NAFTA and the Midwest impact

By Paul Warfield, SVP, International Banking

How could changes to NAFTA impact Midwest businesses?

The North American Free Trade Agreement may be headed for an overhaul. The first step will be a 90-day study period to examine specific causes for trade deficits. At the signing of the Executive Order on March 31, 2017, to initiate the study, Commerce Secretary Wilbur Ross said it will allow the administration to take a “measured and analytical approach” and not do anything too “casually or abruptly.”

Whether terms of the 23-year-old agreement are renegotiated or – failing to come to agreement on new terms – the U.S. pulls out altogether, businesses in the Midwest will most likely feel the impact. As U.S. trade policy is still under study, it pays to take a look at the role played by Mexico and Canada in the bottom lines of some business sectors in Illinois, along with Wisconsin, Indiana and Michigan.

 

Ag Exports at Risk

While agricultural exports have supported Midwestern farmers, the opposite is true in Mexico. Corn is a good example. Before NAFTA it was one of Mexico’s primary crops; today the country depends entirely on corn imports – mostly from the U.S.

Concern is growing among the Midwestern agriculture community after Mexican Senator Armando Rios Piter, who leads his nation’s congressional committee on foreign relations, proposed a boycott of U.S. corn, as a counter to NAFTA renegotiation. Piter’s measure is designed “to eliminate the dependence on corn imports from the United States.” Recently a Mexican trade envoy to both Brazil and Argentina has been launched with hopes of developing a corn deal with those nations which, Piter says, “seem eager to replace U.S. corn exports to Mexico.”

Mexico is one of the top buyers of American corn. In 2015, Mexico bought nearly $2.5 billion worth of U.S. corn; whereas compared to 20 years ago, just after NAFTA was signed, Mexico bought only $391 million worth of U.S. corn.

Corn also feeds another export supply chain – the Midwest’s food processors and packagers. These companies ship much of their finished product to non-U.S. markets, including buyers in Mexico. Take just one of those buyers, Cinepolis de Mexico, the fourth-largest chain of film houses in the world. Each year the company purchases about $10 million worth of popcorn from the U.S.

And in Wisconsin much of the NAFTA discussion centers on a product central to the state’s economy: cheese. Wisconsin is the nation’s leading cheese-producing state. With nearly 1,200 cheese makers producing three billion pounds of cheese each year, “… we can’t eat it all ourselves,” said Laurie Fischer, former Director of Policy for the Dairy Business Association, in a Wisconsin State Journal editorial. Nearly half of the state’s cheese exports are bound for Mexico. “Thanks in no small part to our trade with Mexico, dairy exports overall have grown to nearly $1 billion — tripling where we were just five years ago,” she added.

Canada and its oat crop is another critical NAFTA topic for food companies – but as an import. According to Canadian agri-food economics researcher Dr. Al Mussell, “… the U.S. wouldn’t be able to support its food processing industries at the level they’ve been able to had they not had access to Canadian products.” An example he points to is oats, a central ingredient in breakfast cereals and other Midwest-produced food products. The oat crop in Canada is nearly triple what U.S. farms produce, with an import value of nearly $60 million, or 94 percent of all shipments coming into the U.S. Sourcing this key ingredient from the next three largest exporters – Finland, Sweden and Chile – would add considerable shipping costs for Midwest food producers.

 

Moving the Goods

There is yet another critical link in the Midwest supply chain where trade policy changes could have a major impact: transportation and logistics. Business has been good across the U.S. for carriers moving freight to NAFTA partners. Freight flows to Canada are up by 7 percent over a year ago, and Mexico flows increased by more than 6 percent in that same period.

Uneasiness over the potential impact of NAFTA changes is voiced by the American Trucking Associations: “Trade and trucking are synonymous, and the increased movement of freight yields more good paying jobs and growth in American companies,” says the organization’s executive vice president Bill Sullivan.

Putting the trucking industry in the context of NAFTA trading partners, Greg Wright, professor of economics at the University of California Merced said “my understanding is that upwards of 60 percent of NAFTA trade is truck based … so there is little ‘replacement’ for this trade coming from anywhere since these are the U.S. land borders.” Based on that estimate and data from the Department of Commerce International Trade Authority, the economic impact to Illinois; along with Wisconsin, Indiana and Michigan; could add up to nearly $10 billion in Midwestern goods and commodities no longer moving to NAFTA partners by truck.

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Which Sector Could See a Positive Impact?

The auto industry has been a consistent focus of NAFTA discussions, including the goal of bringing jobs back to the U.S. that have been moved to Mexico. Those “reshoring” moves could positively impact not only the car and truck makers, but the companies that produce parts required to finish assembly. According to reporting from the Wall Street Journal, “For every car built in North America there are typically hundreds of companies supplying everything from steel body panels to radio knobs. Many locate near assembly plants to minimize shipping costs.” The report adds that, “…if (auto makers) start shifting more work to the U.S., many component makers say they will go with them.”

Across Illinois and Indiana, foreign and domestic brands operate assembly plants – including Ford, Fiat Chrysler, Mercedes, Toyota and Fuji – with parts suppliers located nearby. The same is true in Michigan on a much larger scale; the state is the nation’s auto capitol and home to 60 of the nation’s top 100 automotive companies.

Auto parts manufacturers and other suppliers to the industry cover the region, with some preparing to ramp up production if new trade policies bring assembly operations back to the U.S. One of those companies, a Chicago-area safety equipment maker, told the Journal they have 300,000 square feet of production space on standby – to be added to their current 80,000 square feet – just in case.

Perspectives on the NAFTA Timeline

The process for making changes in trade policy with NAFTA partners is likely to be lengthy, but with no solid timeline as yet. The administration must give Congress 90 days’ notice under trade law before beginning formal NAFTA renegotiations. “I would like the results tomorrow, but that is not the way the world works,” Commerce Secretary Wilbur Ross said in an interview with Bloomberg TV.

Canada’s Foreign Minister Chrystia Freeland also cautioned patience when she told reporters, “It’s important for people to not get ahead of themselves. The U.S. administration needs to have a long domestic consultation period.”

As for the third partner, Mexico’s current chief trade negotiator, Economy Minister Ildefonso Guajardo, seems to see it differently. He has said that extending talks past early 2018 would be “irresponsibly injecting uncertainty after uncertainty” due to Mexico’s general elections next July, and the U.S. mid-term congressional elections in November 2018.

Summary

The future of U.S. trade policy has potential challenges covering a broad swath of Midwestern businesses, whether importers or exporters, makers of finished goods, transport companies, commodity producers or users of ingredients and parts. While no timeline is set for new trade agreements, the best practice for decision makers is to stay on top of initiatives by trade and business groups, in the Midwest and nationwide.