Media attention on corn and tortillas prices in Mexico has abated, but little has changed in the economics and public policy of corn production in Mexico. On January 1, 2008 NAFTA will be fully implemented and free trade in corn will occur among the three countries, and government officials all three countries must be prepared to deal with the next crisis in corn trade.
Mexico has very real political and economic problems in dealing with corn trade with the U.S. Corn has been a staple of the Mexican diet for centuries, much in the same way that rice has been for Japan and Korea. The difference is that Japan and Korea have achieved a high level of economic development and rice production is a small economic activity. That is not true for Mexico.
According to estimates for 2003 by the Economic Research Service of USDA, about 20 percent of the economically active population in Mexico is involved in agriculture, compared to 1.9 percent in the U.S. and 2.1 percent in Canada. Agricultural output as a percent of total GDP is 3.7 percent in Mexico, 2.2 percent in Canada and 1.0 percent in the U.S. Output per person in agriculture is $2,700 for Mexico, $40,000 for the U.S. and $48,600 for Canada. Economic adjustments in Mexican corn production have much greater economic and political ripples than in more developed countries.
The Foreign Agricultural Service of USDA reports that Mexico imports about 6-7 million metric tons (mmt) of corn each year, almost all of it from the U.S. and almost all of it yellow corn used for livestock and poultry feed and for processing. Mexican farmers produce about 21-22 mmt of corn per year, mostly white corn for human consumption, but about 3-4 mmt are used for livestock feed. White corn supplies were large enough last year that at least one company was considering building an ethanol plant to supply the California market.
The 15-year transition period under NAFTA required Mexico to allow an increasing amount of corn to enter from the U.S. tariff free under a tariff rate quota (TRQ) that increased to 3.7 mmt for 2007. Mexico can impose a tariff on above quota corn, but has chosen to have a tariff of only 1-2 percent on yellow corn in recent years. The Mexican government also chose to have a tariff of only 2-3 percent on white corn until the Mexican Congress required the imposition of the maximum allowed tariff of 72.6 percent for 2004, 54.5 percent for 2005, 36.3 percent for 2006 and 18.1 percent for 2007. Cracked corn can be imported without a tariff or other regulations and imports have grown to over 2 mmt in recent years. On January 23rd the Mexican government announced an additional unilateral TRQ 1.3 mmt. White corn was allocated 450,000 mmt of the TRQ and yellow corn 850,000 mmt.
The recent increase in the price for corn in all three NAFTA countries may actually result in a smoother transition to free trade in corn in 2008. Higher Mexican corn prices will improve incomes for Mexican farmers, both commercial and limited resource farmers, and stimulate increased production. Whether these higher prices will cause a change in Mexican farm support programs is uncertain. The strong demand for corn in the U.S. for ethanol plants will lessen the potential for U.S. farmers to increase white corn production to compete with Mexican white corn. The downside is that the Mexican government will need a long-term plan to help low income people pay for corn based products.
Political groups in Mexico that were urging renegotiation of NAFTA because of concerns that Mexican farmers would be put out of business by cheap U.S. corn are now pushing renegotiation because the U.S. is causing high food prices in Mexico. With or without NAFTA Mexico cannot wall itself off from the effects of market forces outside the country. The economic evidence of the past 50 years shows that economic and trade policies need to be flexible enough to adjust to outside market forces.
One obvious lesson from the recent reactions in the Mexican corn market is that a 15-year transition period is of no value when governments and industries do not make preparations for the ending of the transition period. Mexico is no more prepared to accept free trade in corn than the U.S. is to accept free trade in sugar. The same was true for pork when the ten-year transition period ended on January 1, 2003. Pork producers in both countries were sure that pork from the other country would cause irreparable harm.
Corn trade in the NAFTA countries is a good example of why free trade is so important and why it is so difficult to achieve. Based on climate and soil types the U.S. naturally has a comparative advantage in the production of corn. While some corn production will occur in all three countries with or without NAFTA, consumers in Mexico and Canada have much to gain by accessing U.S. corn. While little of the imported corn is directly consumed, U.S. corn is used to feed livestock and poultry in both countries and in processing for starch and other products.
The consumer benefits of free trade in corn are overshadowed by the real political problems of how U.S. subsidies for corn producers may impact the potential for increased corn production in Canada and the Mexican government’s desire to protect limited resource corn producers from low corn prices and low-income consumers from high corn prices. While free trade agreements are promoted based on their economic benefits, the reality is that free trade agreements are about politics, not economics. The recent disruptions in the Mexican corn market are part of the arguments for moving toward more open trade, not a reason to reverse course.