Trump’s Trade Tactics Will Hurt American Agriculture

US Corn Belt ​economies may ​nosedive as ​Mexican farmers ​are incentivised ​to produce more ​even as the ​country is ​forced to mull ​food diversification.​

Mexico is the ​third biggest ​importer of ​American farm ​products. It is ​the biggest ​importer of ​American corn, ​dairy products, ​pork and rice. ​  PHOTO: BLOOMBERG

Cecilia ​Tortajada and ​Asit K. Biswas |​ THE BUSINESS ​TIMES | June 8, ​2017

THE election ​of Donald Trump ​as US president ​has changed the ​relations that ​have existed in ​recent decades ​between the ​United States ​and Mexico. ​

Among many of ​his outrageous ​claims are that ​the Mexican ​government is ​“forcing ​their most ​unwanted ​people” ​who are “​criminals, drug ​dealers, ​rapists, etc, ​into the United ​States”. ​He wants to ​build a “​big beautiful ​wall” on ​the shared ​border, paid ​for by the ​Mexicans, to ​stop illegal ​migration. He ​plans to ​renegotiate ​North American ​Free Trade ​Agreement (​Nafta) which ​contributed a ​US trade ​deficit with ​Mexico in goods ​of US$63.2 ​billion last ​year. He has ​also suggested ​a border ​adjustment tax ​which will make ​Mexican imports ​more expensive. ​

Overall, Nafta ​has been ​beneficial to ​Mexico, Canada ​and the US. ​Since Nafta was ​signed in 1994, ​foreign direct ​investments (​FDI) in Mexico ​have averaged 2.​6 per cent of ​gross domestic ​product ​compared to one ​per cent two ​decades before ​Nafta. Today, ​annual ​bilateral trade ​between the two ​countries is ​running at US$​580 billion. ​

Mr Trump’​s anti-Mexican ​rhetoric did ​initially ​affect Mexico. ​The Mexican ​peso nosedived ​following his ​election last ​November. It ​has now almost ​recovered. FDI ​in Mexico last ​year fell by 6 ​per cent, and ​is estimated by ​some to drop as ​much as 21 per ​cent this year. ​Moody’s ​Analytics ​estimated that ​some US$4.5 ​billion of ​investments ​have been on ​hold in Mexico ​since Mr ​Trump’s ​election. ​

Mr Trump seems ​to fight an age-​old battle with ​Mexico without ​good understanding ​of the ​situation and ​with an ​outdated ​protectionist ​strategy. Much ​of it hinges on ​manufacturing ​activities and ​offshoring of ​manufacturing ​jobs to Mexico. ​

One area that ​has not entered ​his calculations ​is agriculture. ​Globalisation ​may have ​contributed to ​manufacturing ​job losses in ​the US but it ​has significantly ​benefited its ​agricultural ​sector. ​

US exports of ​agricultural ​products to ​Mexico have ​increased ​nearly fivefold ​since Nafta was ​signed. Mexico ​is the third ​biggest ​importer of ​American farm ​products. It is ​the biggest ​importer of ​American corn, ​dairy products, ​pork and rice; ​the No 2 buyer ​of soya beans ​and wheat; and ​No 3 for beef ​and upland ​cotton. ​According to US ​Department of ​Agriculture, ​Mexico is ​expected to ​import 4 per ​cent of US corn ​in 2016-17. It ​buys 7.8 per ​cent of US pork ​production. ​

For the 2014-​15 crop ​marketing year, ​US corn ​production was ​360 million ​tonnes, 13 per ​cent of which ​was exported. ​Mexico ​accounted for ​23 per cent of ​this export. ​

In 2016, ​Mexico imported ​US$17.9 billion ​of American ​agricultural ​products –​ US$2.6 billion ​for corn, US$1.​5 billion for ​soya beans, US$​1.3 billion for ​pork and US$1.2 ​billion of ​dairy products. ​Mexico imports ​98 per cent of ​its corn from ​USA.

Lulled by a ​steady supply ​of farm ​products from ​US, low ​transportation ​costs and an ​implicit ​assumption that ​good times will ​continue, ​Mexico did not ​diversify its ​agricultural ​imports to ​ensure its long-​term food ​security. ​

The breadbaskets ​of the world ​are US, Brazil, ​Australia, ​Russia, ​Argentina and ​Ukraine. US is ​the world’​s top exporter ​of agricultural ​products. ​However, as the ​US rivals are ​rapidly ​adopting modern ​farming and ​agricultural ​technologies ​and improving ​their transport ​and farm ​products ​handling ​infrastructure, ​America’s ​global export ​share has been ​steadily ​declining in ​recent years. ​

POLICY UNCERTAINTIES

Some past ​events have ​contributed to ​accelerate this ​decline. In ​1979, US banned ​grain sales to ​the then Soviet ​Union because ​of Afghanistan ​invasion. This ​forced USSR to ​improve its own ​food production.​ Brazil and ​Argentina ​rapidly ​accelerated ​their grain ​production to ​grab market ​share from ​America. ​

In 2016, ​Russia – ​a significant ​global wheat ​importer of the ​past – ​surpassed US ​for the first ​time in 2016 as ​an exporter. ​

American ​policy ​uncertainties ​in terms of ​Nafta and ​potential ​disruptions ​have now ​compelled ​Mexico to ​consider food ​diversification ​on an urgent ​basis. ​

As America ​threatens to ​close its ​agricultural ​export, Brazil ​and Argentina ​are now trying ​to open a new ​market. ​

Mexico already ​has free trade ​agreements (​FTAs) with 45 ​countries, the ​highest in the ​world, but not ​with Brazil and ​Argentina. ​Brazil’s ​Agriculture ​Minister Blairo ​Maggi has said ​that the ​country is ​“back in ​the game”.​ FTAs between ​Mexico, Brazil ​and Argentina ​have become a ​priority issue ​for all the ​three countries ​because of ​economic self-​interests. ​Mexico is also ​discussing ​bilateral deals ​with Australia ​and New Zealand ​as well. Former ​president ​Ernesto Zedillo ​said that it is ​“waste of ​time” to ​play “​Nafta tweaking ​games with the ​Trump ​administration”​.

Agricultural ​trading ​companies such ​as Adecoagro, ​in which the ​family of ​George Soros ​own 9.5 per ​cent of the ​shares, are ​exploring new ​export ​opportunities ​to Mexico. ​Adecoagro, ​based in Buenos ​Aires but ​listed in New ​York, manages ​434,000 ha of ​farmland in ​Brazil, ​Argentina and ​Uruguay, and ​harvests some ​two million ​tonnes of ​agricultural ​products every ​year. It ​exports to ​Africa, Asia ​and Middle East ​but not to ​Mexico. ​

Mr Trump’​s vituperations ​may prove to be ​beneficial to ​Mexico over the ​long term. It ​is incentivising ​farmers to ​produce more, ​modernise ​agriculture, ​increase crop ​yields, expand ​cultivable ​areas and ​improve ​transportation ​and storage ​infrastructure. ​The latest ​upheavals are ​forcing Mexico ​to take a ​realistic hard ​look at itself. ​These will be ​beneficial to ​Mexico but will ​be detrimental ​to the US over ​the long term. ​An important ​benefit of the ​Trump diatribes ​has been that ​it has united ​the Mexicans, ​from the far ​left to the far ​right like ​never before. ​

Nafta talks ​will start ​later this year.​ Meanwhile, the ​approval rating ​of Mexican ​president ​Enrique ​Peña ​Nieto is close ​to single digit.​ If the economy ​performs ​anaemically (​Mexican ​financial ​institution ​Bancomer ​predicts ​economic growth ​this year of a ​paltry one per ​cent), Mr ​Peña ​Nieto is ​unlikely to go ​for a hard sell ​of Nafta if it ​does not look ​appealing to ​the Mexicans. ​Thus, Mexico is ​likely to play ​hardball with ​the US. They ​have more ​options than ​they initially ​realised. ​

There are too ​many moving ​parts in Nafta ​negotiations. ​Most states in ​the US Corn ​Belt voted for ​Mr Trump. If ​their economies ​nosedive, they ​may become ​restless. ​Should US ​decide to ​“​punish” ​Mexico, the ​market is ​likely to sell ​off Mexican ​peso aggressively.​ This may make ​Mexican ​products ​cheaper even ​with border tax ​tariffs. ​

When the ​Trumpcare bill ​was being ​discussed, Mr ​Trump said that ​“nobody ​knew that ​health care ​could be so ​complicated”​. He may be ​forced to ​express similar ​sentiments on ​negotiating ​Trumptrade with ​Mexico. ​

The writers ​are co-founders ​of the Third ​World Centre ​for Water ​Management, ​Mexico and are ​now with the ​Lee Kuan Yew ​School of ​Public Policy ​at the National ​University of ​Singapore. ​

Source: http://bit.ly/2sLFr1c