Five Minutes with Steve Dittmer: The coming death of world tradeFive Minutes with Steve Dittmer: The coming death of world trade
AFF's Steve Dittmer 'views with alarm' the current Administration's approach to the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP).
June 14, 2018
Just in case you don't know him, let me introduce you to Steve Dittmer and the Agribusiness Freedom Foundation (AFF), an organization he founded. According to the AFF web site "The Agribusiness Freedom Foundation promotes free market principles throughout the agricultural food chain. AFF believes it is possible to value the traditions and heritage of the past, while embracing the future and the changes it brings. AFF is a communications and educational initiative striving to preserve the freedom of the agricultural food chain to operate and innovate in order to continue the success of American agriculture."
He could be called the king of free market mavens and his 'beat' is agriculture. He believes in serving the consumer, first, and all good things should follow. He's also wary of short-term, politically-motivated solutions, preferring well-planned and fact-based long-term answers, especially when it comes to ag issues and international trade.
With that in mind, it becomes immediately obvious that he 'views with alarm' the current Administration's approach to the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). There are two problems as he sees it: (1) It's taking too long to revise NAFTA, and (2) walking away from TPP and crippling NAFTA with unreasonable demands gives away too much of our natural ag advantages.
A few weeks ago, he wrote an editorial attacking the lack of progress with NAFTA negotiations and suggested a new team be put in place to move things forward quickly before permanent damage was done. A few days later, the Wall Street Journal, the loudest voice of Main Street, conservative business, editorialized a similar opinion. There's was bloodier, though, an 'off with their heads" rant that demanded immediate action and a new negotiating team.
There is one fact that stirs Dittmer: the Trump administration's opening day kill shot at TPP and its continued dithering with NAFTA, is dealing a serious blow to American agriculture.
Q. Steve, 'reordering' international trade agreements seems to be #1 with a bullet on Trump's hit parade. Upon taking office, he immediately walked away from the TPP. Now he's holding both our North American trading partners' feet to the fire on NAFTA. In an editorial, your organization slammed Robert Lighthizer's handling of the negotiations and then a strange bedfellow appeared - the Wall Street Journal agreed with your position a few days later. Let's start with an outline of your objections to what you called Trump's untenable demands. What are the sticking points that are threatening to kill the NAFTA conversation?
A. The most unreasonable demand is a requirement for a so-called sunset provision, i.e. the treaty would have to be re-approved every five years. Free Trade Agreements are long-term treaties between nations, often approved by various government entities. They are not short term contracts. Another non-starter with both Canada and Mexico is replacing the dispute settlement mechanism in NAFTA. Both countries plus American businesses agree that the system works. It is also similar in structure to the one used at the WTO. If it isn’t broke, don’t fix it.
Another is the law of diminishing returns applied to the complicated mechanism, (rules of origin), that already exists to set what percentage of auto parts must be manufactured in the U.S. and what percentage must be made by a NAFTA country. Under present rules, 62.5 percent of the net cost of a vehicle must be North American. Under renegotiation, the U.S. has been pushing for roughly 75% North American and over 50% U.S. manufacture. In addition, the U.S. has been insisting on a percentage of parts manufactured by workers earning about $15/hr. vs. the $6 many Mexican workers earn.
Our research has shown that while labor costs are a factor in locating auto plants in Mexico, there are other key factors. Mexico has over 40 FTAs with countries around the world, including the EU. An American auto company shipping the final assembled vehicle to Europe from Mexico saves a ten percent tariff, e.g. $5,000 on a $50,000 vehicle, which far exceeds the entire profit margin on many vehicles made in the U.S.
Q. Your editorial tied TPP and NAFTA together as two things that should be resolved quickly. Let's talk about TPP, first. What do we gain with it? What do we lose without it?
A. TPP opened up growing Pacific Rim markets in a region of the world with lots of growth potential. It also established a trade group and closer ties to countries from the region with the U.S., as a counter to ties China is trying to establish.
From the beef industry’s perspective, TPP was worth it for the tariff reduction with Japan alone. We have been paying a 38.5% tariff on our beef exported into Japan for nearly 40 years. Not only does that make our products much more expensive than they need to be for Japanese consumers, Australia concluded an FTA directly with Japan that initially gave them a 15% tariff advantage and will continue to step down and give them more and more pricing advantage over American beef.
TPP would have gradually reduced our 38.5% to 9%. We have been trying to get a reduction for years, with no success. Only the pressure of deals with ll other countries at once persuaded Japan to agree to such a deal. A bilateral agreement that would reduce our tariff that much is considered doubtful, although the administration has been working on it for some time.
Q. Your NAFTA editorial was diplomatically entitled "Time for Fresh Horses." The WSJ comments were headlined with a much more caustic "A Looming NAFTA Debacle." Both questioned Trump's wisdom and the deal-making acumen of his team. From your point-of-view, what would constitute a good deal between the three nations?
A. From our perspective, once the ill-conceived mCOOL was dispatched with, the beef industry has fared pretty well under NAFTA. The movement of beef and cattle has been free enough so that the markets can modulate changes forced by drought patterns, cattle supplies, packing capacity and consumer desires. Businesses, especially manufacturers, have been able to manage costs, skills, labor supplies and market access in the best ways for them to make money. The number of times parts and subassemblies cross back and forth over borders is surprising. That is why both agricultural interests and business interests told President Trump to, “First, do no harm.”
Most of them saw no real problems with NAFTA, except for some new areas like internet trade, some financial services and private investment in Mexico in energy and telecommunications. The biggest risk is that President Trump could pull us out of NAFTA - something he has the power to do - and cause irreparable harm to agriculture and business and the general economy. In addition, if folks think we have pressure on our southern border now, just destroy American and Mexican businesses in Mexico and a major part of the Mexican economy by wrecking NAFTA, and then see how many Mexican families attempt to flee to America.
Q. You've asked for 'Fresh Horses' if the negotiations aren't back on track ASAP. It's an easy thing to ask but could you suggest who those horses might be? Or who they should represent?
A. In the interests of time, there are two deputy USTRs confirmed, in place and well qualified, Jeff Gerrish and C.J. Mahoney. In addition, the chief agriculture negotiator, Gregg Doud, has been confirmed and has an excellent agriculture and economic background. We don’t have time to find a whole new USTR and get him or her confirmed, with a Democratic Senate minority expert in not confirming nominees. After all, with all the great things President Trump has done for the country and for agriculture, we did not ask or want him opening up NAFTA.
However, many new NAFTA chapters have already been buttoned up. It wouldn’t be so difficult to finish the NAFTA negotiations if some realistic expectations, some common sense infiltrated the higher echelons of the U.S. negotiating team and President Trump. Shove the unneeded baggage like the sunset proposal and overhauling the dispute resolution process overboard and agree to reasonable percentages for auto manufacturing. The basic structure could be agreed to in a week.
Trying to dictate to the Mexican government how to get their businesses and economy to get workers’ pay from $6.00 to $15.00 is not really our business, any more than dictating environmental standards or union rules is, as our political left tries to do in trade treaties. President Trump’s job - as he has already gotten a great start on- is to make business conditions in our country the best they can be, to make them want to operate and manufacture here. The unrealistic demands stem from trying to micromanage things by making doing business in Mexico more difficult. That makes no more sense in a free country than penalizing companies that leave by putting tariffs on anything they ship here, like the President has threatened.
Q. You and the Wall Street Journal concurred on Lighthizer's "Let's Make a Deal" negotiating tactic is a failure. WSJ wrote Lighthizer's demands were "preposterous," and suggested "he's set up his boss for an embarrassing political and economic failure" and "losses in the midterm elections." Knowing Trump's penchant for controlling everything, do you think Lighthizer is striking out on his own or is he following the President's marching orders?
A. Donald Trump made plain his unhappiness with America’s trade deals in his campaign. It is the only general area we disagreed with him when it came to economics and politics. He has had both protectionists and free market proponents involved in his campaign and his administration. Commerce Secretary Wilbur Ross leans protectionist and Peter Navarro is the most protectionist economist anyone has found. Steve Moore, from outside the administration and Larry Kudlow, from both outside and now inside the administration, are true blue free market economists. Treasury Secretary Steven Mnuchin leans free market.
So the President has plenty of opinions on both sides to listen to. I know of no one who can explain how a self-professed believer in free trade, an economic growth proponent and a Wharton School grad (Editor's note: Trump graduated from Wharton's undergraduate school of finance and commerce) cannot understand the irrelevancy of trade deficits. A trade deficit is nothing like a budget deficit. We are the largest economy in the world. We are a nation of comparatively well off citizens with more money per capita to spend than citizens in most countries.
We tend, relatively, to be spenders rather than savers. God did not allocate natural resources and climates evenly throughout the planet. As a rich country, we do tend to buy more things from some countries than they buy from us. So? It’s our money. Why should our government tell us how to spend it? And if other countries take the excess money we spend with them and buy T-bills or stock in U.S. companies, so what?
More to consumer wants, Americans like their coffee, their chocolate and their bananas. We can’t raise coffee bushes or bananas in our climate, nor the cacao beans that become chocolate. But the countries that can supply those things are relatively poor countries. We can afford to buy tons of coffee and cacao beans and shiploads of bananas from those countries. But there is no way on earth they can keep up with us. We are going to spend more money on coffee alone than those countries could afford to buy things from us. There will be a trade deficit. So?
If we were to avoid a trade deficit with those countries, we would have to limit how much American citizens could buy by imposing a quota. Can you imagine what life in America would be like if by April 1 the government announced the quota for coffee beans had been filled and there would be nothing at Starbucks until next year? Or no bananas after May 1? Or chocolate after March 15? It wouldn’t be safe to walk the streets. You think road rage is bad now? Imagine decaffeinated maniacs roaming the roads going no-chocolate cold turkey.
One has to think, given that President Trump keeps track of many things, that if he was displeased with Lighthizer’s track, he would give directions to change or resign. So far, that hasn’t appeared to be the case with NAFTA or China. (The) Wall Street Journal even complained editorially today that no real strategy is obvious. Part of that could come from totally opposite views of trade in his camp, plus the President’s penchant for applying pressure, threatening lots and seeing what turns up.
Q. Let’s describe the shape of a new NAFTA deal. Mexico has already signed a deal with Argentina to replace lost ag trade with the U.S. A few north-of-the-border pundits say uncertainty about the future has caused Canada to rethink the wisdom of its long-time, tightly-bonded trading relationship with us. They’ve been very aggressive lately at courting new trading partners, too. Will Mexico and Canada come back home if NAFTA is renegotiated soon or have those horses already left the barn?
A. There is no question that uncertainty and ill-advised proposals from the U.S. have forced our NAFTA partners to go looking for new partners, new sources and new trade agreements. The EU is eager to exploit the opportunity. But we have some ways to recoup our losses. For one, folks can palaver all they want, but they can’t change geography. It is always going to be closer and cheaper to ships goods from next door than from across the sea or even from South America.
We also produce some of the highest quality goods in the world. Our resources, business efficiencies, competition and - usually - relatively stable political environment make us a reliable source of raw materials and manufactured parts and subassemblies. The basic infrastructure of the supply and manufacturing chains businesses have built up among the three countries are still there, as long as the President doesn’t pull out and destroy everything.
But the longer the uncertainty goes on, the more likely there is permanent damage. We need to get our negotiating team to straighten up and fly right and soon, whoever makes the final decision.
Editor's note: This interview was conducted just days before the World Meat Congress in Dallas. The theme was "Trusting in Trade" and spokesmen from our trading partners in the E.U., Canada and Mexico were on hand to discuss the future of worldwide trade in meat and other agricultural products. On Thursday morning - the opening day - Trump announced sweeping tariffs on aluminum and steel, considering it to be a national security issue. He also threatened China with significant import duties.
He might tax the German automobile industry, too, labeling it a possible threat to national security. Diplomatic sources said Trump told French president Emmanuel Macron he would maintain his trade policy “until no Mercedes models rolled on Fifth Avenue in New York.”
The response from most of the WMC speakers? Barely controlled anger. The quick response from their governments? Heads of state called for serious retaliatory tariffs on a long list of agricultural products.
The European Union plans of 25% on roughly 200 American products, including orange juice, denim, bourbon, motorcycles, peanut butter, motor boats and cigarettes.
Mexico plans to retaliate with comparable penalties on U.S. products, including lamps, pork, fruit, cheese and flat steel.
Canada's minister of foreign affairs, Chrystia Freeland, said her country would place tariffs on imported steel and aluminum equivalent to the value of steel and aluminum exports to the U.S.
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