US backs out of TPP; is NAFTA repeal next?
Trade changes might hurt Wisconsin's economy
February 1, 2017
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Machinery, medical supplies, energy and electric materials and dairy goods. The top four industries of the badger state will not see increases in exports due to a recent executive action that could harm Wisconsin’s economy.
A proposed free trade deal between the U.S. and 11 other nations that would have increased Wisconsin dairy exports by 15 percent was cut down when President Donald Trump on Jan. 23 signed an executive order that mandated a full U.S. withdrawal from the proposed Trans Pacific Partnership (TPP), firmly removing the U.S. from all negotiations in the process.
Trump has also said he wants to renegotiate the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico.
Last week, the President also imposed a flat 20 percent import tax rate on Mexico in order to pay for the planned and approved border wall. This series of actions has led to mixed feelings about the fate of U.S. international trade, and the impact it might have on Wisconsin.
Several of Wisconsin’s largest industries depend, to some extent, on international trade and exports, including dairy, manufacturing and electrical and energy markets.
While federal directives might seem far away, the level of concern various actions should draw depends on a matter of perspective. But most sources agree that national issues can impact the local area and our lives more than we might expect.
The Dairy Market
The number of dairy products exported from Wisconsin varies each year, said Dr. Mark Stephenson, Director of Dairy Policy and Analysis at UW-Madison.
The U.S. is the largest exporter of cheese in the world, and Wisconsin produces the most cheese throughout the nation, Stephenson said, adding that Wisconsin is also a major producer of butter and other dairy products, such as milk.
Wisconsin’s market accounts for 15 percent of all U.S. dairy exports.
Despite entirely truthful stereotypes about how much Wisconsin natives love cheese, it is impossible for just 5.8 million people to eat it all themselves.
“Our state doesn’t consume as much as we produce, so we sell internationally to get outside money,” Stephenson said.
However, over the last couple years, Wisconsin’s dairy exports have decreased due to higher costs of selling cheese to Canada. The United States’ northern neighbor has resisted free trade in recent years because it threatens its own dairy market.
The United States also sells a lot of dairy to several nations in South America. Many nations in the world import all their dairy products from either the United States or the European Union, which exports the largest amount of dairy, rather than just cheese. Brazil has been a huge business partner of the U.S. dairy industry.
The TPP included many major agricultural sales competitors to the U.S., including Australia and New Zealand.
The TPP would have had a small positive effect on Wisconsin’s dairy industry. The NAFTA, however, has had a much more significant positive impact on Wisconsin’s dairy export market since its inception in 1994 under Bill Clinton’s Administration.
“Regardless of Wisconsin’s economy alone, if states didn’t get these additional export opportunities, there’d be more competition nationwide,” Stephenson said. “We sell a lot of dairy to Mexico. NAFTA has been good for the U.S. dairy industry.”
The U.S. dairy market had been a closed industry prior to the implementation of the NAFTA. Prior to 1994, the U.S. exported commodities and imported foods. In 2005 especially, agricultural exports soared due to price convergence.
While renegotiating the NAFTA could result in tremendous loss of profits in Mexico, it may allow for the U.S. to open up new opportunities in Canada, Stephenson said. But this isn’t enough to convince him of reopening talks on the specifics of the North American trade deal.
“We have a good thing going, and any renegotiations could just as well only end up being more restrictive,” Stephenson said. “I think it’s not a good idea (to renegotiate). Trade is an important part of the dairy industry, and it could be very painful for our state to move back on that.”
Moving back on international trade would lose potential for state growth, said Steve Deller, Professor of Agriculture and Applied Economics at UW-Madison.
“If those markets dry up, it would have a detrimental impact on farmers and cheese makers,” Deller said, adding that recent political developments on trade will have a huge impact on Wisconsin jobs.
Deller said his fear is that the full withdrawal from the TPP and possible renegotiations or an outright repeal of the NAFTA will start a trade war and pull the United States back into a recession.
Wisconsin dairy farming supports 43, 915 jobs, and dairy processing supports another 35,000 jobs on top of that, Deller said.
Wisconsin Cooperative Network President and CEO Tom Leibe said Wisconsin’s overall agriculture industry supports more than 400,000 jobs and has an industry value of over $88 billion.
The State of Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP) lists Wisconsin’s agriculture industry at an $88.2 billion market value.
“It’s mind-boggling how significant Wisconsin is,” Leibe said, adding that while there is much at stake, it is important for people not to “get wound up in the issues, because it’s important to look at the issue in every direction.”
“The president looks at the world through a transactional lens,” Leibe said. “But with a UW-Whitewater alum (Chief of Staff Reince Priebus) in the White House, I think we stand a much better chance with our trade industries. Reince Priebus is extremely thoughtful of what happens in Wisconsin—(Speaker of the House of Representatives) Paul Ryan as well.”
Leibe said congress would never have accepted the TPP, regardless of who took the oath of office this January. He added that the focus on withdrawing from the TPP is to negotiate new trade opportunities at arm’s length with individual nations, rather than to renegotiate a larger deal “with everyone all at once.”
The Manufacturing Industry
In 2015, machinery was Wisconsin’s largest exported good, with medical instruments in second, then electrics, energy and dairy. Our state is among the top 20 U.S. states with the highest percentage of its GDP reliant on exports to Canada and Mexico.
Wisconsin exported $7 billion to Canada in 2015, according to UW-Whitewater Economics Department Chair and Associate Professor of Economics Dr. Jeff Heinrich.
The state’s 2015 Gross Domestic Product (GDP) was recorded at $235 billion in 2007 and at $332 billion in 2015, Heinrich said, adding that state exports to Canada account for two percent of Wisconsin’s annual GDP, and exports to Canada, Mexico and China combined amount to just over four percent of the state GDP.
Wisconsin’s overall exports was placed at just over $22 billion in 2015, with 26 percent being machinery.
Several companies in the local area of Walworth and Rock counties manufacture machinery, electric supplies or medical instruments, including Schneck Process LLC in Whitewater, Prent in Janesville, SSI Technologies in Janesville, Trostel LTD. in Lake Geneva and Gallina in Janesville.
Prent hires many college-age students of both UW-Rock County and UW-Whitewater, among other schools and local residents.
Dave Corbliss, Director of Sales and Operations at Gallina USA LLC, based in Janesville, said his company sells primarily to customers in the U.S. and Canada, with some in Mexico, Central America and South America.
“We do minimal exports overseas now,” Corbliss said. “We sell about half a million dollars overseas a year.”
This decline is sales opportunities in Mexico and elsewhere is due to a general shift towards further business with Canada. But if the nation whose flag bears a bear chooses to buy product from other sources, in the event of a repeal of the NAFTA, then it would hurt Gallina, among other U.S. companies.
Corbliss said he’s thought a lot about the possibility of lost sales opportunities.
“Canada’s dollar is bad right now, so it would be more of a self-injury to Canada,” Corbliss said. “If Canada couldn’t buy as much from us, it would mean a 6 percent loss in sales, but we can absorb that.”
Corbliss said he is divided on the issue of re-negotiating the NAFTA on a personal and professional level. Personally, he would like to see changes implemented to the trade deal; professionally, he feels it would be an even playing field with or without the NAFTA, because even in free trade there are taxes to be paid.
Ceding Global Leadership
“With the United States withdrawn from the TPP, Wisconsin’s economy will see no change; either positive or negative,” said Heinrich. “The TPP would have been a small positive action, but that potential for increased exports is no longer possible.”
The TPP was a trade block to exclude China, designed to force the Chinese to adjust their economy and ultimately lead to less American dependency on Chinese markets.
“I’d not be surprised if China will step in,’ Heinrich said. “The question we have to ask is: ‘has the U.S. ceded global leadership to China?’”
The growth of China’s economy has not necessarily been at the United States’ expense, Heinrich said, but some Chinese policies present disadvantages to the U.S. since China is currently a big trade player in Asia, making it difficult for the U.S. to sell to or access markets in the Pacific Rim.
“The TPP tried to get Wisconsin in a better position with Pacific Rim countries,” Deller said. “We’re telling our partners that we’re backing away, which allows China to step in, and that can hurt us in the long term.”
The Japanese and South Korean automotive markets are closed, and the U.S. will not be able to access them without the TPP. The downside for the dairy market is steeper.
“These trade deals come from a place where bargains are made,” Heinrich said. “Nothing is agreed until everything is agreed.”
Of NAFTA, Heinrich said that if the U.S. administration begins to pick apart the deal, then other countries will make changes unilaterally as well.
“The U.S. has less at stake, so we may have a negotiating advantage,” Heinrich said. “But it’s not clear that the U.S. got a bad deal in the first place.”
It is not possible to bring lost manufacturing jobs back to the U.S., Heinrich said, because those jobs were lost due to automation and not trade. Automation is the use of machinery to replace human physical labor tasks.
“If we back out of the NAFTA, it would be exceptionally costly to businesses, and would only be good for supply chain people,” Heinrich said. “The prices of goods would increase.”
International trade cooperation in North America would also be unlikely if the U.S. attempts to adjust or repeal the 1994 trade agreement. Heinrich said the Trump administration has had little input from trade experts.
Harder isolationism is unlikely, Heinrich said.
“Trade is not just about trade anymore,” Heinrich said. “With China, we could use an increased trade relationship as leverage to gain more influence.”
In offering trade opportunities to countries around the globe, the U.S. also brought agendas of freedom as well as trade goals, Heinrich said. China and Russia traditionally have brought different values to their trading partners.
“But now, the existing world order may be unwound,” Heinrich said. “Who’s to say these nations won’t invade a neighbor?”
Prospect of Lifted Sanctions
Russian President Vladimir Putin has expressed optimism regarding the Trump administration, remaining hopeful that the U.S. leader will eventually advocate for lifting currently emplaced economic sanctions against Russia, which were enacted by the Obama administration in 2014 over the aftermath of Russia’s annexation of Crimea, a peninsula in southern Ukraine.
The idea of increased trade with Russia would effectively change very little for the U.S. economy, as Russia’s main export markets are fracking sand and natural gas, of which the U.S. already has an abundant supply and is seeking to export, rather than import.
Wisconsin is the world’s largest producer of fracking sand, which is used to extract oil from the Earth. This process entails drilling a hole in the ground above oil reserves, then filling the hole with fracking sand to release hydrocarbons, which effectively release the oil and natural gas from the ground as the sand sinks underneath it.
Overall Effects on Local Residents
It is tremendously important for students to research the industry they plan to go into, Heinrich said, because some industries may be affected far more than others.
“Look at your particular industry, see how much it exports and how much international trade affects you,” Heinrich said. “Walking back trade deals can hurt certain industries.”