The U.S. meat industry voiced concerns about supply chain upheaval with Mexico if renegotiation talks on the North American Free Trade Agreement break down.
In the aggregate, agricultural supply chains are more sensitive than others to the impacts of trade policy changes.
Agriculture industry representatives have consistently voiced that concern to Trump administration officials over the past year in the context of the North America Free Trade Agreement (NAFTA) renegotiation, asserting that talks should seek to preserve the composition of perishable goods supply chains, even as the administration has placed a renewed emphasis on the sometimes clashing priority of domestic manufacturing growth.
USA Poultry and Egg Export Council (USAPEEC) President Jim Sumner and U.S. Meat Export Federation (USMEF) Vice President for Communications Joe Schuele in recent interviews pointed to meat exports to Mexico as a potentially major flashpoint in terms of supply chains that could be most upset by a U.S. NAFTA withdrawal, as hundreds of millions of pounds of white and red meat flow there every year.
Value chains for U.S. meat exports have adapted over the lifespan of the 24-year-old trade agreement to respond to unique needs related to product chilling and shipping velocity, among other things.
For example, Mexico-bound supply chains of U.S. poultry, namely chicken leg quarters and mechanically separated chicken (which is ultimately sold as ground chicken), have been specialized over the course of NAFTA to the point where some of those products are shipped fresh. Streamlined processes and national proximity enable some Mexican consumption without the extra steps of freezing and thawing, Sumner said.
Additionally, much of the mechanically separated chicken (MSC) enters Mexico in combo bins—huge, polyethylene-lined containers that can each carry hundreds of pounds of poultry and allow for storage without dividing product into small bags, thereby reducing shipping costs, he said.
The shipping methods themselves likely wouldn’t change if President Trump withdraws the United States from NAFTA, which he has repeatedly threatened at different times since the start of his 2016 election campaign.
However, the U.S. agricultural sector is acutely aware that a NAFTA termination, and the higher tariffs expected to come with it, would erode the comprehensive supply chain optimization that has worked cohesively with NAFTA’s market access benefits and regionally tailored regulations to allow U.S. meat to be shipped across North America more efficiently and less expensively.
According to USAPEEC data, Mexico was, by far, the leading export destination by volume for U.S. broiler chickens January-November 2017, the most complete recent period for which statistics were available as of the first week in February.
The United States exported 547,703 metric tons of broiler chicken to Mexico during that period, surpassing the next three largest markets—Cuba, Angola, and Canada—combined, USAPEEC said. Those shipments to Mexico accounted for nearly one-fifth of total U.S. broiler chicken exports during that period.
The United States also exported more turkey to Mexico—258,207 metric tons—during the first 11 months of 2017, than all other markets combined, according to the statistics.
Moreover, for the full year of 2017, Mexico was the leading importer of U.S. pork by volume, as it has been for several consecutive years, accepting 801,887metric tons throughout last year, according to USMEF data.
Mexico was the No. 2 destination by volume for U.S. beef, clearing 237,972 metric tons last year, according to the stats. The country remains an “especially important” market for U.S. beef shoulder clods, rounds, and variety meat, USMEF said in a February press release.
Withdrawal Complications. Sumner and Schuele both indicated they’re less concerned that U.S. meat exports to Mexico will abruptly plummet in the event of a NAFTA withdrawal or other disruption, than they are of the possibility Mexican importers would start shopping for other potential sourcing options.
That would also complicate U.S. meat export planning, as producers and other domestic supply chain actors would have to enter into new overseas shipping arrangements to maintain the quantity and frequency of trade flows.
Another variable facing the U.S. meat supply chain is indirect limitations on U.S. poultry, egg, and red meat (including beef, pork, and lamb) exports in the NAFTA region because of a recently weaker Mexican peso.
After any U.S. NAFTA withdrawal, it could become more attractive for Mexican traders to build connections with exporters from the European Union and the roughly 55 other countries (based on World Trade Organization data) outside the NAFTA region with which Mexico has preferential trade relations separate from the overarching global WTO framework.
Also noteworthy is that if NAFTA dissolves and the Trans-Pacific Partnership is implemented by all 11 current members as planned, Mexico would be more closely linked with several other trading partners, which could then start competing more formidably with the United States for Mexican market share.
“We’re not feeling like Mexico is ever going to close to U.S. pork, but if we were facing tariffs or some other obstacles that made it not possible to export pork to Mexico at the rate that we have been, then we’d have to find alternative destinations for a certain percentage of that product,” Schuele said.
Not only would North American stakeholders potentially see meat price hikes in a post-NAFTA scenario, but they’d see other costs “beyond what most people would assume,” he said.
Finding willing buyers outside Mexico in the event of significant losses in the No. 1 foreign outlet for U.S. pork means a “completely different scenario for moving that product into an overseas market,” Schuele said.
Similar to chicken leg quarters and MSC, many Mexico-bound hams “basically come right off the processing line” into refrigerated containers that can be trucked directly to Mexican processors, increasing productivity, he said.
“It allows everybody in the supply chain to get a good return for that product, because you’ve found a very efficient way for it to move across the border, directly to the front of processing,” Schuele said. “Not having to freeze it is actually a help for product quality.”
Any other pork export scenario would involve the added financial and logistical costs associated with ocean freight, freezing the product, more labor-intensive labeling requirements, and farther distances, he said.
Retaliation. Termination or other disruptions to NAFTA could force U.S. meat producers and shippers to look to export to destinations outside Mexico, though existing shipping velocity would be somewhat buoyed by established value chain proficiencies and the contiguousness of the two countries.
“We hope that’s not the case, but we might not have any choice, if . . . say, instead of having tariff-free access to Mexico, you’re looking at a 20 percent tariff,” Schuele said.
On the white meat side, Mexico is already increasing imports of chicken and, in some cases, turkey, from South America—namely Brazil, Chile, and Argentina—after recently granting those products duty-free access, the same benefit it grants to the United States, Sumner said.
“This has already had some impact on reducing our exports to Mexico,” he said. “If there is a withdrawal or an abandonment of NAFTA, it could be disastrous for the U.S. poultry industry.”
If Mexico gets “upset enough,” officials might want to “send a strong message to Washington” through restrictive duties, Sumner said.
Members of the Mexican government have taken issue with several sentiments expressed by the Trump administration in the NAFTA renegotiation context.
Mexican officials have scoffed at implications that the administration could seek to incorporate southern border wall discussions into NAFTA talks, and have rejected notions that they would continue negotiating if Trump were to activate the six-month withdrawal process under the agreement.
But any retaliatory urges by Mexican officials would likely bump up against a continuing Mexican government focus on controlling inflation, and any inclination to raise food tariffs would probably have to respect such considerations.
“We don’t know which road that Mexico would take,” Sumner said. But NAFTA termination “could be very problematic for our exporters.”
It would be unreasonable to try to project how much Mexico could cut U.S. poultry and egg imports in any act of retaliation, Sumner indicated. “It could be 10, 20, 50, 80 [percent cuts]. We don’t know—only the Mexicans,” he said.
But the geographic proximity and the vast, deeply integrated supply chains between the two countries would likely provide some insulation from any NAFTA termination consequences for southward U.S. poultry exports, Sumner said.
“No other country would really be able to take our place in the Mexican market without increasing costs considerably to Mexican consumers, especially those [living in the] areas in closest proximity to the U.S. border,” he said.
In addition to a NAFTA termination or U.S. withdrawal scenario, a NAFTA proposal to make it easier for certain U.S. agricultural producers to petition for antidumping and countervailing duties during winter months has given pause to many in the U.S. agriculture industry, including Sumner and Schuele.
Many concerns center round a perception that easing standards for certain U.S. growers to bring duty cases during colder months could spark retaliation from Mexico. A higher proportion of certain U.S. crops are derived from south of the border in the winter, spurring increased competition with crops raised in states like Florida.
The proposal was contentious enough that Sen. Jeff Flake, R-Ariz., placed a hold on Gregg Doud, Trump’s nominee for chief agricultural negotiator in the Office of the U.S. Trade Representative (USTR), from November to February, before dropping it upon receiving assurances from USTR and Senate Finance Committee Chairman Orrin Hatch, R-Utah, to increase their engagement with him regarding the proposal.
USTR didn’t comment on the progress of NAFTA agriculture talks for this story.
Cross-Border Spats. U.S. red meat exporters have experience with backlash from their NAFTA neighbor, as Mexico retaliated against U.S. hams during the NAFTA trucking dispute, Schuele said, which officially lasted from 1998 to 2015, at which point the United States finally opened all of its territory for Mexican truck access in line with its NAFTA commitments.
“We did feel there was a bit of a slowdown when those retaliatory duties were in place,” Schuele said. “It wasn’t a major slowdown, but it was noticeable. So that’s something we hope not to experience again.”
USMEF hasn’t yet taken an official position on the current seasonal/perishable antidumping and countervailing duty NAFTA proposal, but whenever such a controversial policy proposal arises, “it certainly raises concerns about retaliation,” Schuele said.
Mexico filed a complaint through NAFTA’s dispute settlement process in 1998, alleging that the United States did not implement its trucking obligations within three years of the pact’s Dec. 17, 1992 signature, as ordered by the agreement.
A NAFTA dispute settlement panel in 2001 authorized Mexico to retaliate in the amount of lost trade.
Mexico waited until 2009 to impose a first scheduled batch of duties on almost 90 U.S. agricultural and manufactured goods. Mexico suspended those duties after the U.S. Federal Motor Carrier Safety Administration started a pilot program in 2011 to pave the way for Mexican trucks to gain access to the entire U.S. territory.
The trucks were officially granted full access in January 2015, at the conclusion of the pilot.
Trucking Crisis. U.S. agriculture supply chain professionals should be aware of a USTR NAFTA trucking proposal, backed by the Teamsters union that could impact truck availability and affect U.S. meat shipments, Agriculture Transportation Coalition (AgTC) Executive Director Peter Friedmann said.
The proposal seeks to limit operation of Mexican trucks, involving a certain buffer zone along the U.S. southern border that Mexican truckers would have to pay heed to.
That pitch would exacerbate a U.S. trucking “crisis” due to a shortage of drivers, trucks, and chassis, as well as spiking prices, which is already posing the biggest challenge to U.S. agriculture logistics, Friedmann said. Therefore, the U.S. agriculture industry isn’t “inclined” to endorse such a provision, he said.
The U.S. economy is “reviving fast,” with an increased need for trucking, as more than twice as many trucks are entering seaport gates, with more empty containers, as the demand for quicker transport has increased in recent years, Friedmann said.
With more American shippers shifting from inland rail to truck transport domestically, there are far fewer 20-foot and 40-foot ocean containers available at mid-country agricultural hotspots for port backhauls of agricultural goods, he said, as the 53-foot containers often selected today for inland trucking cannot be used for maritime cargo.
Port backhauls, or matchbacks, involve filling imported ocean containers at the U.S. port, trucking them to their inland destination, offloading them there, and then returning them to the port with an export load.
In the present day, more frequently “you’ve got . . . a 53-foot [full] container on a trailer hauled to the middle of the country, then that truck turns around and brings it back empty to the coast,” Friedmann said. “Meanwhile, another truck then has to pick up that container. You’re supposed to drive it to the middle of the country, get it loaded, and drive it back. We’re creating a duplication now.”
Friedman said agriculture industry executives should, naturally, closely observe NAFTA talks.
But he added that he strongly believes that NAFTA won’t be scrapped, as there are no logical considerations, political or otherwise, that should lead the Trump administration to withdraw, or to lead the three-member governments’ negotiators to adopt unsettling provisions as the renegotiation concludes.
“Maybe if you had thought the sky was going to fall, you better start finding some other sources of the product, but I don’t think it is,” Friedmann said. “And I may be wrong, but I’m putting money on it, that there will not be a significant change, and there may be no change impacting agriculture.”