The trade war comes to the prairie

Source: By Catherine Boudreau, Politico • Posted: Thursday, February 16, 2017

Just outside of Rolla, North Dakota, a town of about 1,300 people west of the Red River Valley, his rolling, fertile land might seem a world away from coastal ports, international business deals and the very idea of “globalism.” But when he sells his barley, it’s not a local proposition: About two-thirds of his crop is shipped some 2,000 miles to brewers in Mexico. The deal with his Mexican customers – he contracts with them directly, and has it malted in Minnesota along the way – is a chance to make a little more money from a commodity crop. That’s been especially important to his bottom line over the past few years, as world commodity prices have hit seven-year lows.

Heartland American farmers like Lentz are among globalism’s prime beneficiaries. Agriculture is North Dakota’s top industry, and it gets a significant boost from the $4 billion in farm goods, including wheat, soybeans, barley and sorghum, sent across borders every year. And they often travel much farther than Mexico: More than 90 percent of the state’s soybeans are exported, mainly to China.

The vast quantity of agricultural products that North Dakota exports is a story shared by farm states across the country. American agriculture sent $129 billion worth of goods abroad in fiscal 2016 – more than 20 percent of all the food grown in the United States. That number has more than doubled over the past decade, making agriculture a rare bright spot in the U.S. trade accounts. When President Donald Trump and free-trade critics fret about the United States’ $500 billion trade deficit, it’s often lost that American farmers run a large and growing surplus, and have been since the 1960s. Last year the surplus was $16.6 billion. The USDA projects it will rise to $21.5 billion this year.

The Trump administration has come out of the gate seemingly gearing up for a trade war — withdrawing from the Trans-Pacific Partnership, threatening to pull out of NAFTA and rattling relations with Mexican President Peña Nieto with talk of paying for a wall along the southern border by imposing taxes on imports. The goal is to restore U.S. manufacturing jobs in languishing industries like steel, and help the Rust Belt factory workers who turned out to vote Trump. But farmers and ranchers have a lot to lose, and they’re are starting to worry their entire industry will be collateral damage in Trump’s trade experiment. Lentz already lost $200,000 in new malted barley business he was expecting this year after one of his customers in Mexico cancelled plans to expand their brewery due to escalating tension between the countries.

A coalition of more than 130 U.S. agricultural groups has anxiously sent letters to President Trump expressing eagerness to work on modernizing NAFTA, but in a way that protects the United States’ $38.6 billion in farm exports to Canada and Mexico – its largest trading partners. The coalition also is encouraging the administration to reduce tariffs and trade barriers in the Asia-Pacific region, similar to what the TPP would have accomplished in countries like Japan, Vietnam, Malaysia, Australia, and Singapore. The letters invoke Trump’s promise to rebuild the manufacturing sector, noting that the U.S. food and agricultural industry represents 12 percent of all manufacturing jobs in the country, and would benefit greatly from increased exports to Asia.

The tradeoff between old-line manufacturing and their own livelihoods isn’t lost on farmers, especially when developing new trade deals. “If NAFTA is renegotiated, we certainly are concerned that agricultural market access will be sacrificed for other manufacturing jobs,” Ben Mosely, vice president of government affairs at USA Rice Federation, told farmers and ranchers during the Southwest Ag Issues Summit in Fort Worth, Texas this month.

Politically, the president’s “America first” stance on trade has the potential to cause a rift between two sets of his most fervent backers in rural America. In trying to protect people relying on manufacturing and service work, Trump could burn bridges with farm voters who rely on the agricultural economy—and who overlooked his stance on trade in the hope they’d benefit from less regulation and lower taxes.

“I think he is in danger of losing a lot of that support,” said Roger Johnson, president of the National Farmers Union. The NFU is critical of free trade agreements and opposed TPP because of lost jobs and low wages in rural communities—most U.S. farmers rely on income from other jobs—but worries that an overly aggressive Trump administration will hurt one of the few upsides the agriculture business can count on. “It’s one thing to renegotiate trade agreements to get better terms,” he says, “but it’s a whole other thing to blow up deals and get fewer exports in the process.”

U.S. FARMERS AND RANCHERS are among the most productive and efficient in the world, growing more food and raising more animals than Americans can consume, even as their numbers have dropped to less than 2 percent of the population. The industry’s success story can be attributed to a multitude of factors: the nation’s exceptionally fertile farmland; its long tradition of investing in transportation, research and technical advancements; and a farmer-friendly U.S. government that subsidizes producers when prices and revenue fall.

Today, America exports at least 50 percent of its corn, soybeans, rice, wheat and cotton, though the U.S. share of the global grain market has declined as other countries grow more food for exports. High-value agricultural products, such as fresh fruits and vegetables, nuts, meat and dairy products are increasingly being sent overseas. More than 70 percent of the almonds, walnuts and other tree nuts grown in the United States are exported, along with about 25 percent of the pork.

A popular statistic says that one farmer can supply food and fiber for nearly 150 people across the globe. In general exports are rising, and NAFTA has been a key part of that growth. Canada and Mexico together account for nearly one-third of all U.S. agricultural exports, and in the 20-plus years since the trade deal was enacted, U.S. food and agriculture exports to both countries more than quadrupled, the result of economic integration and the ability move goods freely between the three countries while avoiding taxes on most goods.

At the same time, manufacturing hasn’t fared so well: The U.S. trade deficit in manufactured goods has steadily risen for decades, reaching $86 billion last year. And America has lost more than 56,000 private manufacturing establishments since 2001 as companies move facilities abroad, according to the Bureau of Labor Statistics. Free-trade critics largely blame globalization for the decline as companies seek out lower labor costs, while researchers also point to the automation of factory lines.

The U.S. manufacturing sector does enjoy more political clout, however. More than 12.5 million people work in the industry, compared with 3.2 million farmers. And 23 percent of the rural population lives in counties dependent on manufacturing jobs, while only 6 percent of people in small town USA rely on the agricultural industry. There’s a reason farmers are worried.

THE FARMING EXPORT boom isn’t the same thing as a booming economy: Even as U.S. farmers and ranchers send enormous amounts of their goods abroad, they are earning nearly 45 percent less than four years ago. Record levels of production across the globe have hurt commodity prices while the costs for seeds, fertilizer and equipment hold high. At the same time, there is less demand from China as it tries to transition from a manufacturing to a service economy, which has slowed down its growth. U.S. agricultural exports to China, a top three trading partner, have tripled over the last 10 years but plateaued at around $20 billion, according to the USDA.

For farmers, new trade deals are seen as one of the only ways to boost revenue: They promise to knock down tariffs while harmonizing food-safety and animal and plant health regulations that often restrict certain U.S. products from entering foreign countries. The TPP was projected to increase U.S. farm sales by $4.4 billion annually once fully implemented, according to the American Farm Bureau Federation. The beef and pork industries would have seen some of the largest growth as they gained more access to lucrative markets in Japan and other Asian Pacific countries that eat parts of the animals Americans won’t put on their plates (think brain, ears and hooves).

But now TPP has been declared dead, and President Trump has pledged to handle trade policy by negotiating bilateral deals one at a time – an effort that could take years. House Agriculture Committee Chairman Mike Conaway has been trying to reassure U.S. agricultural producers. In an interview with POLITICO on the sidelines of the Southwest Ag Issues Summit, he said that TPP merely “set the floor” for what a good free trade deal looks like for U.S. agriculture, so new bilateral deals could potentially be better. Trump has also pledged to strongly enforce trade deals to ensure they are fair to the U.S., something farmers and ranchers liked to hear during the campaign. It’s difficult for U.S. producers to compete on a level playing field when China, India and other countries subsidize their agricultural sectors beyond commitments at the World Trade Organization, Conaway said.

“I’m excited about the better that Mr. Trump said he wants to deliver,” Conaway said. “I think he’ll be pretty hard-nosed on enforcement, as well, once he understands who is abiding by their agreements.”

But bilateral deals are easier promised than done, and the U.S. agriculture industry could just as well end up getting less market access than it might have in a multilateral agreement like TPP, simply because fewer countries are involved, said Bill Reinsch, a distinguished fellow at the Stimson Institute and an international trade expert at the law firm Kelley Drye.

The first test appears to be Japan, with Prime Minister Shinzo Abe in Washington, D.C. this week to discuss the road forward. The National Cattlemen’s Beef Association, which often points out that the U.S. industry is losing $400,000 a day to Australia because of lower tariffs on its meat to Japan due to a free trade agreement, urged Trump to use his meeting to discuss eliminating trade barriers similar to those achieved in the TPP. So did the National Pork Producers Council.

Japan, in the TPP, granted the United States some access to five of its “sacred” agricultural sectors — rice, beef, pork, dairy and wheat —as Abe elevated the deal as a key way to grow Japan’s economy and directly counter China’s growing influence in the region. But that win for American farming depended on other leverage in the huge deal – leverage the US wouldn’t have if it just tried to ink a bilateral trade agreement with Japan.

Further complicating a deal is automobile manufacturing. Trump rebuked Japanese automakers last month for exporting vehicles “by the hundreds of thousands” while American cars have a very small presence in Japan. In order to protect the U.S. industry, he may offer Tokyo less than what the United States conceded to in TPP. If that’s the case, Japan could take its sensitive agricultural market off the table – which would please a politically powerful voting bloc in Japan that was urging Abe not to ratify the Asia-Pacific pact all along.

“It’s a fatal trap if Trump goes down that road,” Reinsch said. “Everyone knows you can’t pass a trade agreement without U.S. farmers on board. There are a lot of states in the Midwest where agriculture is really important. That means a lot of lawmakers won’t vote for a deal if farm groups go in and tell them it’s a terrible agreement.”

Meanwhile, former Agriculture Secretary Tom Vilsack, now president and CEO of the U.S. Dairy Export Council, is telling industry leaders to call their Mexican importers and reassure them their business arrangements will stay in place. He also said he urged Trump’s nominee for Agricultures Secretary, Sonny Perdue, to defend agricultural trade within the new administration so it doesn’t get left behind in the attempts to boost manufacturers, according to the Hagstrom Report.

Brian Duncan, who grows corn and soybeans in Ogle County, Ill., that mostly feed his 70,000 hogs destined for foreign countries, says his community is “on pins and needles” as they “patiently wait” on President Trump’s next move.

“We saw hog futures take a hit when the Mexican President cancelled his meeting [with President Trump]. Markets in general don’t like uncertainty,” Duncan said, adding that it’s difficult to operate in an environment where one tweet or statement from the administration can change everything.

Duncan said he hopes the Trump administration understands what the entire country has to lose in a trade war. Moves to shelter American manufacturing jobs could lead to retaliation, and countries often retaliate against U.S. agricultural goods first – which also raises food prices for consumers. He also expressed skepticism about whether Trump can balance the interests of farmers and ranchers who rely on expanding exports and opening borders, with protecting the manufacturing sector from foreign competition.

“He has to walk a fine line,” Duncan said, “and I’m not sure there won’t have to be a trade-off.”