USMCA to Increase Exports of Capital-Intensive Agricultural Products

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The United States-Mexico-Canada Agreement (USMCA) provides important opportunities for U.S. agricultural producers. Canada and Mexico are the first and third largest export markets for U.S. food and agricultural products. According to the Office of the United States Trade Representative, exports to Canada and Mexico support over 325,000 U.S. jobs.

Economists typically advocate for policies that reduce tariffs, quotas, and other trade barriers because free trade is more efficient. When there is free trade, each country can specialize in producing the goods in which it has a comparative advantage. In other words, the United States specializes in producing goods that it can produce at lower cost than Canada or Mexico and exports these goods. Meanwhile, Canada and Mexico specialize in the goods that they can produce at lower cost and export these. At the global scale, free trade is welfare enhancing—we produce more with lower-cost resources, so overall we believe we are better off.

Nevertheless, everyone does not benefit equally from the removal of trade barriers, and some may be made worse off. For example, an economics paper by Autor et al. shows that increased import competition with China during the 1990s and 2000s led to decreased earnings, increased risk of obtaining public disability benefits, higher probability of changing employers, and higher probability of changing industries among individuals who formerly worked in manufacturing industries that competed with increasing Chinese imports.

So, who do economists expect will win or lose from USMCA? A paper by Xin Zhao, Stephen Davadoss, and Jeff Luckstead forthcoming in the Journal of Agricultural and Applied Economics simulates the effects of the USMCA compared to a failure to renegotiate NAFTA, which would convert tariffs between the United States, Mexico, and Canada to those defined by Most Favored Nation (MFN) tariff levels applicable under the World Trade Organization. Their model suggests that overall, the United States is slightly worse off under the USMCA because the increased trade between our neighbors would deteriorate our terms of trade (e.g. reduce the value of the U.S. dollar relative to that of our neighbors). However, their model also predicts that U.S. exports of capital-intensive agricultural products will increase by over forty percent to both Mexico and Canada, because the United States has a comparative advantage. That is important for most agricultural producers in Montana because they produce capital-intensive goods.

There are of course caveats to simulation models. The authors must make underlying assumptions about the market structure, and these always simplify reality. Second, the counterfactual of failed NAFTA is an extreme case. NAFTA has been in place since 1994. Consequently, converting from NAFTA to MFN tariffs would be a difficult and costly transition for most producers and consumers in the United States. Nevertheless, the United States does have a comparative advantage in the production of many capital-intensive agricultural products, and producers in these industries are expected to benefit along with the industries where these producers buy inputs and the local communities where they purchase goods and services.

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About Author

Diane Charlton

Diane Charlton is an assistant professor in the Department of Agricultural Economics and Economics at Montana State University. She received her Ph.D. in agricultural economics from the University of California, Davis. She has done research on agricultural labor markets in Mexico and the United States along with researching the determinants of migration. She never tires of talking about agriculture with her sister and brother-in-law from their almond orchard in the Central Valley of California, and she is looking forward to learning more about and researching agricultural production in Montana and the northern Great Plains.

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