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Winning at the border on trade

It may be Donald Trump who is re-opening NAFTA. But today, more farmers north of the border are seeing some solid wins for Canada

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Ron Davidson calls in from a hotel room in Washington, D.C., with NAFTA on his mind. As senior vice-president of international trade and public affairs for the Canadian Meat Council, he’s no stranger to the U.S. capital. And with the renegotiation of the North American Free Trade Agreement in process, there are more cross-border trips on Davidson’s calendar.

That’s not a bad thing, he says.

“Canada, as you know, didn’t ask for the renegotiation,” says Davidson. “But you know, now that it looks like it is going to happen, the meat industry in North America is looking to actually improve NAFTA… we’re looking at this as an opportunity to actually reduce the barriers that continue to exist at the border.”

Cautious optimism is a common theme across non-supply managed commodities as the 23-year-old trade deal is cracked open, although few had envisioned a renegotiation before Donald Trump was elected U.S. president in 2016.

“I think that’s the most important point, that we don’t view the upcoming negotiation of NAFTA as a threat. Rather we view this as an opportunity to improve on an agreement that is now over 20 years old,” says Cam Dahl, president of Cereals Canada. “It’s time for it to be updated.”

Specifically, he’d like a new deal that streamlines regulations and harmonizes sanitary and phytosanitary trade rules, while also building a framework to address future concerns.

“We don’t know what the regulatory environment or pressures are going to look like 10 years from now, so from our perspective, it’s really important to put a NAFTA process in place that will ensure we have a way going forward of addressing those regulatory impediments to trade,” says Dahl. “… because I’m sure 15 years from now, there are going to be things that we haven’t thought of yet.”

Restructuring the trilateral trade deal could also address existing trade irritants, Dahl says.

Complaints, for instance, have arisen over the Canada Grain Act, especially over provisions that can prevent assigning grades to U.S.-grown grains. “If a variety is registered in Canada as well as the U.S., then it should be eligible for the same kind of grading consideration no matter where it is grown,” agrees Dahl. “That is a holdover of past systems that have evolved over time in Canada and I think we should move to adjust those irritants if we can.”

The Canola Council of Canada also sees North American trade talks as an opportunity to modernize what has been a successful free trade agreement in their view.

“Right now we have tariff-free access for canola seed, oil and meal through NAFTA, so for our main exports NAFTA is working very well,” says Brian Innes, vice-president of government relations with the Canola Council. “Where we have interest is on things like further-processed products, such as margarine and shortening, and in those cases there are opportunities.”

And it’s those kinds of issues, like value-added porducts, says Sylvain Charlebois, dean of the faculty of management at Dalhousie University, that the Canadian government is signalling a willingness to tackle

Moving on value-added

“Ottawa has made some interesting moves over the last year or so. I mean they actually eliminated the tariffs on several ingredients coming from the United States, signalling to the U.S. that we are willing to play ball,” Charlebois says. “We are willing to actually make the processing sector more competitive by allowing cheaper ingredients from the United States to come into Canada… that’s a signal that was needed.”

Still, Ottawa had little time to prepare for renegotiation of a deal that wasn’t on their radar until international trade became a sticking point in American political rhetoric.

“I don’t recall the Liberals stating that they were willing to reopen NAFTA while they were running for office back in 2015, so this is coming as a surprise,” notes the professor. “This wasn’t planned… it’s being imposed on us to go back to the bargaining table and set out a new path for our economy and for agriculture.”

Yet this won’t be easy. Canada currently lacks a cohesive food policy of its own, and early efforts to build a national food strategy have been anything but transparent since consultations began, says Charlebois.

“We’re actually being invited back to the bargaining table with no clear vision of what we are trying to accomplish here as a nation, let alone as a partner of a tri-national partnership,” Charlebois says. “We’re still a new country and we’re not very strong at thinking strategically about trade, particularly beyond primary production.”

Still, while the objectives from different ag sectors may be different, they aren’t necessarily competing. The vision held by Canada’s pork and beef sectors, for instanace, is less about value-adding and more about increased integration of an already highly integrated system of production.

Excess inspections

“On the meat sector, and particularly with the U.S., we are totally together, we want more integration, we want fewer differences between the two countries and fewer problems at the border,” the Meat Council’s Davidson says. “We would like Canadian meat to be treated like U.S. meat, which means when you cross the border and you get your clearance at the border, you then go direct to a USDA inspection facility somewhere in the country.”

Currently, Canadian meat is subject to two inspections when it enters the U.S., whereas U.S. meat is only inspected once as part of the border-crossing process.

“There were a few things in the original agreement dating back to the Canada-U.S. trade agreement that were supposed to have been done on the meat inspection side of things that were never followed through on,” says Dennis Laycraft, executive vice-president of the Canadian Cattlemen’s Association. “So we’re taking a proactive approach. We’d like to see some of those issues resolved.”

Laycraft adds there is strong support from American counterparts when it comes to streamlining import and export processes. But strong support from American commodity groups and even U.S. lawmakers doesn’t guarantee a positive outcome for Canadian producers and processors.

“We just don’t know what the terms are going to be, we don’t know what attitude the Trump administration will actually showcase during the talks. We are dealing with a highly unpredictable administration and that’s why it’s really difficult to really foresee what may happen or what could happen with NAFTA 2.0,” Charlebois says.

Observers also point out, however, that U.S. President Donald Trump has already walked back from some of his more hardline positions on trade, including a threat to withdraw from NAFTA entirely.

“What’s concerning about President Trump is his move towards bilateral trade agreements and away from agreements that involve many countries,” says Canola Council’s Innes. “On the grains and oilseed side broadly — and on canola specifically — we benefit when there are common rules of trade around the world, and that means having trade agreements where there are many countries involved.”

Trump has already withdrawn the United States from the Trans-Pacific Partnership and was the first world leader to publicly indicate interest in a bilateral trade agreement with the United Kingdom once it leaves the European Union.

“As Canada pursues its trade agenda in the Trump era, it’s more important than ever that we look at establishing relationships and agreements with multiple countries, such as the Trans-Pacific Partnership,” Innes adds. “If there is an impact of the Trump era on how we see trade in the world, it’s around a clearer focus on the importance of agreements involving multiple countries and ensuring we have strong relations and a strong ability to get rid of trade barriers in markets that are growing, like those in Asia.”

Looking to new markets

As important as the American market is for Canadian producers and processors, commodity groups are not putting all of their eggs into an American basket. Not just because of uncertainties around NAFTA, but because diversity is key to weathering any trade storm.

“Yes, there are ongoing negotiations, but does the renegotiation of NAFTA cause us to look at or re-evaluate other markets? The answer is no, because we have been focused on market development and expanding free trade since we’ve come into existence,” Dahl says.

With Canadian competitors already having struck trade agreements with Japan, Dahl said this is one market Canada needs to prioritize. A trade deal with China would also boost Canada’s ag across the board.

“We are very interested in the discussions that have begun with China,” Dahl says. “There is a long way to go before we start talking about a trade agreement with China, but that is something we are active in.”

Canadian meat processors are particularly interested in developing markets outside of North America, as overseas markets present opportunities to sell products less desired by domestic consumers.

Gary Stordy, public relations manager for the Canadian Pork Council, explains pork is divided into various pieces and products to allow for maximized profit in a number of markets.

“They want to take each piece and ship it to a country where they get the best value for it and that is why, certainly, a lot of our pork loins are shipped to Japan, because they can get a good value or return on it,” he says. “When we talk about expanding trade and increasing market diversity, it’s taking that potential or that product and having the option of sending it to more than one spot, because when you just send it to one spot you’re a price taker.”

Another way agribusinesses hope to expand Canada’s reach is by reviving the Trans-Pacific Partnership.

“We thought with the U.S. leaving the TPP that it could stall, but Japan continues to say they would like to see that move ahead,” Laycraft says, adding the Cattlemen are still participating in meetings on the deal, working with counterparts at home and abroad to keep it alive.

“I think we are cautiously optimistic that it could move ahead without the United States. The key market is Japan for us; we would see the tariffs quickly reduced to the same level as Australia.”

Canadian beef is currently subject to a 38.5 per cent tariff in Japan, while Australia’s bilateral trade deal with that Pacific Rim country will see their tariffs drop to nine per cent over two years.

“We are looking for markets everywhere, and you know NAFTA is a critical one, but Japan is really critical, and we are fully supportive of the government’s work to move forward with a free trade agreement in China,” says Davidson.

Switch to China?

Despite all the allure of the Chinese market, however, it’s unlikely to ever replace the United States as Canada’s most important trading partner. And no other market will ever be quite so close to our doorstep.

“(The Chinese market) is certainly going to grow, but I mean they do have the third-largest cattle herd in the world, so it’s not that they don’t produce beef,” Laycraft points out.

Canada also has an advantage over virtually every other country in the world when it comes to delivering fresh product to the United States. That, combined with the integrated nature of the Canadian and U.S. production systems, means America will always be Canada’s largest export market, says the cattleman.

According to Agriculture and Agri-Food Canada, Canadian meat sales exports to the United States increased 3.71 per cent between 2014 and 2015, while exports to Hong Kong and Japan decreased by 59 per cent and 24 per cent, respectively.

Exports to China increased by 381 per cent over the same period but, even so, the United States accounted for about 71 per cent of all red meat and live animal exports in 2015.

Field crops also rely heavily on exports to the U.S., even as other markets are pursued.

“Right now the U.S. represents a little over a third of all of our exports,” says Innes. That works out to $3.6 billion a year, “so certainly a very substantial amount.”

Mexico accounts for another eight per cent of Canadian canola exports, or about $825 million each year, Innes adds. That brings the percentage of canola exports under NAFTA to 45 per cent.

“We need the U.S. more than the U.S. needs us, no matter what is being said,” says Charlebois. “The economics are against us. They are 300 million consumers there and we are 36, or 37 million, so we need to get along with the U.S.”

Back in Washington, meanwhile, Davidson makes his final point.

“We’re an export-oriented country and this continent is export oriented, so our competition in the global marketplace is each other, yes, but it’s actually South America, it’s Australia and New Zealand, it’s Europe,” Davidson says. “For us, this has the potential to actually provide some positive outcomes. We can’t guarantee that, but there is certainly an opportunity there.”

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