer in CPTPP nations that don't have free trade arrangements with Washington.

China tariffs hit the soybean harvest

Japan is a prime example. The Asian giant is the top market for U.S. beef, but Australia's products could now take over America's spot since foreign beef tariffs in Japan will be cut by 27.5 percent for Australian producers under the CPTPP, The National Cattlemen's Beef Association has warned.

"The US beef industry is at risk of losing significant market share in Japan unless immediate action is taken to level the playing field," Kevin Kester, the association's president, said in a statement earlier this month.

It's a similar story for American wheat.

Thanks to CPTPP, Canadian and Australian wheat exports to Japan now immediately benefit from a 7 percent drop in the Japanese government's mark-up price, which will become a 12 percent reduction in April, U.S. Wheat Associates President Vince Peterson said in a recent statement. By April, American wheat will face a $14 per metric ton resale price disadvantage to Australia and Canada, he warned, adding that his industry faces "imminent collapse" in Japan.

The U.S. and Japan don't have a free trade deal in place, something on which Trump has been pressing Tokyo. In comparison, European nations, which also aren't part of the CPTPP, are expected to fare better given the E.U-Japan bilateral trade deal.

China will import more meat products from the US: EIU

A $2 billion loss for US real income

If the U.S. had stayed in TPP, the country's real income would have increased by $131 billion annually, according to the Peterson Institute for International Economics. Now, "the United States not only forgoes these gains but also loses an additional $2 billion in income because US firms will be disadvantaged in [CPTPP] markets," the think tank said in a February report.

Trump has repeatedly said joining the pact would not have been good for his country. The venture, according to the president, would have damaged U.S. manufacturing, added to the trade deficit and sent American jobs overseas.

If the CPTPP's roster of participants grows, the pressure on U.S. goods overseas would likely keep rising.

The United Kingdom, for one, has said that it is considering becoming a CPTPP member. The deal can help ensure "that a trade war in the Pacific does not hit British households in the pocket," the U.K. Department for International Trade said in a Sunday statement. It would also help U.K. businesses expand into new markets at a time when the country may no longer have special privileges with the E.U.

"I've never seen such nervousness in the U.S. business community as I see now," Steve Okun, senior advisor at McLarty Associates, an international trade consultancy, told CNBC last week, referring to developments such as the CPTPP. There is a sense that "the world is moving forward without us," he said.