How Differing Trade Policies May Impact U.S. Agriculture: The Potential Economic Impacts of TPP, USMCA, and NAFTA

Abstract

In the last two years, the United States has reversed the post-World War II trend toward the lowering of trade barriers and a commitment towards multilateral free trade. Citing a need to “level the playing field” and hold trading partners accountable to their commitments, the current Administration has moved towards a more protectionist and perhaps mercantilist position vis-à-vis trade policy. One of the Administration’s first actions in this regard was the decision to leave the Trans-Pacific Partnership (TPP) agreement, followed thereafter by raising tariffs on steel and aluminum imports. The Administration’s actions on trade are likely to have significant implications for U.S. farmers as these actions target three of the largest markets for U.S. agricultural exports – Canada, China and Mexico – accounting for some 44%, and representing an average of $63 billion, of U.S. agricultural exports 2013 to 2015.

Though the yet-to-be-ratified renegotiation of the North American Free Trade Agreement (NAFTA), known as the United States-Mexico-Canada Agreement (USMCA or NAFTA 2.0), consolidates the gains from the original agreement and provides some additional modest market access for U.S. agricultural exports (an estimated $454 million), U.S. farmers still are facing strong headwinds and the possibility of a significant loss of export revenues. According to these estimates, the United States’ withdrawal from the TPP reduces agricultural and food exports by $1.8 billion a year ($1.4 billion, with the offsetting $454 million of USMCA export gains). Following trade liberalization between the 11 remaining TPP members, there is an increase in trade within those countries, which substitutes away from U.S.-based imports and causes a corresponding loss in U.S. export markets. However, if the United States were to rejoin the TPP, the agreement would significantly benefit U.S. farmers — the loss of $1.4 billion would turn into a gain of $2.9 billion in additional agricultural exports. If the current U.S. trade policy were to continue towards protectionism (i.e., with the U.S. withdrawal from TPP, with the global retaliatory tariffs and if the United States were to entirely withdraw from NAFTA), U.S. agricultural exports would drop by $21.8 billion. These negative trade impacts would be reflected in lower incomes for U.S. farmers, reduced agricultural land returns and farm labor displacement. On average, such an export reduction is equivalent to $4,000 per person employed in the agricultural and food sectors. This scenario would also result in an aggregate welfare loss of $42.5 billion to the U.S. economy, or over $340 per U.S. household. What does all this mean? It suggests that U.S. agriculture is entering a volatile period in international trade. The data suggests the sector currently risks losing much of the trade gains achieved over the past three decades. The analysis predicts that if the USMCA is approved, if the trade war ends and if the United States rejoins TPP, U.S. agriculture could see not only the gains of the past decades reinforced but could also realize the potential for additional trade gains. Needless to say, the outcome strongly impacts the future of the U.S. food and agriculture sector.

Keywords: Agriculture, United States, Quantitative Assessment, NAFTA, USMCA, TPP, Trade Policies

JEL Classification: F13, F17, C54, C68