Rabobank eyes potential effects of NAFTA breakup

April 26, 2018 04:21 PM
 
VANCOUVER, British Columbia — The breakup of the North American Free Trade Agreement could mean more U.S. imports of fresh produce from Mexico and Canada.

VANCOUVER, British Columbia — The breakup of the North American Free Trade Agreement could mean more U.S. imports of fresh produce from Mexico and Canada.

That’s one of the conclusions of a pending report by Rabobank, according to Roland Fumasi, vice president and analysts with Rabobank N.A., Fresno, Calif. The analysis on the implications of a failure in NAFTA negotiations is expected to be released to Rabobank clients in late April, he said.

“We actually expect that a NAFTA breakup encourages more trade flow to the U.S,” he said at an April 25 business session during the Canadian Produce Marketing Association convention and expo, giving session attendees a sneak peek of the report in his presentation.

In his talk, Fumasi said that if NAFTA 2.0 talks fail and the U.S. pulls out of the agreement, the currencies of Mexico and Canada would undergo significant depreciation. He said Mexico could see as much as 15% to 20% depreciation. Canada may see a currency depreciation of about 10%, he said.

“We all know that in that scenario, product flowing from Mexico to the U.S., and from Canada to the U.S., is going to be more price competitive and cheaper,” he said.

If there is no NAFTA, Rabobank assumes that the three countries would revert to World Trade Organization rules and trade under the most favored nation tariff levels, he said.

The U.S. has low tariffs for fresh produce under the most favored nation clause, with most tariffs around 4%, he said.

“You are talking a 4% tariff against a backdrop of 10% Canadian dollar depreciation and a 20% Mexican peso depreciation,” Fumasi said. “Those currencies’ depreciation would more than compensate for tariffs that the U.S. would levy.”

On the other hand, he said U.S. exports would be hamstrung by a high dollar, making exports to northern and southern neighbors more expensive.

What’s more, Canada’s tariffs would revert back to levels that are higher than the U.S, and Mexico’s tariffs levels would be much higher, at double-digit percent for many commodities. Before NAFTA, for example, Mexico applied a 75% tariff on U.S. potatoes.

Fumasi said it impossible to reliably predict whether NAFTA 2.0 will succeed or fail.

“If you said it was 50/50 right now, I wouldn’t argue with you,” he said.

In other remarks, he highlighted the growing importance of Asia and its rapidly growing ranks of middle class consumers as a key export market for Canadian and U.S. fruits and vegetables. He also said the trend toward organic produce shows long-term strength and that online shopping will continue to grow in relevance for fresh produce suppliers.

 

Labor challenges

Among industry challenges, he said labor supply for the fresh produce sector will be stressed in the years ahead.

The annual growth rate in the population of Mexican youth from 15- to 35- years old has been declining for years, from about 700,000 in that age group in 1990 to growing by just 200,000 in 2018. By 2030, statistics cited by Fumasi show that the population of 15- to 35- year olds in Mexico will start declining by 100,000 annually.

As birth rates slide and industrial production expands in Mexico, Fumasi said young adults there will have more career options.

“As a country, Mexico will continue to look more like the U.S. and Canada as far as economic development,” he said.

That has implications for both Mexican agriculture and U.S. fresh produce growers, who have long relied on migrant labor.

“When I talk to growers in Mexico, the biggest supply side challenge is labor,” he said. “If labor is a challenge in Mexico, imagine what that means further north.”

The solution to the labor issue lies with technology, he said.

“I know all hands are on deck working on solving that problem and do a better job and being able to mechanically harvest more fruits and vegetables for fresh consumption,” he said. “It is not just about changing immigration policies, it is beyond that.”

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