Former Ag Secretary Reacts To Signed Trade Deals

Jan 17, 2020  | 25 min  | Ep4522

Tom Vilsack served as Secretary of Agriculture for eight years and now is CEO and President of the U.S. Dairy Export Council. The dairy industry is seen by some as a winner in the Phase One and USMCA deals. Mr. Vilsack spoke at length about the news of the week regarding trade from his current position and former role in policy leadership. The following is the full interview conducted by Market to Market Executive Producer David Miller. 

Full Transcript: Tom Vilsack: We had strong bipartisan vote, reflective of the work that the administration did in negotiating the deal, and the work that Democrats in the House did and improving the enforcement of provision. So a good outcome. For the dairy industry, there are basically three very fundamental parts of this one, the Canadian market becomes a bit more open than it has been quotas have been improved and increased. We're going to watch how they implement those quoted increases to make sure that we get the benefit the full benefit. Secondly, the elimination of what is called class seven. It's a way in which the Canadians price powder which is allowed them to export their powder at a significant advantage over everyone else. And so they've seen a significant increase in exports and taking market share away from Us, producers and processors, that's going to end it's going to be replaced with a different pricing system that hopefully will avoid a an advantage for the Canadian exports. And then third an opportunity for us to reopen or if not, not necessarily reopened, but an opportunity for us to preserve the Mexican market, which is our number one market. But to do so in a way that also protects our ability to sell cheese is that the European Union is attempting to try to get a monopoly on the use of certain names of Jesus. This is called a geographic indicator indications, these g eyes basically Under the agreement side letter, there's a due process, there's a way in which the United States will be notified if the EU seeks to have additional monopoly and protections will be able to come in and object and say no, no, this is a common name and everyone should be able to use it. So really important to us to put a number on exactly how much more business there will be. That once it's fully employed. The USMCA will it'll take several years for those tariff quotas to be increased. But once it's fully implemented, the expectation is somewhere between 200 and $300 million additional business opportunity which is, which is important.

For some tomato growers, primarily in the southeastern part of the United States, I think they were just satisfied with the agreement because they feel Mexican tomato growers have a competitive advantage or or flood the market, if you will, to disadvantage their tomato growing. They are obviously not satisfied. But at the end of the day, you know, no trade agreement is ever perfect. That's why they are constantly renegotiated. And that's why it's important to note in this agreement that there is a provision for reviewing the terms and conditions of the agreement on a periodic basis, which is important. And I think the enforcement mechanisms that were added to the agreement, really strengthen it provides a greater level of confidence and assurance that what people have agreed to do they're actually going to do.

There's no question. This is an improvement over NAFTA. There are many industries that weren't even in existence at the time NAFTA was negotiated. And that was one of the reasons why it was important to modernize the agreement. And so those those new opportunities are involved in the agreement as well. So it's a more comprehensive agreement. It's a more enforceable agreement. It has stronger labor and environmental provisions. And while American agriculture doesn't necessarily have a large benefit from this agreement, again, the maintaining the status quo keeping markets open, very, very important for us agriculture.

Each individual senator has their ability to make a decision. I think it's fair to say two things. One, this is clearly a better deal than NAFTA into that a significant majority of senators and a significant majority of Members of the House of Representatives felt that the enforcement provisions were improved to the point that they had confidence that this better deal would in fact be implemented in a way that would make it a better deal. Obviously, some folks disagreed. But at the end of the day, it was a very strong bipartisan vote.

It's a complicated formula that requires an understanding of what the Chinese were purchasing before the retaliatory tariff issues arose before the trade war rose, adding to that a certain amount, committed amount of additional purchases, and then over a two year period, it averaging out to be somewhere in the neighborhood of $40 billion of sales. The USTR, US trade representative offices is setting up in its own separate implementation office. The sole responsibility of that office will be to monitor the performance of the Chinese in this particular agreement. You know, at the end of the day, the Chinese are famous for promising Not so famous for delivering. And so it's going to be important in this agreement to make sure that we monitor performance on a regular basis that we get information from the ag industry, the entire industry, what sales are taking place so that we can make sure that from January 1 of 2022, June, December 31 2020, that in fact, these purchases have taken place. We won't know that until sometime in 2021. And if it turns out that these purchases are not being made, there is a provision a series of provisions in the agreement that are allow for the parties to essentially raise a concern, have it adjudicated or determined, or in the alternative to leave the deal. There is a process by which the deal can be terminated at either parties and systems. So I think what what I feel is that every day where there is performances is a good day, but I don't think we necessarily should be overly cocky. confident that for the next two years, every day will be a day of implementation and compliance. There are some good provisions in disagreement, no question about that the ust hours office have done a good job in negotiating for the dairy industry. There's no guarantee of specific purchases. In fact, there's no guarantee for any specific commodity, that they will get X number of billions of dollars of purchases between the next couple of years. But it's anticipated that the oil seeds in some of the protein, commodities will probably get the lion's share of the purchases, because that's who have been most adversely affected and impacted by the retaliatory tariffs. On the dairy side, you have to look at the non tariff non scientific barrier sections of the agreement, places and opportunities where the Chinese are basically saying in the past, we created a difficult situation for you to get your plant registered. So you could sell your Our country, or we made it hard for you to, to certify a particular product for sale in our country, we're now going to make it easier for you to certify and register your plants and your products. That in the past, we've been a little bit hesitant to allow your infant formula into our market, we're now going to make it easier for that infant formula to get into your market. We have always resisted the ability of utilizing way permeate, not for feed additives, but for food, human food consumption. Now we're going to basically allow that to take place. So there are very important provisions that if implemented, the way they were intended will be of some benefit to the US dairy industry, the infant formula provision may be something that increases sales by 100 million dollars $200 million, time will tell. There is the same due process system if you will, for G is that we just with reference to usmca, that's important to to the cheese processors in this country. And there's a, you know, I think an opportunity for us to to ensure that other aspects of agriculture also benefit. There's a provision that I know we worked on during my, during my administration at USDA, where biotechnology trades would take forever to get approved by the Chinese Well, now, according to this agreement, they're willing to do it within a certain period of time, within 24 months, instead of three or four or five years. This was the case before. So there are some positive aspects of this agreement. But again, the proof is in the pudding. The proof is in the implementation of the agreement.

I think it's a little bit of both, I think we're going to see a resumption of markets that we had before. I think we're going to sell a lot more soybeans than we did before. I think we're going to sell more pork in part because they need pork Their their hog industry was devastated by African swine fever. And it's going to take a while for them to rebuild that hog industry. So their consumers are now seeing very high prices for pork. So I would anticipate we'll see some pork sales. I think what the beef issue that you mentioned is an important one because it opens up a bit more, at least from a transparency standpoint, sales of beef, there was beef getting into China from us, but it was getting in from through Hong Kong and a variety of other other gray markets, if you will. That they for many, many, many months, they were prohibiting the use of our chicken getting into their market, that's now opened up that the $40 billion a number is is not just ag products, it's also seafood. So there'll be an opportunity as well for for that to be involved. So again, a lot of opportunity here potentially, right. It's a two year agreement. Don't know what happens afterwards. I the concern I have about the $40 billion purchases. Is that whether or not there's adequate demand in China? For $40 billion of American agricultural products? I there's no question. There's a demand for pork. There's no question that they can use soybeans. But how much do they need? And are we creating a circumstance where they are purchasing product storing product and then two years from now we'll be created with a circumstance where they have an oversupply and and not likely to be in a business position to purchase for from us. And so are we going to have a very nice stable market for a couple years? And then are we going to see a drop in that market? Are we going to have the kind of stability that I think farmers in this country would love to have a market that is consistent and stable?

Well, that gets back to the supply and demand piece of this. If they are purchasing from others, then they have to purchase from us and they can't consume it all then They're obviously going to store it. And if they get it to a point where they store too much, then obviously they're at some point in time in the future, they're going to drop off their purchases. And so you don't have that consistency and that predictability that you need to be able to make business decisions here. That's why it's important I think for for our industry, specifically for dairy in particular, to diversify, it's it's important for us to look at other markets, in addition to China, as big as it is to look at ways in which we can take full advantage of the Southeast Asian market ways in which we can take advantage of Japan and South Korea, maybe someday opening up India, as well and then beginning to figure out a longer term strategy of how we access markets that will continue to grow and develop in Africa. I think it's going to be important for us agriculture to have a long term look here and not just be focused on one major purchaser. I think we run the risk of of something upsetting the applecart here. Maybe it'll, it'll be something that happens in the South China Sea and before you know it, or maybe it's something in relationship to Hong Kong or Taiwan or, or North Korea, that creates a circumstance where we're at odds with China. And that impacts and affects trade with China.

I'm not confident we're ever going to get to phase two, simply because what we're asking the Chinese to do interface to negotiation is to fundamentally change the way they do business, to fundamentally move away from state owned enterprises that they subsidize and support and provide those enterprises with a competitive advantage in their market that is central not just to their economy, but it's also central to the Communist Party maintaining control in China. So asking them to change their way of doing business is really asking them to essentially change their entire philosophy. I think that is a pretty heavy lift. And it's particularly heavy lift when you're only doing it alone when you haven't solicited and developed and taking the time to put together a coalition and alliance of countries that are being similarly disadvantage by that, being able to come in and say to China, look, you need to be part of the International global system. To do that you need to, you can't have the state owned enterprise process that undercuts that. It's going to be important for you to make sure that you make, it's gonna be important for us to make sure the EU, South America, maybe even some of the African nations are joining us and some of the other Asian nations are joining us in saying to China, you've got to change your rules that might put enough pressure on China to take a look at fundamental change. But if it's just the US, and I just don't think that we are going to be able to force them or push them into a situation like that.

It gets complicated because it gets into the politics of the US political system. We obviously are are in election year, and I'm sure the Chinese are very interested to see what happens in the election. So I don't really anticipate that we're going to see a whole lot of activity short of what we've now seen, which is the agreement being signed, and a slow, steady process of implementation, hopefully, a series of purchases that take place over time. After the election, depending upon the results, I don't know what the Chinese reaction will be. And I don't know where we go from here. I think this is a very, very difficult relationship, because it's not just a trade relationship. There's a division within the current administration about how to deal with China, there are some who believe we need to be engaged with China that we need to figure out how to work and how to effectively compete, but an inappropriate way and we don't see them as quote unquote, an enemy but we see them as a, as someone who is a competitor and somebody that we need to keep a wary eye on. There are others who believe that we should disengage our economies, that we should go our own way and let China go its own way and not be as reliant upon each other. And that that battle has not yet within this administration. I don't think been totally resolved. So that's why you have phase one. And what phase one essentially did from an agricultural perspective, it did deal with a series of irritants and issues and barriers over time that had been parts of negotiation. And it did provide a fairly comprehensive effort to try to eliminate so many of those barriers and for that the administration, USTR and others should be should be congratulated. But in terms of in terms of long term changes, in terms of of assurances that China is going to always be this way, is it essentially a two year agreement, and and it's subject to either party terminating on a moment's notice. So, again, I think, to me, great that we've got the agreement great that we don't see an escalation of the trade war. Great that we have a promise to purchase additional agricultural products. And as that promises fulfilled, that's good news for American agriculture. But I think it's appropriate to have a healthy dose of skepticism and concern, so that you keep an eye on implementation.

You know, I think that's one of the challenges, especially for the dairy industry. Many of the other commodities that do business with China do the business through state owned enterprises, which means they get those state enterprises get instructions from the government, and the government has the power to say, for this deal, don't worry about the tears for this deal, don't collect the tears for this year will reimburse you for the tariff. So the tariffs don't become an issue. Dairy doesn't operate quite in the same way. There's not as many activities through the state of enterprises as there is through private sector. Private Sector doesn't have the capacity to sort of wave or or not, not not taking the consideration retaliatory tariffs. So it's going to be up to the Chinese government to figure out how to do that in a way that the retaliatory tariffs don't create a barrier to the Chinese fully performing their agreement to purchase products. I don't know how they're going to do that. And we'll obviously have to keep an eye on how they do it. So that we make sure that we're not at a at a disadvantage, but at the end of the day, this is a pretty hard number. So sometime in 2021, we will know whether in fact, the Chinese purchased 40 billion hours of agriculture and seafood products, if they did great if they didn't. Then the question is, what does the US do? The US there's a dispute resolution process that is multi leveled, do they go through that? Do they decide that the Chinese weren't really serious after all, to they terminate the agreement yet to be determined?

In a perfect world, the US would have been able to say, if you aren't performing the agreement, we're going to reinstate territory. escalate tariffs and you can't retaliate. But we don't live in a perfect world. We live in a world where you're negotiating, and each party has a certain level of leverage and power over each over the other party. And you, I think the fact that you can terminate the agreement is an acknowledgement of the fact that you're dealing with two very large economies, two very large countries, two very powerful countries, and that neither one can compel or force the other to do that, which they don't want to do. And I think that's an that's another important aspect of of China. Very, very rarely Can you compel the Chinese to do something that they don't themselves want to do? They usually operate in their own self interest. They're very good at negotiating. They're very smart. They're very tough. They're very persistent. And I, you know, I think Ambassador lighthizer was also tough and persistent. And I think the result is an agreement, the agreement essentially, if you do the numbers What we're going to do is over four years, we're going to roughly sell them the same amount of agricultural products that we would have sold them if this thing hadn't triggered. But the barriers that have been removed the barriers that have been reduced on these non tariff and non scientific barriers, that's real. And that's that's that's important progress.

We had recently determined China we recently put China on a warning list or list of current currency manipulation. So this was a way of essentially taking them off that list, which would have potentially created some challenges for them. It is not surprising that the Chinese press is basically reasserting the fact that there are ways in which disagreement can be performed in their ways in which disagreement can be avoided. That is par for the course that is something to be anticipated. That's why you have to be a bit skeptical and that's why you have to see performance. And every performance every every day that you get performance is a good day and every You don't get performance is a day that you should begin to wonder whether or not disagreement is everything that some folks are suggesting. I don't think anybody can tell you with a great deal of certainty that everything that's been agreed upon in this agreement is actually going to happen. But I'm glad that we have an agreement. I'm glad that the that there's at least a truce that we're not seeing or ratcheting up because that would have been even more difficult and devastating for American agriculture and for the dairy industry.

You know, the problem with that shotgun his analogy is it is it the other side's got to shut down a shotgun behind their door. You see, and that's the problem. We saw. We saw dairy sales drop off by somewhere between 45 and 47%. Because of tariffs, and those tariffs haven't gone away. So they're still there, and hopefully they figured out a way to work around them to be able to purchase more dairy products. They did provide a one year waiver on way permit because they saw the benefit to their hog industry for consuming more way permeate, they may have to do the same thing in terms of way permit going into human for human consumption. So all of that is yet to be determined. But again, a good that we have an agreement good that there's not an escalation. Good that we at least have some idea of what that agreement consists of. Now, we need to monitor and now we need to keep our fingers crossed, and hope that this this actually gets implemented the way it was intended.

Well just went into effect and so it's it you know, we're not sure that I can give you specific numbers of what I can tell you is this. We lost a bit of market share on ingredient sales last year in Japan powder sales way, things of that nature. Why because we as a result of pulling out of TPP and as a result of the EU and the New Zealand government's essentially entering into a trade agreement with the Japanese that provided for an elimination of tariffs, we had to pay a tariff, our competitors did not. And when you're dealing with powder and a commodity like that, that price differential makes a difference between whether or not you get a sale or don't get a sale. So we lost market share. So I anticipate with the implementation of phase one, where we now are now on a level playing field with our competitors, that things will go back and we will reclaim that market share that was lost in 2019. On the cheese side, we weren't as disadvantaged today, we would have been disadvantaged in the future. So I would expect that we'll continue to see robust cheese sales. This is a country that is just consuming cheese that are very significant rate. And it's anticipated they'll continue to do so for the next 10 years at a rate of 4% per year. So plenty of opportunity in Japan.

There's one other thing that I think impacts and effects the dairy industry, which is that we, for the first time that 2015 are not dealing with the overhang of even intervention stocks. In other words, when the EU changed its way of, of compensating and supporting agriculture, what they did is they created a circumstance where there was overproduction, if you will, in the European dairy industry, and that overproduction led to the stockpiling of a substantial amount of powder. Those are called intervention stocks. And essentially, what happens is that you over a period of time would slowly release a portion of those surplus stocks into the market, further depressing the market. So for the first time in 2015, there isn't any powder in those intervention stocks. So we have a much less pressurized market, if you will, the clog in the system has been eliminated. And so that should lead to opportunities for us for more sales, and it should lead to fewer European sales. On the powder side, and we're I think we're beginning to see some elements of that in Southeast Asia. significant increases in November of last year, the last month that we have data for. We saw the best year best month ever of skim milk powder sales in history, the industry in November. So hopefully that trend continues. Hopefully we see the continued robust purchases in Southeast Asia. And hopefully we see the benefit of that intervention stock issue being resolved.

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