U.S. - MEXICO AGRICULTURE: A TRADE SUCCESS STORY
Agricultural trade and investment plays an important role in U.S.-Mexico economic relations, even with the uneven size of the two economies. In 1998, agricultural exports from the United States to Mexico totaled about $6 billion, while agricultural exports from Mexico to the United States totaled about $4.7 billion. For the United States, this represented about 12 percent of agricultural exports while for Mexico, it represented more than 60 percent of agricultural exports.
Agriculture in Mexico and in the U.S.
Mexican agriculture is a much more significant factor in the Mexican economy than U.S. agriculture is in the U.S. economy.
Agriculture contributes 8 percent to Mexico’s gross domestic product (GDP) and employs about 22 percent of the labor force (about 8 million workers).
For the United States, agriculture comprises only 2 percent of GDP and employs about 2.7 percent of the labor force (a bit under 4 million workers).
However, the United States has considerably more arable land than Mexico. Only 12 percent (230 thousand square kilometers) of Mexico is arable while 19 percent (1,800 thousand square kilometers) of U.S. land is arable.
Agricultural Trade Trends
The 1990s has been a decade of exceptional growth in U.S.-Mexico agricultural trade. U.S. agricultural exports to Mexico at the beginning of this decade totaled $2.5 billion and grew 12 percent annually to $3.6 billion in 1993, the year before the North American Free Trade Agreement (NAFTA) was implemented. The 1995 peso crisis and ensuing recession in Mexico caused a 23 percent downturn in these exports that year. However, starting in 1996, U.S. exports recovered exceptionally well, leading to an average annual compound rate of growth of almost 11 percent per year since NAFTA was ratified. Mexico is now the third-largest market for U.S. agricultural exports, exceeded only by Japan and Canada.
Mexican agricultural exports to the United States have grown about 11.5 percent per year since NAFTA came into force. Prior to NAFTA, Mexican exports to the U.S. were stagnant at about $2.5 billion per year.
U.S. exports to Mexico have been lead by grains, growing at almost 13 percent per year, and oilseeds and their products, with a growth rate of 12 percent per year. Mexican exports to the U.S. have been led by vegetables, growing at 11 percent per year; fruits at 17 percent per year; and beverages, at 28 percent per year.
Mexico’s Internal Changes
Well before NAFTA was negotiated, Mexico embarked on a serious effort to modernize its agricultural sector.
Early in the 1990s, Mexico began reducing artificial sanitary and phytosanitary restrictions on imported agricultural products and eliminated import and export licenses.
In 1992, Article 27 of the Mexican Constitution was amended to provide both
subsistence and private farmers with legal certainty of land ownership.
In 1993, Mexico moved away from its traditional approach to help the farm community, namely, providing subsidies for fertilizer, electricity, credit, insurance, etc., and price controls on products. It adopted in its place a program called Procampo, which provides direct payments to farmers who produced maize, beans, wheat and other grains. The payments on these products are based on crop area in these products between 1990 and 1993. They are fixed in real terms and will be paid for 15 years whether the farmer continues in that production or not.
All of these changes moved Mexico away from the Ejidos system: land tenure that arose out of land reform following the Mexican Revolution (1910-1917). This reform divided up large landholdings and provided individuals with between 9 and 45 acres that could be worked individually or collectively, but not sold or rented. This system became progressively less efficient over time.
In 1995, President Zedillo instituted an Alliance for Agricultural Development which grew out of a ministerial-level task force to provide a diagnosis of the agricultural sector and to develop a plan to rescue the rural sector, increase rural welfare, profitability and competitiveness. This public-private sector initiative aims to improve productivity by increasing investment, shifting production toward higher value added products and developing agribusiness opportunities. The details of this program were conceived mostly by producers and will be run both by producers and by State Agricultural Councils.
Chapter 7 of NAFTA lays out the rules for agricultural trade between the three North American partners. It contains three separate bilateral arrangements for U.S., Mexican and Canadian agricultural trade.
NAFTA’s goal is the liberalization of agricultural trade and the reduction, elimination, and harmonization of sanitary and phytosanitary (SPS) measures.
NAFTA eliminated most non-tariff barriers and many tariff barriers immediately and began a process to phase out all tariffs over 10 or 15 years.
By setting up a trilateral agricultural working group, the NAFTA process works to avoid barriers created by SPS measures, to harmonize agricultural classification and to develop grading and marketing standards. It also encourages the elimination of export subsidies and the use of domestic support programs that are not trade-distorting.
A number of the trade disputes between the United States and Mexico arise from SPS issues. An SPS is any scientifically defensible measure taken to protect human, plant or animal life or health.
NAFTA prohibits the use of SPS measures as disguised barriers to trade.
While nothing in NAFTA prevents member countries from establishing measures to protect consumers from unsafe products or protect domestic crops and livestock from foreign diseases, countries are encouraged to adopt international and regional standards where appropriate.
State and local governments are allowed to enact standards more stringent than those adopted at the national level, so long as these standards are scientifically defensible. For example, California has a number of SPS measures more restrictive than national standards.
Comparative Advantage WITHIN North America
It is important to understand the complementary nature of agricultural production in the United States and Mexico. The United States has a comparative advantage in grain production, animals and animal products, and oilseeds.
A good example is corn.
Corn shipments to Mexico averaged about 700 metric tons (MT) during the two years prior to NAFTA due to Mexico’s artificially high domestic price for corn.
Since the start of NAFTA, Mexico has permitted the market to allocate corn production. U.S. exports of corn have soared to an average annual shipment of 4,000 MT.
Corn was one of the products most sensitive in Mexico, and Mexico set a 15-year phase out of its Tariff Rate Quota (TRQ). A TRQ establishes a two-tier tariff rate: a low rate on imports up to a certain quota level and a much higher rate on imports above that level. Mexico’s quota level for the low tariff rate was set at 2,500 MT for 1994 and increases 3 percent a year. The initial over-quota tariff of 215 percent is cut 24 percent over the first six years and will be eliminated after 2008. In most of the first five years of NAFTA, Mexico has been importing corn well above the quota level. However, in order to maintain relatively low corn prices in its domestic market, Mexico has chosen not to collect the higher duties.
Mexico has a comparative advantage in vegetables, fruits and beverages.
Mexico’s exports to the United States of winter vegetables has grown from about $1 billion in sales in 1993 to about $1.8 billion in 1998 under NAFTA. This represents a 12.5 percent increase per year in these sales.
Mexico’s exports of fruits and fruit juices also have grown extraordinarily fast, rising from $.3 billion in 1995 to $.7 billion in 1998, an 18.5 percent annual increase.
Shifting agricultural production away from grains and towards vegetables, fruits and fresh flowers will continue. Currently only 9 percent of cultivated area in Mexico is used for the production of fruits, vegetables and fresh flowers, but this output accounts for 34 percent of the value of Mexican agriculture. Conversely, 67 percent of the cultivated land is used for grains, but this leads to only 36 percent output by value.
Agricultural Trade Disputes
In the context of almost $11 billion in two-way agricultural trade between the United States and Mexico, trade disputes, while important, do not impact the overall success of economic integration in agriculture. The NAFTA itself has processes, methods and procedures to assist in the solution of problems.
There are three types of disputes that have occurred between the United States and Mexico under NAFTA in agriculture. First are the sanitary and phytosanitary (SPS) disagreements. Second are the accusations of “dumping,” which means goods are sold at a lower price than they are in the home country or less than the cost of production. The third area of dispute involves different interpretations of the NAFTA agreement itself.
There have been two important products where there has been major progress toward a solution in a trade dispute: avocados and tomatoes. The United States prohibited the import of avocados from Mexico for 83 years for SPS reasons. Mexico made the case that the reason for the SPS exclusions had been solved. The U.S. Department of Agriculture issued a final ruling in early 1997 to permit U.S. imports of Mexican Haas avocados from the state of Michoacan to 19 northeastern states and the District of Columbia from November through February. Mexico has requested that additional northern states be added to the list.
Tomato imports constitute about a quarter of U.S. consumption and most of these come from Mexico. The Mexican tomato industry has made major technological changes in recent years and is becoming increasingly competitive with U.S.-grown tomatoes because of high quality and low cost. Florida growers brought a dumping complaint against Mexican tomato growers. This complaint has been at least temporarily resolved by an agreement with private sector Mexican producers to voluntarily sell their tomatoes above a minimum price.
NAFTA calls for the complete liberalization of trade in sugar between the United States and Mexico by 2007. At the time NAFTA was negotiated, there was the clear view among U.S. industry and the U.S. government that Mexico would not be a major exporter of sugar. The Mexican government had privatized the sugar industry in 1989 and the industry was struggling with a lack of capital in the early 1990s.
The United States has a very protected sugar market, with U.S. domestic prices generally well above world market prices. The high domestic U.S. price is maintained by a strict quota system for imports and to date has been maintained with no government outlays. As part of the NAFTA agreement, Mexico has adopted U.S.-style sugar protection. Thus domestic prices in Mexico also are well above world prices. In addition, the privatized Mexican sugar industry has embarked on a strategy of increasing productivity and lowering production costs. Mexico is now a net exporter of sugar.
The NAFTA dispute arises from different interpretations of the agreement for sugar under NAFTA. In order to get the NAFTA agreement approved by Congress, Mexico and the United States developed a side letter to limit the imports of Mexican sugar before 2007. First, this side letter permitted Mexico to export more than its historic small quantity of sugar only if it became a net exporter of sugar. The side letter made this more difficult by including High Fructose Corn Syrup (HFCS) only on the consumption side. In fact, Mexico became a net exporter of sugar in 1997 and has shipped its limit of 25,000 MT, which will continue until October 2000. At that time the U.S. version of the side letter will limit Mexican sugar exports to 250,000 MT until 2007. Mexico believes that all limits are to be removed in October 2000. During the process of this negotiation there were a number of drafts of side letters, and today there is no agreement as to which was the final version.
This sugar issue also is mixed up with Mexico’s concern with the rapidly increasing imports from the United States of HFCS. HFCS now represents about 20 percent of the sweetener market in Mexico. While most HFCS is imported from the United States, new production facilities are being developed in Mexico in partnership with U.S. industry.
Mexican duties on HFCS are falling due to NAFTA but were temporarily increased due to the dispute over corn broom imports to the U.S. On top of this, Mexico issued a finding in 1997 that U.S. firms were dumping HFCS and retaliated with a significant dumping duty. This duty has had its desired effect of reducing U.S. exports of HFCS to Mexico.
Cattle and Hogs
Hog prices in the United States in 1998 were exceptionally low due in part to the economic crisis in Asia and a strike at a processing plant in Canada. In June 1998, the Mexican Pork Producers Council filed an antidumping petition against the U.S. swine industry. In February the Mexican government made a preliminary determination that U.S. sales of live hogs were being made below cost and this had a potential damaging impact on Mexican production. The Mexican government has established a floor price for hog imports into Mexico at a level designed to protect its domestic production.
Cattle trade between the United States and Mexico has been complicated since the start of NAFTA. First, with NAFTA, Mexico reduced its 15 percent duty on live cattle to zero. Due to the economic recession and draught in 1995 and 1996, Mexico exported much of its stock of cattle to the United States for slaughter. For the past two years, about half of the cattle exported from the United States to Mexico has been for breeding purposes to increase its herds. Meanwhile, since grain prices have been lower in the United States, Mexico has continued to export cattle to the U.S. for fattening before slaughter (feeder cattle). In 1994 the Mexican cattle industry filed an anti-dumping complaint against the U.S. cattle industry. While the Mexican government found some evidence of price discrimination, it did not find the threat of injury and the case was dropped. This case was renewed in 1998. Meanwhile, the U.S. industry in 1998 initiated an anti-dumping case against the Mexican industry. In January this case was dismissed as the U.S. International Trade Commission found no threat of injury to the U.S. industry from Mexico. Meanwhile, the two major industry groups in the U.S. and Mexico have been working together to resolve differences.
Investment in Agriculture
A number of U.S. agribusiness firms have significant investments in Mexico.
These include Campbell Soup, General Mills, Ralston Purina, PepsiCo, CPC International, Kraft Foods, Coca-Cola and Pilgrim’s Pride. For example, Pilgram’s Pride, the fourth-largest chicken producer in the U.S., entered Mexico in 1988 with an initial investment of $25 million. From its initial 480 thousand kilos of locally produced birds per week of production, it is now the second-largest chicken producer in Mexico with 2.7 million kilos of chicken and an investment of about $180 million.
Sales of these affiliated companies grew rapidly before NAFTA following the opening of Mexican industry to foreign investment, from $1.6 billion in 1987 to about $6 billion at the start of NAFTA in 1994.
These sales stagnated at that level for the first few years due to the peso crisis. Over the past two years, these sales have again been growing significantly. It is interesting to note that based on the analysis of the U.S. government, only about 3 percent of the product of these affiliates of U.S. companies is exported back to the U.S.
And Mexican firms also are investing in Mexican agriculture. For example,
Grupo Maseca is the holding company of Gruma Corp., headquartered in Monterrey, N.L., with subsidiaries located in Los Angeles and Irving, Texas. Gruma has modernized traditional corn flour and tortilla production and has become a world leader in this business through its expansion of operations throughout Mexico and into the United States and Central America. Gruma is now the largest corn flour producer in the United States.
Pulsar International, also headquartered in Monterrey, has a number of high-technology agribusiness companies as part of its operations. Savia (formerly Empresas la Moderna) is a multinational agrobiotechnology company active in 123 countries on five continents. Pulsar has invested more than $4 million in the International Agricultural Research and Training Center, located in Chiapas to conduct research on more efficient agricultural production methods, including the use of beneficial insects as an alternative to traditional pesticides.
Agriculture and the Environment
NAFTA specifically prohibits the relaxing of environmental, health or safety measures as a way to attract investment. The side agreement specifically required each NAFTA country to effectively enforce their own environmental laws. Keeping track of environmental laws in Mexico at the federal, state and local levels will be facilitated by the Access-Mexico program of the U.S.-Mexico Chamber of Commerce. This program is developing an on-line database with all of the Mexican environmental laws and regulations in Spanish with English translation.
In October 1998, the U.S. president established the President’s Council on Food Safety. This Council is tasked with developing a comprehensive strategic plan for federal food safety activities, taking into consideration the 1998 report of the National Academy of Science (NAS) which analyzed the current food safety system and made recommendations to improve that system. The NAS report noted that an effective and efficient food safety system must be based on science and that a reorganization of federal food safety efforts is required. The NAS report further noted that the plan should address the additional and distinctive efforts required to ensure the safety of imported foods.
In April 1998 the U.S. Food and Drug Administration (FDA) issued draft guidelines on steps to minimize microbial food safety hazards for fresh fruits and vegetables and set June 1999 as the deadline for comments. The Mexican Agriculture Department (SAGAR) is working in coordination with FDA and USDA in many areas of food safety, including the development of 15 sanitary protocols with the United States. SAGAR is providing information and technical assistance to 64 Mexican farm organizations and has established 80 specific animal and plant health standards and 64 quality standards as part of its certification system for animal and plant health, quality assurance and food safety.
The dramatic increase in agricultural trade between the United States and Mexico is a result of liberalizing trade on both sides of the border and the reality that each country has a comparative advantage in a wide variety of products. U.S. agribusiness firms are well established in Mexico and there are many additional areas for further investment. The governments of Mexico and the United States are working well together to solve a few specific problems in agricultural trade and the Chamber urges this effort be continued and the existing disputes be resolved. The increased emphasis of the U.S. government on food safety, and its work with Mexican agricultural officials, should assure U.S. and Mexican consumers that all food is safe, including imported food.
-- March 1999
The preceding paper is part of the United State-Mexico Chamber of Commerce's NAFTA Forum series, which considers general trade issues and sector-specific concerns between the two nations. The information contained herein is for informational and educational purposes only.
Albert C. Zapanta, President
John Harrington, Senior Economist and author of NAFTA Forum series
Jeff Sparshott, Director of Communications
United States-Mexico Chamber of Commerce
1300 Pennsylvania Avenue NW, Suite 270
Washington, DC 20004-3021
Tel: 202-371-8680 Fax: 202-371-8686
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