Little clamor in Minnesota for retooling NAFTA

Over the past eight years, the trade deficit that Minnesota once had with its neighbor to the north, Canada, has been cut by two-thirds.

The state's trade with Mexico, meanwhile, has gone from a deficit to a surplus.

To many state business leaders, the main reason for those positive signs are the same: the North American Free Trade Agreement, which aimed to eliminate trade and investment barriers between the U.S., Canada and Mexico.

The fate of the historic 23-year-old trade pact is now uncertain, with President Donald Trump telling Congress he will begin renegotiating this summer.

How that turns out in Washington will have especially big consequences in Minnesota. Canada and Mexico are now the top trading partners for Minnesota farmers and manufacturers, accounting for one-third of the state's $19.2 billion in exports in 2016, according an analysis of data from the Minnesota Department of Employment and Economic Development.

This may be why few trade associations representing Minnesota businesses report gripes from members about NAFTA.

Nick George, president of the Midwest Food Processors Association, which includes Minnesota giants General Mills, Hormel and Faribault Foods, met recently with Canada's agricultural minister. George said the Canadian official wanted to emphasize that "NAFTA isn't broken."

"I think our members would agree," George said of the association's affiliates, who are based in Minnesota, Wisconsin and Illinois. "I don't hear members saying it's broken."

On his ranch in Walnut Grove, Mike Landuyt explained that he and other Minnesota cattlemen are fine with their ability to do business under NAFTA.

"NAFTA's been good for the cattle business," said Landuyt, president-elect of the Minnesota Cattlemen's Association. "Everything I hear is positive."

Most of Minnesota's massive agricultural industry has benefited from NAFTA. Canada and Mexico ranked second and third behind China as the leading foreign purchasers of the state's agricultural products, each market growing by nearly 200 percent from 2000-2014.

But not everyone has enjoyed the benefits of free trade. On his dairy farm in Goodhue, 60-year-old Dave Buck said Minnesota milk producers wish they could sell more to Canada, but they are blocked by trade restrictions despite NAFTA.

"We don't export to Canada because it is too tightly controlled to get anything in there," Buck said.

During his campaign, Trump blamed manufacturing job losses on NAFTA and promised to return them by sacking the trade agreement. Since NAFTA took effect Jan. 1, 1994, the number of manufacturing jobs in Minnesota shrank from 355,500 to 319,600, DEED figures show. It's unclear how many of those jobs were lost to the trade deal, the agency said.

Since 2001, 8,890 Minnesotans have received benefits from Trade Adjustment Assistance, a federal program that helps those who lose jobs because of free trade agreements, including NAFTA.

Last week, the White House touted a new deal that removed trade sanctions from Mexico in exchange for limiting the amount of Mexican sugar that can enter the U.S. The deal — a huge win for Minnesota's sugar beet industry — was an example of the kind of reform that can fix NAFTA, the Trump administration said.

Cargill had worried that tariffs and other penalties for alleged Mexican sugar dumping in the U.S. might spark Mexican retaliation in the sweetener market. The Minnesota-based agricultural giant praised the agreement for maintaining "an open sweetener market" and preserving the "strong and productive trade relationship with Mexico, which is vital to successfully modernize NAFTA."

Canada recently blocked imports of a new milk concentrate made by U.S. dairy processors, Buck said. It produced an economic "domino effect" that left U.S. processors unwilling to buy his and other dairy farmers' milk.

In response, Trump slapped a tariff on Canadian lumber coming into the U.S. The president also threatened to withdraw from NAFTA, relenting after Canadian and Mexican leaders asked him to renegotiate instead.

Angering the state's top trading partners in renegotiations could have consequences for Minnesota consumers and businesses.

"Most of the large [medical device] companies here have production facilities in Mexico," said Shaye Mandle, CEO of Medical Alley, the state's med-tech trade group. "Increasing tariffs adds to the costs of products. You need to make sure renegotiations that are supposed to bring jobs back in one category are not costing jobs or increasing prices in another."

University of Minnesota trade specialist Tim Kehoe was a consultant for Mexico during the original NAFTA negotiations. Kehoe said revisions can help, but the tenor of renegotiation is critical.

"The president is looking for wins for the U.S.," Kehoe said. "Trade negotiators look for mutual gains [among all the countries].

"NAFTA did a good job. Mexico is now one of the biggest trading partners for Minnesota agriculture. If renegotiations hurt Mexico, they will certainly slap restrictions on the U.S."

By far the biggest hit to Minnesota exports since 2008 has come in iron ore sales to Canada, down from a high near $500 million in 2010 to just $63 million in 2016.

A global collapse in steel prices — not NAFTA — caused the nose-dive, said Kelsey Johnson, president of the Iron Mining Association of Minnesota, a trade group for the state's iron mining companies, which extract most of the country's ore.

"Three of our biggest facilities were idled last year," Johnson said, explaining that steel prices were below U.S. production costs.

Johnson likes NAFTA and fears renegotiation could lead to "increases in tariffs that will drive us out of the [Canadian] market."

"People don't understand how we are intertwined and dependent on each other," she said.

As a product category, chemicals showed the greatest growth in exports to Canada. Medical technology remained steady.

On the plus side, Minnesota has pumped up exports to Mexico for the past eight years. Overall, sales south of the border jumped $1.4 billion. Med-tech sales were up 58 percent. The state realized a 900 percent increase in the sale of vehicles, aircraft, vessels and other transport equipment to Mexico, growing from an inflation-adjusted $24 million in 2008 to $258 million last year. Sales of plastics tripled, while sales of prepared food doubled.

Robert Kudrle, an international trade economist at the University of Minnesota, cautioned that "bilateral trade balances don't mean much in the short term." He said Canada's role as a source of raw materials to the U.S. and Mexico's role as a supplier of "intermediate materials" used in the production process could cause imbalances.

"Most economists agree that NAFTA has strengthened the U.S.," Kudrle said. Whatever the trade numbers say, Minnesota and the rest of the country have "a strong symbiosis with Mexico and Canada."

For Kudrle, that means Trump's attempted retooling of NAFTA "is one of the least promising of the president's ideas."

In Goodhue, Buck has set his expectations low. The state exports about $35 million in dairy products to Mexico and Canada, but only a third of that goes north.

"We would obviously like to export more to Canada," Buck said. "But I am not overly optimistic based on past experience."

Jim Spencer • 202-662-7432 • MaryJo Webster • 612-673-1789