Free and fair trade matters for produce and floral stakeholders because consumers worldwide depend on international suppliers for year-round product offerings. With a membership base of 2,500
companies in 40 countries spanning the fresh produce and floral supply chain, PMA takes a global perspective when it comes to trade-related issues. Understandably, PMA’s members are concerned about the potential impact of recent proposals from the White House and the U.S. Congress on global trade—particularly trade in products with the United States.
We appreciate the need for PMA members to have as much time to prepare for potential changes in the trade landscape; however, as you likely appreciate, this is an evolving situation. Despite statements by the president and congressional leaders, there are limitations and timelines established under existing treaties and implementing statutes, as well as binding rules under the World Trade Organization which, if broken, could subject the United States to penalties.
There have been three areas where the president or congressional representatives have either taken action or stated the intent to do so. Those three areas, which we explore in detail in this article, include:
- Renegotiation of the North American Free Trade Agreement (NAFTA),
- Withdrawal from the Trans-Pacific Partnership (TPP), and
- A proposal to establish a U.S. border adjustment tax.
A closer look at the U.S. trade shows that:
- The U.S. is the largest importer of fresh produce globally, importing 17.2 million tons in 2014 totaling $18 billion.
- Fresh fruit imports jumped from 26 percent of fresh fruit in the U.S. in 1980 to 49 percent in 2010.
- In 1980, the U.S. imported 8 percent of fresh vegetables available; in 2010, 24 percent of fresh vegetables were imported.
- 70 to 80 percent of U.S. cut flowers come from outside of the country.
The U.S. is also a significant fresh produce exporter. More than 6.7 million tons exported in 2014 equaling $9.7 billion, with top export destinations including Mexico, Canada and Japan.
North American Free Trade Agreement
What’s the issue?
NAFTA is a trilateral trade agreement among the United States, Canada and Mexico. Negotiations were concluded in 1992 and the agreement entered into force in 1994. U.S. President Donald Trump has stated that if the governments of Canada and Mexico are unwilling to make unspecified changes to NAFTA, he will begin the process of withdrawing the United States from the agreement.
What do we know?
Food and agricultural trade has tripled under NAFTA, growing from $9 billion to the current $36 billion in trade between the three countries. Mexico ranks second among U.S. export markets, after Canada, and is the third-leading supplier of U.S. imports. More than half of all Canadian agricultural exports go to the U.S. Total trade in the region (exports plus imports) amounted to $531.1 billion in 2015. Included in this amount was $5.4 billion in fruit imports to the United States from Mexico and $5.5 billion in vegetable imports to the United States from Mexico, making Mexico the United States’ top foreign supplier for both categories.
Changes to NAFTA are possible, if agreed to by the U.S., Canada and Mexico. Both Mexico and Canada have opened comment periods for public stakeholder input on NAFTA renegotiations. Public comments will be taken into consideration for negotiations.
The U.S. president can make certain changes to NAFTA without congressional approval—though any renegotiation would require 90 days’ notice to Congress. The Trade Act of 1974, which also applies to NAFTA, the World Trade Organization and other U.S. trade agreements, grant the U.S. president authority to unilaterally withdraw from trade agreements. In most cases, including NAFTA, this requires six months’ notice to the other parties. The Trade Act of 1974 also grants the U.S. president authority to unilaterally impose punitive tariffs. However, these increases are capped at 20-50 percent higher than the rates in effect in January 1974, thus resulting in only modest increases in many cases.
What don’t we know?
While it is unclear what specific changes the U.S. president is proposing with regard to NAFTA, a modernization of NAFTA could result in changes reminiscent of recent TPP provisions that address intellectual property rights, e-commerce, investor disputes, labor and environmental standards, among other things. Other topics discussed could touch upon border infrastructure, liberalization of telecommunications, and energy collaboration.
Canada and Mexico may not agree to renegotiated terms the U.S. president considers a “victory.” Trade is not a zero-sum game and new terms must include wins for all three nations.
While the president has some unilateral authority to rescind or repeal portions or all of NAFTA, congressional approval may be necessary for changes to the underlying implementing legislation in the scenario of a renegotiated agreement.
Should the United States impose new tariffs on goods from either country, Canada or Mexico could take retaliatory actions.
The U.S. will likely not take major steps to renegotiate NAFTA until all the necessary cabinet level appointees are confirmed by the U.S. Senate. Those appointees include Wilbur Ross as Secretary of Commerce, Robert Lighthizer as U.S. Trade Representative. Secretary of State Rex Tillerson has already been confirmed by the Senate.
What’s the issue?
TPP is a multi-lateral trade agreement among 12 nations: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam. TPP member countries account for almost a quarter of global fresh produce trade, and experts predict that middle class buyers in the Asia-Pacific region will be the world’s largest buyers of fresh fruit and vegetables by 2030. Armed with these statistics and an analysis on the potential impact of TPP on fresh produce, PMA advocated for U.S. implementation of TPP by visiting targeted congressional offices and officials in the Executive Branch to offer support for the trade deal.
What do we know?
Formal negotiations on TPP concluded in early 2016, but President Obama never presented the final trade deal to Congress for ratification due to lack of apparent congressional support for the trade deal. Among the first executive orders President Trump signed after taking office was a directive to the U.S. Trade Representative to give formal notice of the United States’ withdrawal from TPP. Only one country, Japan, has ratified the agreement. The agreement requires at least six countries, comprising 85 percent of the GDP of the countries that are parties to the agreement, to ratify it before it takes effect. Without the United States, which comprises more than 50 percent of total GDP of the TPP countries, the agreement as negotiated cannot proceed.
The new U.S. administration under President Trump has expressed a preference for bilateral, one-to-one negotiations over multilateral trade agreements like TPP that involve several countries. President Trump has stated his intent to engage in bilateral negotiations to ensure improved opportunities for U.S. exports.
What don’t we know?
President Trump has not identified which countries with whom he would seek to begin negotiations first. On average, bilateral agreements require two to three years to conclude. Combined with the possibility of having negotiations underway with multiple countries at the same time, it is difficult to predict when any new agreements would take effect.
With regard to Pacific region trade discussions, the member countries of the Pacific Alliance free trade agreement have scheduled a meeting mid-March in Chile and have invited TPP member countries plus China and South Korea to participate in post-U.S. TPP withdrawal discussions. Meanwhile, China continues to lead trade negotiations with many TPP players under the auspices of the Regional Comprehensive Economic Partnership (RCEP).
Border Adjustment Tax
What’s the issue?
Tax reform is one of the highest priorities for the new Congress and the new U.S. administration. One piece of the Republican tax reform proposal is already facing heavy scrutiny, and could significantly impact many PMA members since almost $30 billion of fruits and vegetables were imported and $14.4 billion were exported in 2016. Additionally, cut flower imports to the United States were valued at more than $714 million in 2016.
The border adjustment proposal, similar to value-added taxes used in many European countries, would change the tax structure for businesses paying corporate and non-corporate taxes. The border adjustment would apply to all domestic consumption of goods and services, excluding goods and services produced domestically and consumed elsewhere. The border adjustment is referred to as a destination-based principle—the tax is based on where the good ends up (destination), rather than where it was produced (origin).
What do we know?
The Tax Foundation offers an example of how the border adjustment tax would work. In this example, there are three hypothetical businesses. Company A does all of its business in the United States. Company B imports all of its goods and sells them in the United States. Company C purchases all of its goods in the United States and exports them to foreign countries. For simplicity, all three companies have $100 in revenue, $60 in costs of goods sold, and $40 in profit. The businesses pay a tax rate of 20 percent (a tax decrease is included in the overall Republican tax proposal), which is $8, leading to an after-tax income of $32.
Under the current tax model, all else being equal, the three companies all pay the same tax. Under the Republican proposal, a border adjustment would eliminate the deduction for the costs of imported goods and exempt sales of exported goods.
Company A would continue paying the same amount in taxes, as they do not import or export any products.
Company B, which imports all inputs and sells domestically, would be unable to deduct its costs of goods sold. Therefore, the company would be taxed on its entire revenue of $100, paying $20, an increase of $12 in taxes paid.
Company C, which exports all of its goods, would no longer be taxed on any of its revenues. Therefore, its taxable income would be negative $60, leading to a tax bill of negative $12, receiving a tax refund.
Under the border adjustment proposal, economists predict that the U.S. dollar will appreciate, which, according to proponents, will stabilize the effects of the tax changes to Companies B and C. For Company B, the higher dollar will lead to less expensive input costs. For Company C, the higher dollar will lead to less exports.
What don’t we know?
It is important to remember that specific legislation for the broad tax reform proposal has not yet been released, and a timeline for congressional consideration is unclear. PMA members are encouraged to stay informed, but should not expect immediate changes.
Rep. Kevin Brady (R-TX), chairman of the House Ways and Means Committee, is continuing to finalize the Republican’s tax proposal. Conversations are moving forward, and as soon as more details become clear, the PMA D.C. team will provide updates.