What the USMCA Means for the U.S. Dairy Sector

The North American Free Trade Agreement (NAFTA) between the U.S., Mexico and Canada has been replaced by the United States-Mexico-Canada Agreement (USMCA), which is basically an upgraded version of NAFTA with major changes involving the country of origin rules, labor provisions, intellectual property protection, digital trade provisions, dairy sector access and express shipments. A key sector to be impacted by the implementation of USMCA apart from automobiles will be the dairy sector. While the agreement has ensured that Mexico will continue to be the largest import market for U.S. dairy products, it has also opened up the Canadian dairy market for U.S. exports.

Canada

Canada is the second largest export market for U.S. dairy products, valued at $731 million in 2018. The export value is limited owing to import restrictions (tariffs up to 315.5 percent, Class 6 & 7 milk pricing) in Canada to protect domestic dairy producers. As per the Class 7 pricing, farmers can sell skimmed milk to dairies at competitive prices and thus compete with U.S. supplies. With the help of this policy, Canadian exports of skimmed milk powder (SMP) expanded globally while the U.S. producers lost exports of high protein ultra-filtered (UF) milk to Canadian cheese and yogurt processors. The U.S. UF milk exports to Canada declined from $102 million in 2016 to $49 million in 2017 due to implementation of the Class 7 milk pricing regime. Now, with the new USMCA trade agreements, Canada has agreed to:

• Introduce tariff rate quotas for U.S. dairy, poultry and egg products (access to 3.6 percent of the Canadian dairy market)

• Eliminate tariffs for whey powder and margarine

• Eliminate current milk classes 6 and 7, and

• Monitor exports of SMP, milk protein concentrates and infant formulas

The agreement has given American dairy producers access to about 3.6 percent (up from 1 percent) of Canada’s dairy market. This will increase U.S. exports to Canada by an estimated $70 million. As per the USDA, implementation of USMCA will grant the U.S. access to:

• 50,000 MT of additional fluid milk

• 12,500 MT of additional cheese

• 10,500 MT of additional cream

• 7,500 MT of additional skim milk powder

• 4,500 MT of additional butter and cream powder

• 1,380 MT of additional concentrated and condensed milk

• 4,135 MT of additional yogurt and buttermilk

• 520 MT of additional powdered buttermilk

• 2,760 MT of additional products of natural milk constituents

• 690 MT of additional ice cream and ice cream mixes

• 690 MT of additional dairy, and

• 4,134 MT of additional whey

Although this is a modest gain for the U.S. dairy trade, in the long run, with the continuous increase in tariff quotas for the agreement period, Canada can become a leading dairy market such as Mexico.

In addition to the U.S. trade benefits, dairy product companies in Canada will also profit, as implementation of this agreement will grant them access to U.S. milk producers who charge less than Canadian producers. Thus, the new agreement can create a procurement opportunity for dairy industry players as well as a trade opportunity for U.S. dairy producers.

Mexico

The USMCA agreement preserved Mexico’s zero tariffs policy for U.S. dairy product exports, which has ensured that Mexico will remain the largest export market for U.S. dairy products. Mexico accounts for one-quarter (~$1.3 billion in 2018) of the total U.S. dairy exports and with the new agreement, the duty-free market access of U.S. dairy products to Mexico will continue. In addition, Mexico has agreed to grant access to prior users of certain U.S. cheeses such as parmesan, gouda and mozzarella, which is a positive sign for the U.S. cheese producers. Unfortunately, the fate of the U.S. cheesemakers is unclear due to the ongoing tariff tiffs between the two countries.

Conclusion

The NAFTA agreement created many opportunities for participating nations, and the USMCA’s similarly balanced trade clauses are a positive sign for the dairy industry. However, with elections nearing in both the U.S. (a presidential contest in 2020) and Canada (federal election in October 2019), the trade agreement framework and implementation will be a concern. Moreover, tariff rows will also be a major factor in deciding the ratification of the agreement. The implementation of the trade agreement and participation of countries is expected to be clearer by end-August 2019, after the Trade Promotion Authority process.