Selected Developments In Business Law from the Agribusiness Committee — From NAFTA to USMCA – What It Means For California’s Fruit And Vegetable Industry

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is from the February 2019 update to Advising California Partnerships. References are to the book’s section numbers. The most significant legal developments since the last update include developments in such important topic areas as professional responsibility, federal and state taxation, securities law, and arbitration.

In 2017, campaign rhetoric of withdrawing from the North American Free Trade Agreement (NAFTA) nearly turned into reality; but after a flirtation with ending the trade agreement, the Trump Administration called for a renegotiation. It left unresolved – and hotly debated in some circles – whether a president has the power to withdraw unilaterally from a trade agreement. The answer turns on fine points of constitutional law that are rarely litigated.

For much of California agriculture – at least fruits and vegetables – the 1993 free trade agreement combined with market changes, dramatically reshaped the industry. Consumers demand year-round supply of produce and shippers look to Mexico to produce when California cannot. Berries will grow in Watsonville in the summer and Oxnard in the spring and fall, but Mexico fills an important gap in the winter. Avocados from Mexico were long barred from entry in the US, ostensibly for concerns about plant pests but economics may have lurked under the surface. Once some parts of Mexico gained access to the U.S. market, California producers learned that the market grew and so did their returns.

Companies have integrated across borders, fulfilling the promise of the free trade agreement. Targeting Mexican produce meant targeting California companies and the returns enjoyed by California growers as a result of the stability that comes with year-round supply. Several U.S. companies sought to make the case that the trade deal benefits U.S. companies. The Produce Coalition for NAFTA formed to make the case about the important domestic benefits to international trade.

Florida is also a home for the winter production of fruits and vegetables, and producers there often finger Mexico as a threat; they claim that competing products are dumped in the U.S. market (that is, sold in the U.S. for “less than fair value”). Amplifying this charge, the Trump Administration pointed to produce from Florida as an example of the unfairness of trade between the three countries.

Yet, the record does not reflect that Mexican produce damages U.S. markets, nor are the fruits and vegetables dumped. With strawberries, for example, it is certainly true that Mexican strawberries sold in the United States have increased, going from 64 million pounds in 1996 to 262 million pounds last year. If you looked only at that figure, you may conclude that production has shifted from the U.S. to Mexico. That is not the case – U.S. strawberry production also rose over the life of NAFTA. Nor is it the case that this production came at the expense of Florida, which produced nearly 200 million more pounds of strawberries last year than in 1996.

The U.S. negotiators asked for “seasonal dumping” rules that would allow domestic producers to build a dumping case and impose duties based on a quick snapshot of data. Never mind that this proposal violated World Trade Organization rules. The rules of NAFTA are layered atop the World Trade Organization’s rules. By this proposal, the U.S. asked its two most important trading partners to accept trade rules less favorable than the U.S. extends to all other countries. What is more, if Canada and Mexico agreed to the dumping proposal, it would be a weapon they could use against the U.S. For these reasons, most of U.S. agriculture opposed this provision.

The new agreement has shed the NAFTA name for the U.S.-Mexico-Canada Agreement (USMCA), and the new deal rejects the “seasonal dumping” idea. After the agreement is signed, the Congress must vote on it, but cannot make changes, under the fast track trade laws. The vote is likely to be close, and that may allow the dumping issue to re-enter the debate. It would not be in the agreement itself but could come in the form of changes to the Trade Act of 1930, which codifies the existing rules on what is considered dumping. Side deals necessary to cobble together the votes are often part of the deal making. Whether or not seasonal dumping is part of the deal remains to be seen. A vote is not expected before the middle of 2019.

This article was originally prepared by Karen Boon (karen.boon@driscolls.com) of Driscoll’s, Inc., in Watsonville, CA, and is republished with permission.