Tuesday, June 27th marked the start of three days of Congressional Hearings in the U.S. into the impact of the renegotiation process of the NAFTA Treaty due to begin after August 16th. Strangely, only 24 hours total were scheduled for testimony of interested parties during those 3 days of public hearings – giving each participant somewhat less than 10 minutes of testimony! That fact alone speaks volumes that Trump and his secretary Wilbur Ross are not really interested in public opinion. Their priority is to “do away with the worst trade deal ever” as Trump repeated over and over during the election campaign. It should, therefore, come as no surprise that U.S. farmers and their support groups have been in an increasing state of grave concern that the changes contemplated by Trump in the current NAFTA Agreement will represent a significant threat to their farm and ranch operations. Farmers are being cynically told that renegotiation will be a positive development. A number of ultra-conservative congressional lawmakers, Agriculture Secretary Sonny Perdue and Secretary of Commerce, Wilbur Ross are all arguing insistently that the U.S. agricultural sector will benefit enormously from a new and trustworthy agreement – a position that now is beginning to appear more and more illusory. In fact, early statistics indicate a serious slowing of farm exports so far this year which appears to be the result of faltering trust between Mexican importers and U.S. exporters. In other words, deep uncertainties over increasingly uncertain trade relations are clouding the future and the numbers are beginning to prove that out: For the first time in five years, in the first five months of this year, U.S. exports of soybean meal used to feed Mexican livestock and poultry have fallen by 15%, and U.S. poultry exports to Mexico dropped 11% over the same period – the biggest decline since 2003! U.S. corn exports have also dropped by an unexpected 7%. American farmers are painfully aware, that Mexico is the largest international buyer of U.S. corn (8 million tons annually), as well as soybeans and poultry, the very foundations of cross-border agricultural trade. This decline in exports is to be attributed to the growing unease of Mexican buyers who rightfully fear that renegotiation of NAFTA may, in the extreme case, lead to Trump pulling the U.S. out of NAFTA altogether. Many Mexican companies are consequently turning to other suppliers in Brazil, Argentina and Australia, for replacements to U.S. agricultural products – should worse come to worse. What is now causing absolute panic among U.S. farmers is that the same Mexican importers are paying more for the same products they were buying from U.S. exporters, knowing full well that it is costing them more money, but seeing the new strategy as an investment in the event of a breakdown in the negotiations. If our trend to buy food and other agricultural products from sellers in other countries continues in the months ahead, it could have a devastating effect not only on prices of U.S. goods, but stock prices as well. As corn and soybeans that were grown for the Mexican market accumulate in storage silos, the world markets will get flooded with American dumping sales, forcing U.S. farm income even lower. It is clear, that private Mexican importers are not going to roll over and surrender to Donald Trump – but what are officials in our federal government prepared to do in the defense of Mexican interests in the upcoming renegotiation?
On the other hand, a worrying issue related to the renegotiation of NAFTA is the chapter of rules of origin. Earlier we had pointed out that the government of Trump would try to negotiate a greater percentage of USA integration in the goods exported by Mexico and Canada to USA but, that apparently is not the whole history. Now, will not be only the pressure to renegotiate the percentage of USA integration but also to calculate the cost of labor - particularly Mexican - in the manufacture of an input, component or integration of a final good. In other words, the cost of Mexican labor is below cost in Canada and the United States, which has an advantage for Mexico; Since there is now strong pressure for Mexico to increase the cost of labor to make it comparable to the region, which would cause the final cost of production and integration of a good to export to the region to increase significantly. Of course the businessmen are going to be the first ones to point out that it is impossible for them to pay these wages to the workers and not only that, with an income tax of approximately 30%, it is impossible for companies focused on exporting to United States and Canada. Do not forget that Trump has promised to make a tax reform to benefit American companies paying only 15% of income tax. So the question is where were the labor reform and the fiscal reform of our country? Because as we can see, the scenario for Mexico is not very promising and there are just a few options left. For example, it is required not only to put a brake on informality but also to eliminate it, and in this way the government will be able to raise resources and aspire to make the income tax rate very attractive to companies and can win money. We have to act but, sometimes, there is no will to do it!
