FTAs in North America

US, Mexico and Canada finalized a new trade agreement known as United States-Mexico-Canada Agreement (USMCA) that came into force on July 1, 2020. The USMCA replaced the North American Free Trade Agreement (NAFTA) signed in 1994 which was a trilateral trade bloc of the three regions and had effectively eliminated tariffs on most agricultural goods between the US, Canada and Mexico (CME Group, 2018).

The USMCA is a revised version of NAFTA which will promote mutually beneficial trade leading to freer markets, fairer trade and strong North American economic growth. USMCA is also characterized as “NAFTA 2.0’’, or “New NAFTA’’, since many provisions from NAFTA are incorporated with some major changes and new policies on labor and environmental standards, intellectual property protections and some digital trade provisions.

Trade Growth under FTA

Since the implementation of NAFTA, the three countries of US, Mexico and Canada have formed a North American market, trading agricultural products and becoming trade partners. NAFTA facilitated direct connection of North American agricultural markets, marked by expanded cross-border trading, increased imports and exports, higher foreign direct investment and greater institutional and economic integration. Producers have access to relatively cheaper materials and FDI, as well as new ways to market their goods, but they may also face increased competition as well. This intraregional trade also benefits customers, with access to more competitively priced goods, new food options and off-season fresh produce supplies (Forbes, 2020).

Additionally, the interconnectedness of FTA means that open access to Canada and Mexico has indirectly allowed the expansion of US export markets for its agricultural products, especially soybean and soybean products. US soybean shipments to Mexico quadrupled under NAFTA, and doubled to Canada. Mexico is currently the second-largest market for whole beans, meal and oil, while Canada is the fourth-largest buyer of meal for US soybean, making the trade agreement necessary to maintain growth in those three countries (Govt of Canada, 2019).

Potential Opportunities for Palm Oil

Palm oil trade within North America can capitalize on the USMCA. Located in between Canada and Mexico, US is a suitable hub as the gateway to North American market. With USMCA, US has the access for easy trading across the borders where US can re-export palm oil into the two USMCA-linked neighbours. Index Mundi reported that US exported an average of 16,500 MT of palm oil for the past ten years. Facilities including transportation, logistics and ports in the country are well equipped for palm oil transit. High concentration of highway, railroad and waterway systems within the US East Coast makes this area suitable for oils and fats distribution network center, where the top three ports of entry for palm oil are the Port of New Orleans in Louisiana, Port of Savannah in Georgia and Port of New York in New York (Datamyne). Language barrier problem in the Mexican market can be avoided if palm oil is traded through US. With the current US-China trade war, US will need to find alternative soybean importers to reduce its reliance on China purchase. If US were to increase its soybean export to Mexico and Canada under USMCA, there will be less soybean oil produced for domestic consumption therefore, US will need to import other oils and fats as such palm oil to fulfil local demand.

Graph 1 : Relationship between US Soybean Oil Export- Palm Oil Import

Last year, Malaysian palm oil export to US amounted to 542,161 MT which represented 93.5% of the total Malaysian palm oil export to the Americas (MPOB). US maintained its status as Malaysia’s top export destination from the Americas region where MPO export in Jan-June 2020 is at 330,976 MT. US re-exported a total of 77,000 MT of palm oil in 2019, mainly to Canada and Mexico (USDA).

Canada was the fifth largest importer of Malaysian palm oil within the Americas region in 2019, after US, Mexico, Colombia and Haiti. According to Oil World, Canada’s import of palm oil in 2019 constituted 26% of the total oils and fats imports. Total import of Malaysian palm oil in 2019 was at 11,076 MT, while also importing Malaysian palm-based oleochemicals (48,037 MT), finished products (5,759 MT) and palm kernel oil (515 MT) (MPOB). At the same time, palm oil export from US to Canada amounted to 67,600 MT (USDA).

Mexico imported large quantity of palm oil. In 2019, Mexico imported 520,000 MT of palm oil which constituted 41% of the total oils and fats imports. Mexico was Malaysia’s second largest export destination within the Americas region, after US. Malaysia exported 29,673 MT of palm products to Mexico in 2019, which include CPO, RBD palm olein, NBD palm olein and RBD palm stearin (MPOB). Mexico also imported palmitic, lauric and stearic acids from Malaysia. Mexican consumers are price sensitive. The current low prices of Malaysian palm oil may give the benefit in expanding palm oil export to Mexico. This can be achieved through the re-export strategy via US. Currently, palm oil exports from US to Mexico is relatively small. In 2019, US exported about 8,300 MT of palm oil to Mexico, registering 88% increase over the same period in 2018 (USDA). Guatemala and Costa Rica have become Mexico’s two major suppliers of palm oil, primarily because of its proximity to the country (Green Biz, 2019).

Way Forward for Palm Oil in North America

The North America (United States, Canada and Mexico) vegetable oils consumption amounted to 22.84 million MT in 2019. Through the end of 2026, it is projected to hit 32.89 million MT with a CAGR of 4.7%. Demand for vegetable oil from bakery, foodservice and other food processing industries is expected to proliferate vegetable oils development in the coming years. Growing usage of vegetable oils such as palm oil in non-food uses is expected to support further growth. One such market segment is the beauty and personal care products market.

According to a recent study from Grand View Research Inc, the US personal care goods market is forecast to hit 134.2 billion USD by 2025. The key reason for this high growth is the demographic shift in the young consumer market (Grand View Research, 2019). The youth generation continues to invest a significant amount on skin care and other personal care goods to match their social media looks. Even though the personal care products market has witnessed a decline in the wake of the Covid 19 pandemic, the impact is not as severe as seen in other industries. Although discretionary spending has reduced, the market segment has witnessed a consumer behavioural shift towards safe and reliable products.

The region’s growing packaged food industry combined with the food service industry development is further projected to boost consumer development in North American vegetable oils industry. In addition, increasing oil refining industry in Mexico and Canada is anticipated to fuel demand growth alongside robust marketing campaigns by market players to support vegetable oils sales. The USMCA could provide the platform in expanding palm oil re-export from the US to Canada and Mexico.

Prepared by  Nur Adibah and Zainuddin Hassan

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References:

1. CME Group. ‘NAFTA’s Impact on U.S. Agriculture’. 1 May 2018. https://www.cmegroup.com/education/articles-and-reports/naftas-impact-on-us-agriculture.html
2. Forbes. ‘It’s Official: Mexico Is No. 1 U.S. Trade Partner For First Time, Despite Overall U.S. Trade Decline’. 5 Feb 2020. https://www.forbes.com/sites/kenroberts/2020/02/05/its-official-mexico-is-no-1-us-trade-partner-for-first-time-despite-overall-us-trade-decline/#8c4a4e83eabb
3. Green Biz. ‘Palm oil buyers cultivate Mexico’s ambition to grow a sustainable industry’. 22 October 2019. https://www.greenbiz.com/article/palm-oil-buyers-cultivate-mexicos-ambition-grow-sustainable-industry
4. Govt of Canada. ‘Labelling requirements for fats and oils’. 16 May 2019. https://www.inspection.gc.ca/food-label-requirements/labelling/industry/fats-and-oils/eng/1392751693435/1392751782638?chap=0
5. Grand View Research
6. Malaysian Palm Oil Board (MPOB) Jan-Dec Exports to the Americas
7. United States Department of Agriculture report, April 2020
8. Datamyne
9. Oil World
10. Index Mundi