The end of 2004 marked 11 years of experience in economic integration under the North American Free Trade Agreement (NAFTA). In February the Economic Research Service (ERS) of USDA released a Congressionally-mandated biennial report titled “NAFTA at 11: The Growing Integration of North American Agriculture.” The analysis provides insights on how trade agreements can facilitate the movement of products and capital to meet the changing needs of consumers and create new opportunities for producers, while still providing transition protection for politically sensitive products.
The best outcomes occurred when consumer demand is growing and trade agreement rules and other government policies provide flexibility so markets can respond. The Mexican market for pork and poultry products is a good example. Rising consumer incomes allowed per capita consumption of poultry meat to increase by 54 percent from 1993 to 2003 while pork consumption went up 32 percent. Mexican poultry and pork production doubled over those 11 years. U.S. exports of feed grains, oilseeds and products to Mexico also doubled to 16 million metric tons (MMT) per year.
Under NAFTA the Mexican government had agreed to a 3.2 million metric ton tariff rate quota (TRQ) for corn, but has allowed additional imports, 3.8 million metric tons of corn in 2003, with only a one percent tariff to meet the increasing demand for feed. At the same time, imports of pork products from the U.S. increased from 6 percent of the Mexican market in 1990 to 26 percent in 2004. This occurred despite market disruptions by Mexican concerns over the “dumping” of U.S. pork and the imposition of anti-dumping duties on hogs from early 1999 to May of 2003. Also, the second and third largest Mexican poultry producers are affiliates of Pilgrim’s Pride and Tyson.
These changes in production and trade occurred while the Mexican government provided protection for white corn producers. White corn is used for human consumption and protecting small domestic producers is a major political issue. White corn exports from the U.S. to Mexico declined from 2000 through 2004, and total corn production in Mexico has actually increased during the NAFTA time period.
Increased economic integration does not mean the end of policy disputes. The U.S. and Canadian beef and pork markets have become highly integrated, but those relationships are coming under increasing strain as a result of the BSE cases in Canada and the U.S. and the imposition of duties on feeder pigs from Canada. The U.S. and Mexican beef industries are also integrated, but have been less impacted by the discoveries of BSE.
Increased year-round demand for fresh fruits and vegetables by U.S. consumers has increased imports of these products from the NAFTA partners. Mexico accounted for about 30 percent of the $10.1 billion average imports of fruits and vegetables in 2001-03 while Canada accounted for 17 percent. At the same time, U.S. exports of fruits and vegetables averaged $7.5 billion, with 11 percent going to Mexico and 36 percent to Canada.
Producers from the three NAFTA countries established a Fruit and Vegetable Dispute Resolution Corporation that attempts to work out supply issues in a cooperative manner. It was created in 1999 under Article 707 of NAFTA. Producer groups have also used negotiations to handle dumping claims related to U.S. apples and Mexican tomatoes. A Hepatitis A outbreak in 2003 in the U.S. traced to green onions has raised safety issues for supply chains.
The cotton and apparel industries have integrated with U.S. cotton shipped to Mexico were lower cost labor is available to make textiles and clothes. With changes in import quotas under the WTO Agreement on Textiles and Clothing, Mexico has already seen exports to the U.S. decline from $9.7 billion in 2000 to $7.9 billion in 2003 and employment drop by 20 percent. Cotton producers and textile and apparel makers have a shared interest in increased efficiencies in the supply chain to prevent further market losses.
The ERS analysis also shows what happens when sensitive policy issues are not clearly worked out in a trade agreement. The U.S. and Mexico agreed to “side letters” to modify NAFTA as it applies to sugar. Mexico has since said that the side letters are not valid, while the U.S. disagrees. The U.S. has limited Mexico’s access to the U.S. market to the minimum required by the WTO for raw sugar and its customary share of the U.S. TRQ for refined sugar. Mexico has imposed a 20 percent sales tax on soft drinks that contain any sweetener other than sugar. Repeated negotiations have failed to resolve the issues. The U.S. and Canada exempted sugar from NAFTA.
Despite these problems with sugar as a commodity, trade in sugar containing consumer products has continued to increase. While U.S. sugar deliveries to industrial end users dropped from 5.6 million tons in 1999 to 4.9 million tons in 2003, U.S. imports of sugar containing products have continued to grow. Markets for most consumer products have become more integrated even when markets at the commodity level have remained partitioned.
U.S. and Canadian dairy and poultry industries were also excluded from NAFTA. Despite this exclusion, Canada has allowed U.S. poultry imports above the minimum amounts required under the TRQs, which has resulted in imports from the U.S. growing more rapidly than Canadian poultry output.
While it is easy to find points to criticize NAFTA, the reality is that trade is expanding among the three countries to the benefit of consumers in all three countries and providing producers in each country with greater access to markets and input supplies. In 2008 NAFTA will move into its final stage with agricultural products covered by the agreement trading without tariff barriers. A combination of flexibility under the rules of NAFTA and enlightened self interest of importing countries will still be needed for further integration of agricultural production to the benefit of consumers and producers.