The USMCA’s Winners and Losers

It will be called the USMCA (The Village People are not likely to sing the official song, but we’re told the new dance moves will be released soon), and while it looks a lot like NAFTA, it isn’t

by Scott Taylor – a Canadian Meat Business exclusive

Especially if it’s your ox, or in this case, your supply management system, that is being gored.
It is no longer news, but the United States, Canada and Mexico have reached a deal to revamp the North American Free Trade Agreement (NAFTA). The new deal, which will be called the U.S.-Mexico-Canada Agreement, or USMCA, keeps the framework of NAFTA largely intact and maintains the status quo of free trade between the three countries.

Once ratified via the legislative processes of the three countries USMCA will update, modernize and replace NAFTA. In the meantime, the existing NAFTA remains in place so there is now some stability to a situation that was made chaotic by United States President Donald Trump’s apparent desire to make all things chaotic.

The new agreement covers a lot of ground, much of which was already covered by NAFTA, but if you are interested in reading the entire text, it is available at www.ustr.gov.

However, suffice it to say that while the deal makes major changes to the automobile trade — agreements that will help both Canadian manufacturers and Mexican workers — and it certainly provides businesses in all three countries with what U.S. Trade Representative Robert Lighthizer and Canadian Foreign Minister Chrystia Freeland called, “a new, modernized trade agreement.”

“USMCA will give our workers, farmers, ranchers, and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region,” the statement read. “It will strengthen the middle class, and create good, well- paying jobs and new opportunities for the nearly half billion people who call North America home.”

“Every time there’s a trade deal, they’re giving another portion of our markets away”

The revamped deal has 34 chapters and governs more than $1 trillion in trade between the three countries (it was just $25 billion when the original NAFTA deal was ratified). It must still win approval from the U.S. Congress, which is unlikely to happen until next year and is still not a guarantee by any stretch.

However, what was signed this month has been greeted with both pleasure and pain. For the Beef and Pork Industries, it’s all smiles and full speed ahead. For the Dairy and Poultry Industries, it’s an all-out assault on Ottawa.

Let’s start with the winners.

The Canadian Meat Council (CMC) called it, “an important step in maintaining competitiveness and continuing to grow the meat industry in Canada.”
The CMC applauded Freeland and her team and said bluntly, “The importance of this deal to the meat industry cannot be understated.”

“The North American meat industry is fully integrated, and having uninterrupted access across the three countries is critical”, said David Colwell, Chairman of the Board for CMC. “The ability of Canadian meat companies to compete on a global scale depends on their ability to also maintain and grow the North American market.”

While the CMC lauded the deal, so too did the Canadian Pork Council (CPC).

“This news comes as Canadian pork producers are grappling with very low prices made worse by the uncertainty in global pork markets,” the CPC said in a written statement. “The trade relationship between Canada and its American and Mexican neighbours is an important one. An integrated North American market is not only economically advantageous, but it serves to encourage producers to work together to address issues of common concern such as animal health.”

The CPC also stated that it was pleased to learn that the new agreement, “will not include new tariffs and that it contains dispute mechanisms.”

“A new trilateral trade agreement is great news for Canadian pork producers,” said Rick Bergmann, the chair of the Canadian Pork Council. “Lots of hard work has been put into reaching this important milestone and we congratulate all those involved in reaching this agreement, especially Prime Minister Justin Trudeau, Minister Chrystia Freeland and her team and as well as Agriculture Minister MacAulay.

“We look forward to a stabilized pork market that will allow pork producers in Canada, the United States and Mexico to support one another in producing high quality pork and contributing to growing the economy in their respective countries.”

The Canadian Cattleman’s Association (CCA) was on board as well.

“The CCA congratulates Prime Minister Justin Trudeau and Foreign Minister Chrystia Freeland on reaching an agreement that preserves and secures the duty-free access upon which the Canadian beef cattle sector has been built over the past 25 years,” the CCA said in a written statement.

“This is particularly important as we enter the time of year when the majority of beef calves in Canada are marketed. Cattle buyers can feel confident about the long-term stability of the market and compete aggressively to acquire calves.

“In addition to preserving duty-free trade in live cattle and beef, producers are pleased that the existing rules of origin and the most important dispute settlement provisions remain intact: There is nothing in the agreement on country of origin labelling for meat or livestock.”

The deal is not just a big win for beef and pork producers, but it’s also important in order to stabilize supply chains and serve as a platform for continued economic growth for the three countries.

“We are absolutely thrilled that an agreement has been achieved,” said Peter Hall, Chief Economist at Export Development Canada (EDC). “This is excellent news for Canadian exporters. Having an updated playbook with 21st century trade rules will undoubtedly benefit Canadian companies and consumers.

“Moreover, the successful conclusion of the formal negotiation process will reduce a key source of uncertainty that has been a preoccupation for many Canadian businesses over the past year.”

Canadian firms have expressed “investment hesitation,” with 6 per cent reporting to the EDC that they were considering delaying investments in light of the elevated uncertainty around NAFTA.

“We expect this positive resolution to the talks will provide a material boost to investment and economic activity in Canada in the coming quarters,” said Hall who pointed out that Canada is the only G7 country that has free trade agreements with every other G7 country. The USMCA, CETA and CPTPP open up Canadian business to 1.5 billion consumers.

But the U.S. and Mexico, as part of the North American supply chain, remain top trade partners for Canadian firms that sell both here and internationally and for its part, the EDC has maintained and even expanded its distinct regional presence in both the U.S. and Mexico this year, which continue to represent key markets for Canada.

“During the renegotiation process and the resulting uncertainty, many Mexican companies realized the importance of Canadian suppliers as strategic trade partners,” says Arturo Garduno, EDC’s Chief Representative to Mexico. “The signing of this agreement not only benefits the vibrant supply chain, which already exists, but also helps to build on additional opportunities to come.”

However, not every sector is a winner. This agreement is a blow to the Canadian dairy industry and it has not made Canada’s poultry farmers particularly happy.

In fact, one Manitoba dairy farmer told the CBC that the USMCA is “extremely disappointing and will be devastating to my industry.”

One dairy analyst did say the deal could be good for consumers.

USMCA provides greater access to the Canadian market from U.S. dairy producers. In the past, Canadian dairy farmers were heavily protected by a supply management system.

David Wiens, a producer near Grunthal, Man., and chair of the Dairy Producers of Manitoba, told the CBC that the new deal “is a death by 1,000 cuts.”

“We’re extremely disappointed with what we understand has been agreed to,” he said. “With the almost 3.6 per cent access — dairy market access — being given to the U.S., as well as eliminating some of our competitive dairy class, so that will obviously have a majorly negative impact on our industry.”

Canada has agreed to put an end to what’s called Class 7 pricing, a clause created in March 2017 that slashed prices on some Canadian dairy production, things such as protein concentrates, skim milk and whole milk powder, used to make cheese and yogurt. The coordinated price cut had made the American equivalents uncompetitive.

U.S. dairy officials were thrilled with that changed, calling it a major breakthrough for American farmers, especially in Wisconsin and New York, where dairy farmers are eager to offload some of their product on Canada as they grapple with severe oversupply.

“Every time there’s a trade deal, they’re giving another portion of our markets away,” Wiens told the CBC.

“It seems as though they wait until the 11th hour and then they give away a portion of it and it simply is devastating for the industry.”

While American dairy producers get more access to the Canadian market, USMCA cuts Canada’s access to the U.S. market, something Wiens told CBC “is a double impact.”

Meanwhile, the Chicken Farmers of Canada (CFC) were both happy to see an agreement and disappointed that its members had to give up more access to American products. Like the dairy farmers, they are also concerned about losing their own supply management system.

“With negotiations under the new United States- Mexico-Canada Agreement (USMCA) complete, and despite the fact Canada’s chicken sector is giving
up additional access, chicken farmers are relieved that over a year of uncertainty over the future of the agricultural landscape in Canada is over,” the CFC said in a written statement.

“The USMCA makes fundamental changes to how imports are administered, and ensures continued stability for farmers, while guaranteeing the United States access to our market. This will result in an increased market access of over 12 million kilograms. This comes on top of the additional access granted under the CPTPP agreement and the existing WTO access, representing more than 10.7 per cent of our existing production.”

The CFC wanted to make one thing very clear: “It is important to note that the Canadian chicken sector has always been a strong presence within international trade. As the 14th largest importer of chicken in the world, our imports enter Canada duty-free or at a very low tariff.”

“The Canadian chicken sector is a leader in food safety and animal care,” says Benoît Fontaine, Chair of the Chicken Farmers of Canada. “It sustains more than 87,000 jobs, and contributes $6.8 billion to Canada’s Gross Domestic Product. That’s all thanks to the stability provided by supply management. While there is more being given to the already substantial market access in our sector, we look forward to working with the Government of Canada in order to implement changes that are in the best interest of Canada’s chicken farmers.”

The CFC also wants the Canadian government to end a number of practices that hurt the poultry industry.

“It will be more important now than ever for the government to ensure that it maintains its commitment to ending existing practices that currently cost the Canadian chicken industry thousands of jobs, millions of kilograms in production, millions of dollars in revenues and millions of dollars in GDP contributions to the Canadian economy,” the CFC wrote. “These current practices include being able to import unlimited quantities of chicken by importing broiler chicken and falsely declaring it as spent fowl, and allowing companies to substitute high-value imported cuts with low-value domestic cuts for re-export.”

According to its statement: “Chicken Farmers of Canada was also very disappointed to learn about the unprecedented additional access that Canada had to concede for dairy products and shares the concerns that these changes will impact the overall supply management system in Canada.

“When increased levels of market access are granted to supply management sectors, it weakens the import control pillar of the system, which allows farmers to safely predict imports and ensure that they produce enough to satisfy our country’s needs.”

Fontaine elaborated on his association’s position.

“Without a predictable level of imports, and when more access is given, production decreases in Canada,” Fontaine said. “This results in lost jobs, lost production and decreased consumer access to Canadian-raised products, not to mention the reduction in the contribution to Canada’s economy.”

As in any trade negotiation, there are winners and losers. In the case of Canadian protein production and USMCA, it appears there are some big winners and big losers.

Of course, USMCA still hasn’t been ratified by all three country’s legislatures and until there is an actual inspection mechanism in effect, some of the issues might not be as serious as expected.

In the meantime, while some will fare well, others might not. The devil, of course, is in the details.