CUSO Talk
by Pactola
CAP Senior Partner
10/10/2018

One of the areas that has caused great concern for many areas of the economy is trade. President Trump came into office promising to renegotiate existing trade agreements which he believed were often slanted against American companies and workers. He began to use his authority to start trade negotiations with our trade partners and use the power of tariffs on imported goods as a weapon to enforce trade practices that were fairer to the U.S.

These actions caused a lot of fear among those who believed that there would be negative reactions for U.S. exporters, farmers, and for the economy, as a whole. Some areas such as the steel industry cheered the actions as it began to provide protections with domestic steel, producing more jobs. 

Several trade deals have been stuck since this summer. In July, the European Union (EU) struck a deal with the U.S. to avoid a trade war by decreasing tariffs. The EU will also import more American soybeans and natural gas. Both sides were also working toward no tariffs, no barriers, and no subsidies on non-auto industrial goods. 

In September, Trump met with South Korean President Moon and finalized a trade agreement with that country. The deal expands opportunities to export American products in South Korea, including automobiles, medicine, and agricultural products. 

On October 1, the Trump administration announced that the old North American Free Trade Agreement (NAFTA) has now been replaced with a new U.S.-Mexico-Canada (USMCA) trade agreement. The purpose of this was to benefit American workers and businesses in areas where NAFTA has failed. 

American auto manufacturers and workers will benefit from new rules of origin requiring 75% of auto content to be produced in North America. Workers will also benefit from the rules that incentivize high-wage manufacturing labor in the auto sector, thus supporting better jobs for American workers. The USMCA labor section is the strongest labor provisions of any trade agreement. This is a core part of the agreement and makes labor provisions enforceable. 

NAFTA rules helped incentivize offshoring and took many manufacturing jobs out of the U.S.  USMCA also includes a strong protection and enforcement of intellectual property rights. Plus, it has a strong measure of digital trade of any agreement. 

Farmers, ranchers, and agribusiness in America will win as the agreement includes provisions that will benefit agri-trade more fairly. Canada agreed to eliminate its “Class 7” program that allows low-priced dairy ingredients to undersell American dairy products. Canada also agreed to provide new access for U.S. dairy products, eggs, and poultry. 

So, what is the impact on the farm economy? Soybeans have shot up nearly 60 cents since their low in mid-September. Corn prices have rallied by 7%. Canola has shot up 3%. Cattle is up by 7.5% since summer. Milk so far has been flat. Hogs have shot up 36% but most of this is a result of the recent Hurricane Florence. 

What will be the impact of these agreements? First, I believe that these will be ratified by the Senate when Trump takes these to Capitol Hill. Senator Chuck Schumer has already mentioned his interest in a better trade agreement than NAFTA. 

How will these agreements impact commodity prices? There will be some increase in commodity prices as more fair markets will be open for agriculture. However, I would not expect a huge increase in prices as better trade agreements do not change the current over-supply situation the world finds itself in. 

For U.S. manufacturers this can be a mixed blessing. Some raw material prices may increase.  On the other hand, this should increase employment which has currently been at levels not seen since the 1960s. Fair and favorable trade deals for our country will be a win for all of us. 

 

Pactola is a CUAD CAP Senior Partner and a subsidiary of Midwest Business Solutions. We are a Credit Union Service Organization that is dedicated to commercial and agricultural lending and serving multiple credit unions and banks throughout the United States with our services. We help our partners increase their earning assets and profitability. By doing so, we help them become a relevant financial force in their community increasing social good through helping businesses and farmers. Visit our website to learn more. You can contact Phil Love, Pactola CEO at phil.love@pactola.com or 605.223.5154.

 

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