Donald Trump, the new President-elect of the United States has clearly stated his intention to renegotiate regional trade agreements which he believes exploits and encumbers America. Chief among those is the long anticipated and vehemently debated Trans-Pacific Partnership (“TPP”). The regional free trade agreement is between Australia and 11 other nations situations within the Pacific Rim – most notably the US, Japan, Canada and New Zealand. The goal of the TPP in Australia’s view is to open new trade and investment opportunities and further integrate the economies in the Pacific region.
Figure 1. TPP member countries
Source: New York Times
At face value, the TPP seems overwhelmingly positive for Australia. Member countries consume a third of Australia’s agricultural exports and so the 98% tariff reduction proposed should significantly drive Australian export demand. For the majority of Agricultural export industries, including poultry, seafood, fruit and vegetables, the TPP will do just that. Of course, the deal also helps make exports from other member countries – notably beef, dairy, wheat and wine – more competitive against Australia. Beef in particular, which has enjoyed competitive advantage in recent years stemming from the Japan-Australia Economic Partnership Agreement (JAEPA), may be undermined by a blanket reduction of tariffs. Yet even so, most experts suggest the net result would still be positive, even for the abovementioned exports. In fact, the US Department of Agriculture (USDA) concluded that in terms of agriculture, the biggest winner of the TPP would be Australia, which would stand to see a 19% increase in export value by 2025. This represents tens of billions of dollars in new opportunities, not only for the sector but the Australian economy as a whole.
Figure 2. TPP from Australia’s perspective
Source: Business Insider
With that in mind, a Trump victory and the inevitable demise of the TPP that is to follow, is a long term negative for the Australian agricultural sector. It will frustrate and delay further attempts to integrate the region, and more broadly speaking, will impede attempts at constructing a bulwark against aggressive Chinese expansionism. Giving Pacific-facing allies of the US a more expansive network of trading partners outside of China was an important aspect of the TPP in response to China often erratic and unpredictable import/export regulatory regime. The response to the TPP under Trump is symptomatic of America’s pivot towards isolationist, insular policies designed to protect it against an increasingly globalised world.
For listed agriculture stocks, there is no doubt a Trump presidency adds risk to American export demand. It is unclear whether this risk will materialise as a reduction in export volumes, as Trump has not yet clearly outlined how he plans to renegotiate current and intended trade agreements. More than anything, his presidency is likely to be a lost opportunity for Australian exporters. In our view, the positive tailwinds from the TPP have not yet been factored into the market’s forecasts for the Agriculture sector and as such, we believe any forthcoming pressure on valuations will be marginal.
Without the benefit of the TPP, an even greater onus will be placed on the quality of Australian produce, which has historically been a foundational competitive advantage over competitors in emerging markets. Organic produce in particular, has very strong support within the region, benefitting from the expansion of the Chinese middle class. Domestically, growing awareness of the health risks from chemical pesticides and genetically modified foods have also pushed consumers towards organic produce.