NAFTA Implications for Western Canadian Agriculture Mike Gifford Fields on Wheels Conference Winnipeg, Dec.15, 2017

Two Scenarios: Success or Failure Talk first about what a successful NAFTA renegotiation would likely involve for Western Canadian agriculture Turn next to explore scenarios where the US decides to withdraw from NAFTA At this juncture all we can do is hope the first scenario materializes but be prepared to deal with the second

For Canadian agriculture all NAFTA did was add Mexico to CUSTA In CUSTA US wanted to keep Section 22 import quotas In NAFTA US realized it had to phase-out all QR’s if it wanted Mexico to do likewise Canada, however, said it would only negotiate supply management QR’s in the GATT Uruguay Round In Uruguay Round Canada was last to agree to convert all QR’s into tariff-rate quotas (TRQ’s)

US Negotiating Objectives and Sensitivities Export Interests: In general US agriculture very satisfied with CUSTA/NAFTA For grains/oilseeds and cattle/hogs “do no harm” is the overwhelming concern However, for dairy greater access/predictability and disciplines on dairy ingredient pricing in Canada are highest priority

US Export Interests (continued) Small number of technical barrier concerns , e.g. wheat grading, discriminatory provincial wine listing practices, GI protection for cheeses Shared interests in updating Sanitary/Phytosanitary regimes and harmonizing technical regulations US wheat producers want to be able to ship into Canadian country elevator system and be graded like Canadians can do in US (2-4 million MT a year- our best export market)

US Import Sensitivities Sugar dominates – volume and price undertakings forced on Mexico, TRQ’s against Canada Cane/beet producers/processors very powerful lobby, domestic sugar program incompatible with free trade Historically dairy imports extremely sensitive, although US now net exporter. Some US regions/commodities (Florida, tomatoes, strawberries) pressing for fruit and vegetable seasonal AD,CV largely but not exclusively against Mexico

Canada’s Export Interests “Do no harm” and expand access where possible, e.g. dairy, sugar and sugar containing products If US wants greater certainty re dairy export access, Canada would attach value to greater certainty re cattle/beef and hog/pork access Tighter NAFTA disciplines on reintroduction of COOL and other potential technical barriers preferable to exercising existing WTO authorization to retaliate

Canada’s Import Sensitivities Supply management (dairy, poultry) super import sensitive Like US sugar, SM politically powerful and not compatible with free trade, need ongoing import protection to operate system Recent changes in dairy ingredient pricing (Class7) allows SMP to be priced at or below world levels Reforms were necessary to deal with structural surplus of SMP and are already stimulating import replacement and exports

Are Major Domestic Policy Changes Likely? Duty free trade in sensitive products requires fundamental domestic policy changes Absolutely no indication that either country is willing to fundamentally change existing domestic policies for sensitive products Without major domestic policy reforms the best that can be expected is some form of TRQ expansion along lines of TPP and Canada/EU negotiations

Domestic Policy Status Quo with Added Imports – Most Likely TRQ expansion – How much? What about growth? Remember Canada’s poultry TRQ’s are tied to production or consumption, chicken imports now close to 20% market share This is why US poultry industry is less incised about increased access In contrast, Canada’s dairy TRQ’s are fixed. In past, milk production showed little or no growth, but major increases recently (4-6% annual growth) Even with TPP and EU, dairy import access would still only represent around 10% market share

Number of Potential Land Mines Extreme US demands e.g. dismantle supply management are mirrored in a number of other issues Rules of origin for autos, eliminating dispute settlement regarding AD and CV findings (Article 19), Buy America provisions, Five year review (‘sunset clause) – are all potential deal breakers If worst happens and negotiations break down and US decides to withdraw from NAFTA what happens?

Two Failure Scenarios if US withdraws from NAFTA NAFTA continues to apply between Canada and Mexico, CUSTA comes back into force and applies to Canada/US trade. No change for Canadian agriculture NAFTA continues to apply to Canada and Mexico, US also withdraws from CUSTA, and Canada/US and Mexico/US trade governed by WTO and its MFN commitments In both scenarios US agriculture loses big time, particularly in Mexico where Canada will have preferential access and US will not and where Mexican MFN tariffs are relatively high

Impact on Canadian agriculture if US withdraws from CUSTA as well as NAFTA For some products duty free access would continues, e.g. cattle and hogs but for others MFN tariffs would apply e.g. beef, pork, canola oil, wheat, potatoes. Most US agricultural MFN tariffs of interest to Canada are relatively low and expected associated decline in Canadian dollar would help to cushion modest tariff increase impact However, some US MFN tariffs are high e.g. mushrooms, processed potatoes. Others (in particular beef) are subject to TRQ’s and a separate negotiation would be required to gain access to tariff free quota, otherwise high over-quota tariff would apply (26.5 per cent in case of beef)

Other loss of CUSTA/NAFTA impacts Canada less attractive for foreign investment More pressure for trans-Canada transportation flows and less North/South Multinational food processors would have to decide whether keep existing product lines or expand (revert to old branch plant shortcomings rather than remain part of integrated NA agri-food economy)?

CONCLUDING COMMENTS Clearly a revised NAFTA with expanded TRQ access in Canada and US, more security against trade distorting technical barriers and improved disciplines on SPS measures is the preferred outcome Abrupt (six month transition) shift to MFN tariffs for Canada /US agricultural trade would have impacts ranging from relatively severe (e.g. mushrooms, possibly beef) to little or no impact (e.g. cattle, hogs, pork) depending on US MFN terms of access Although much of Western Canadian agriculture is less dependent on US market (grains/oilseeds) than say red meat sector, all sectors would be worse-off if duty free access to US was lost

CONCLUDING COMMENTS (continued) Western Canadian agriculture is better able to-day to adjust to the shock of US withdrawing from CUSTA/NAFTA because of efficiency gains made in red meat and oilseed processing sectors as well as grain/oilseed transportation/handling generally. However, no question that the preferred scenario is the successful re-negotiation of NAFTA