nafta
May 20, 2019

Lifting of Metal Tariffs Spells Better Days for U.S. Cheese

 |  By: Fran Howard

The United States has reached a deal with Canada and Mexico to remove Section 232 tariffs on aluminum and steel coming into the United States from those two countries. Along with the removal of Section 232 tariffs, Mexico is expected to eliminate its retaliatory tariffs as high as 25% on cheese imported from the United States. 

The news was welcomed by U.S. dairy producers and cheese makers, who have already paid a high price due to the tariffs, which have been in place since July 5, 2018. However, at this point, it is uncertain whether the losses sustained by the U.S. cheese industry will be temporary or permanent. 

“Initially, U.S. cheese exporters and Mexican cheese buyers hoped Mexico’s higher tariffs would be short-lived and have little impact, but 10 months later, the negative impacts of the tariffs continue to ripple through the industry,” says Sarina Sharp, analyst with the Daily Dairy Report

Despite the United States’ geographic advantage to Mexico, Europe could still gain market share in Mexico to the detriment of the United States, due to the current price situation as well as a renegotiated trade agreement that has yet to be ratified between the European Union and Mexico. That agreement provides preferential access to many EU cheeses. 

“Currently, EU cheese is trading at a discount to U.S. cheese, f.o.b. their respective ports, just like it did in 2015 and much of 2016. But the price on individual cheese varieties will determine whether EU cheese is priced low enough to overcome the United States’ geographic advantage,” Sharp says. “In the second half of 2016, Europe accounted for 19% of Mexico’s cheese imports, and the U.S. share dropped to 71%.” Today, the U.S. share of Mexico’s cheese imports is higher, but since the tariffs went into effect, U.S. market share has slipped.

Last June, talk of tariffs caused both Mexican importers and U.S. exporters to rush to move cheese across the border, Sharp notes. June’s robust trade nearly offset lower year-over-year exports of cheese to Mexico in July and August, netting the United States a 78% share of Mexico’s cheese imports for the June through August 2018 period. That was only slightly below the 79% share U.S. cheese exporters enjoyed from January through May 2018, before trade tensions began, Sharp calculates.

In September of last year, it appears Mexico began looking to Uruguay for more of its cheese needs, but Mexico’s imports of U.S. cheese still accounted for 76.8% of Mexico’s total cheese imports. “However, in the second half of last year, U.S. cheese was priced at a steep discount relative to product from competitors,” Sharp states. “Thus, in the absence of tariffs, the United States likely would have accounted for even more of Mexico’s cheese purchases than it did in the first half of 2018.”

While no one will ever know how much cheese exporters would have sent to Mexico had the tariffs not been in effect, it is possible to look at what would have happened if the United States had kept its 79% market share through the second half of last year. According to Sharp’s calculations, had that share been retained, U.S. exporters would have sent 2.1 million pounds more cheese to Mexico. “A boost to 80% market share, which was well within reach, would have resulted in 3.7 million pounds more cheese crossing the border in late 2018,” Sharp says. 

Mexico has not published trade data for 2019 but given the trend in Mexico’s cheese imports and global cheese pricing, it’s likely Mexican purchases were robust, Sharp notes. Looking at U.S. export data shows that U.S. export volumes to Mexico this year have declined. 

“In the first quarter of this year, when U.S. cheese was extremely cheap, U.S. cheese exports to Mexico slumped 10.3% year over year. That was a 5.6-million-pound decline. If the United States had managed to send that cheese in addition to an extra 3.7 million pounds in late 2018 to Mexico rather than sending it to a warehouse, it would have reduced the U.S. cheese stockpile by 0.7%,” she says. U.S. cheese stocks in March of 1.38 billion pounds were more than 4% higher than the previous year and near the all-time record high of 1.41 billion pounds hit in late 2018.

The removal of 232 tariffs also paves the way for the legislatures of all three countries to ratify the United States–Mexico–Canada Agreement (USMCA), the negotiated replacement of the North American Free Trade Agreement (NAFTA). A day after President Donald Trump announced the lifting of 232 tariffs, Canada’s Foreign Minister Chrystia Freeland said Canada would move quickly to ratify USMCA.

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