Can Trump’s Chaos Help the Canadian Meat Industry?

For the President of the United States, chaos is good. For him, it keeps people on high alert. They never really know what his point is. Many wonder if he actually has a point. He certainly keeps the world guessing

By Scott Taylor – a Canadian Meat Business exclusive

Recently, Trump’s journey into the world of international trade has been a foray into protectionism, tariffs and punishment for, well, just about everybody and everything and it has created a new – or very old – trade environment that asks people to accept short-term pain for what Trump believes will be long-term gain.

First it was Trump’s decision to pull out of the TPP. Then, it was the re-negotiation of NAFTA. Now it’s trade tariffs and penalties on China and the European Union. As Americans wait for “all the winning,” they will have to get accustomed to a least an extended period of losing.

For example, on April 2, China placed a 25 per cent tariff on U.S. pork products. The Chinese also placed tariffs on automobiles, airplanes and soybeans. Boeing is already worried about cutting jobs and worse yet, China has completely stopped buying American soybeans. In fact, China canceled a net 62,690 metric tons of U.S. soybean purchases in the two weeks ending April 19, citing USDA data for the current marketing year.

“The government has taken a significant step in supporting innovation in Canada’s egg sector”

China is the second largest market for U.S. agricultural exports, and soybeans have historically have been one of the top products sold to the giant and growing Chinese market, according to the U.S. Department of Agriculture’s Foreign Agricultural Service.

So if there is any good news here, it should be good news for Canada. If the Chinese, and perhaps even the EU, stop buying American agricultural products, shouldn’t that be good news for Canadian producers?

“Not necessarily,” said Gary Stordy, the Director of Government and Corporate Affairs at the Canadian Pork Council.

“I will say that the uncertainty brought by any trade disruptions is not positive for the Canadian pork industry, especially in the context of a fully integrated North American pork market,” Stordy continued. “There are no winners in this situation where two countries with influential economies are dealing with a trade dispute through retaliatory tariffs.

“The Chinese tariffs on U.S. pork will only create a level of uncertainty in the short term and influence markets. Our industry prefers stability in the marketplace.”

If, in fact, the United States, is no longer in a position to send large shipments to China, it will still send its products to other markets. It’s not as if U.S. pork will be shut down worldwide.

“Any potential opportunities to expand Canadian pork sales into China will be tempered by strong and steady supplies from Chinese pork producers and from other exporters such as the European Union,” Stordy said. “We believe U.S. products no longer shipped to China will end up competing with Canadian pork in other markets while other U.S. pork will continue to be shipped regardless of the tariff.

“Chaos isn’t good and you will hear a lot of that these days. The fear of course, and the reason for so much concern is that there are a lot of different tangents this can go down and uncertainty disrupts planning and every business wants to plan. It’s especially difficult for a business like pork because it disrupts a product that people want.”

In Manitoba, Brian Lemon, the general manager of Manitoba Beef, would like to say that all of Trump’s bluster doesn’t affect his producers, but then he admits that it does.

“I can’t count the number of times I have answered questions from producers who preface those questions by saying ‘I can’t’ believe Trump tweeted that,’ or ‘Is he really going to do that?’,” said Lemon.

“What Trump does causes fear and the markets don’t like fear. As well, all that noise causes uncertainty in the minds of producers and suddenly you have a rancher say to himself, ‘Do I want to grow this herd or do I just want to wait till next year and see what happens?’ That’s not good for business.”

On the up side, Stordy says, most of Trump’s bluster is just that – bluster. He’s a guy who talks loudly and tends to carry a malleable stick. The fact that Canadian Prime Minister Justin Trudeau has often sacrificed his dignity in order to become as friendly as possible to Trump has helped Canada at the negotiating table.

“Right now, there appear to be no firm tariffs,” Stordy said. “It’s a just a back and forth between the United States and China. The first weekend in May, the United States sent a trade delegation to China and while I’m not sure anything came of the meetings, at least they’re talking. It’s unfortunate that these two major trade nations are dealing with it in this way and in terms of the pork side, it’s not clear how U.S. producers and exporters will deal with it, but at least they’re talking.”

The 25 per cent tariffs on pork products that the Chinese want to place on U.S. exporters will go only so far, according to Stordy. After all, the largest producer in the United States – the world — is a company that is actually owned by the Chinese. As Stordy pointed out, “We all know what Smithfield will do.”

Smithfield Foods Inc. of Smithfield, Va., the largest pig and pork producer in the world (at least 15 million pigs and six billion pounds of pork per year), is now wholly owned by Henan Luohe Shuanghui Industry Group Ltd. of China. Its unlikely Smithfield will change a thing.

“We pretty much know how Smithfield will deal with it,” Stordy said with a bit of a laugh. “They will continue to go into China despite any tariffs because, for one thing, they don’t want to upset their supply chain.”

Here in Canada, all this yelling about “negotiating” might be no more than an all-hat-and-no-cattle situation. After all, prices will ultimately determine what exporters will do.

“The Canada-China market has had a slight decrease in pricing because there has been more competition,” said Stordy. “After all of this, it might be that we maintain the status quo. Right now, we might be sending all we want into that market. Or, then again, we could pull right out of the global market and start ramping up production and heavily increase our exports to China. Of course, it would take at least six months to do that and it’s just one of a number of hypothetical situations that could take place. There are a lot of hypothetical situations.

“We’re waiting to see what happens to other products. Do the Americans keep shipping to China or do they go into other markets which will increase competition for Canadian products? It’s all really hypothetical and that’s one of the problems. The product will move where it’s supposed to move based on prices.

“What we’re really looking carefully at right now is the price of our live animals moving into the United States. What will our price be for live animals in the short- and long-term going into the U.S.?”

Which, of course, brings us to the NAFTA chaos.

It would appear that either the trade delegations from Canada, the United States and Mexico will get a new NAFTA deal done before the end of June or, with the Mexican general election and the U.S. midterm elections coming up quickly, it won’t happen until perhaps mid-2019.

Canada’s Foreign Affairs Minister Chrystia Freeland arrived in Washington for the meetings the first week of May and made it clear to the Canadian news media that she did not book a return ticket to Ottawa.

“We are committed to doing whatever it takes to get a good win-win result,” she told the Canadian Press. “But be clear that we will not pre-judge the outcome of the talks.”

The three countries need to be committed to getting it done because Trump – whether he is serious or not – has threatened (as he always does), to impose 25 per cent tariffs on Canadian steel and aluminum if he doesn’t get a renegotiated NAFTA that he likes by June 1 — a date he “graciously” extended from May 1.

As well, the Mexican general election is July 1 and then along comes the U.S. midterm elections.

“I think the biggest problem is with private investment,” Pedro Antunes, the deputy chief economist for the Conference Board of Canada, told the Canadian Press. “The uncertainty for businesses about whether they will have access to the North American market has played out a big role in holding back private investment intentions.”

Sources have told CBC News that all three NAFTA countries are seeking an agreement-in-principle in the short term that would focus primarily on the auto sector.

“There’s a long way between an agreement in principle and a final treaty that can be signed and presented to the legislatures of all three countries for ratification,” trade expert Lawrence Herman told CBC News. “This is very complicated, much more complicated than I think anybody realized when they started. They’ve made a lot of progress, but once the outlines of an agreement are there, the technical elements have to be negotiated.”

And that’s very true. Canada and the European Union reached an agreement-in-principle on CETA (the Comprehensive Economic Trade Agreement) in 2014 and yet it took until 2017 to finalize the deal and present it to various parliaments for ratification.

While Stordy and his beef counterpart in Manitoba, Lemon, would like to get a new NAFTA done sooner rather than later, they also have some concerns about the deal.

“I’m a big fan of NAFTA,” said Lemon bluntly. “It would not be good for any beef-producing province in Canada if the agreement went south. We ship cattle. Live cattle. We ship it east, west and south. On the national scale, our one federal packing plant really doesn’t make a blip in the market, but our sale of live animals is the basis of our industry and that’s why I believe it’s a good time to have a modernized NAFTA.

“It really does need to refresh itself after more than 20 years and this a good opportunity to talk about streamlining a lot of the agreement. Hopefully, a new NAFTA will thin the border just a little more than it is now. We need to quicken the approval process at the border. We need greater access to veterinary medicines. You know that Canadian cattle still have to be branded with Canada on the brand. That’s something from the distant past. We need more regulatory efficiencies.

“In Manitoba we ship a lot of cattle to the packing plants in southern Ontario. Can’t we find a way to ship them more efficiently on the American side? All we need is one Nipigon Bridge to go down and our whole system is out of whack. Our needs may be small in terms of headlines, but they’re quite significant in terms of their totality.”

Here in Canada the media has spent a great deal of time and space opining on the auto industry, but have given very little attention to the needs of the agricultural sector. For Stordy, and his pork producers and exporters, a “modernized NAFTA” is a key to moving forward.

“We have made a number of suggestions and points where NAFTA can be improved,” Stordy said. “We are hoping for a modernized NAFTA.

“The three countries are more aligned now than ever before. We have quite a modern industry. But there are many irritants and we’re hoping that a new NAFTA will address those irritants.”

One of the major “irritants” for Canadian exporters is how their cargo is treated at the U.S. border.

“Our meat has to stop at a clearing house at the border,” said Stordy. “The paperwork is checked as it should be, but then there is also testing. We don’t dispute that a country has every right to approve what comes across its borders, but when we look at the process we go through with the United States and compare it to what American exporters do when crossing into Canada, it’s so much easier for them. Here it crosses the border and goes to a CFIA-approved facility for testing. We get the U.S. product across the border. Going into the United States there is often a long delay. That’s one of the irritants we’d like to see changed in a modernized NAFTA.

“The ongoing issue, however, is still the dispute mechanism. That reaches pretty close to home for us because we just finished a lengthy WTO (World Trade Organization) battle with the U.S. (on Country of Origin Labelling in 2015). We would like a better system to deal with trade disputes with the United States.”

But to Canada’s pork producers, a new NAFTA would have other important provisions. One of the problems facing the current negotiation is the clause on government procurement. According to CP, the United States is currently demanding access to Canadian and Mexican markets without offering any reciprocity at all. However, Trump has also included a “Buy America” requirement for state and local projects and defense contracts. Canada and Mexico, without rolling their eyes, simply argue that the U.S. can’t have a two-way procurement system – one for them and a different one for Canada and Mexico.
“We want to look closely at U.S. government procurement and make that agreement seamless,” he said. “Especially considering the SPS (Standard Procurement System) and the agriculture side are already there. We also want to make sure there are no tariffs on our products. There are no tariffs now, we don’t want them in a new NAFTA.

“And we would like a more balanced and formal collaboration with the regulators. Let’s get into a habit of communicating regularly. We are currently advocating for that in a new NAFTA. It helps address issues before they become issues.”

The United States has also said that it wants to eliminate supply management in dairy, eggs and poultry, which would, immediately, be a political mess for any Canadian government — Liberal or Conservative. Granted, supply management could be phased out over a decade or so and then government subsidies could be paid to farmers to ease their economic pain, but no government wants to deal with that aggravation.

Worst of all, the U.S. wants to replace the independent dispute settlement mechanism with something more stringent, formal and tilted toward the United States’ position and that has always been a deal-breaker for Canada. In fact, if one studies the history of NAFTA, one comes to realize that the dispute settlement mechanism has been at the core of the deal since Canadian Prime Minister Brian Mulroney and U.S. President Ronald Reagan negotiated the first Canada-U.S. Free Trade Agreement way back in 1987.

It is always fun to note that Trump constantly complains about how the United States has been “outsmarted by the brutal Canadians” in the past. Of course, to be fair to Trump in this instance, he’s actually telling the truth. Canada’s trade negotiators have an impressive legacy of getting the best of the United States on many levels over many negotiations and many disputes.

Of course, as Canadian trade negotiators will tell anyone who bothers to listen, we have to be “brutal.” Canada, after all, is an open trading nation and our closest friend, oldest ally, biggest market and yet our whiniest, most mercurial negotiator, is sitting right across the table from us.

It seems that keeping the United States happy and on board is Job 1.