International trade allows consumers to access supplies of goods in other countries where local consumers may place a lower market value on those products. U.S. consumers place different values on some pork and beef products than consumers in Asian countries. U.S. producers of pork and beef earn additional incomes by selling into those markets and Asian consumers have additional supplies of popular products at reasonable prices.
A similar situation exists in the U.S. and Mexican chicken meat markets where U.S. consumers prefer white breast meat and Mexican consumers prefer dark leg and thigh meat. A logical outcome is to produce chickens in the U.S., consume the breast meat here and sell the leg quarters into the Mexican market where demand is stronger. This is occurring, but Mexican poultry meat producers accuse U.S. producers of “dumping” chicken meat (selling below U.S. selling prices) into the Mexican market. The Mexican government has proposed import duties of 63-130 percent on leg quarters. The duties will force up the price of chicken in Mexico to the benefit of Mexican producers who brought the case to the government.
A recently released study, Impact of Proposed Mexican Duties on U.S. Leg Quarters on Mexican Consumers, by Iowa State University Professor Dermot Hayes analyzes the consequences of such policies. Low prices for dark chicken meat have allowed consumers in northern Mexico to include muscle meat in their diet. There is no other source of dark meat on the international market because South American and Asian consumers also prefer dark meat. Duties imposed would not be on whole birds from the U.S., so the trade off is between whole bird imports and leg quarters preferred by Mexican consumers. Whole birds now sell for 68 percent more per pound than leg quarters. Since Mexican consumers do not have a preference for white meat, they would have to pay more for something they prefer less.
On an annual basis imports of 250,000 metric tons of leg quarter will be replaced by 79,000 metric tons of imported whole birds as chicken prices increase by 22.4 percent. If Mexican producers see this as a permanent change in demand they will expand production by 156,000 metric tons per year because of the higher market prices, but consumers will continue to be less well off. Chicken prices will eventually settle at 11.3 percent higher, and consumers who cannot afford those high prices will consume 86,000 metric tons per year less chicken.
The open border between the U.S. and Mexico has not prevented the Mexican chicken industry from expanding. Production increased by 50 percent from 2000 to 2012 to 2.9 million metric tons. Consumption grew even faster requiring almost 600,000 metric tons of imports in 2011 – 250,000 metric tons of leg quarters and 328,000 metric tons of whole chickens and other products.
The author analyzed USDA market price data and concluded that whole chickens on a per pound basis in the U.S. cost 68 percent more than leg quarters. This percentage is about the same as the lowest proposed import duty. The duty will make it prohibitively expensive to import leg quarters, which is the chicken meat item preferred by many consumers in northern Mexico, and result in more imports of whole chickens.
This trade case on leg quarters is not the first such disagreement on chicken meat. In July 2003 the two governments signed a temporary safeguard Tariff Rate Quota (TRQ) for chicken leg quarters imports to Mexico that expired at the end of 2007 when the transition period for NAFTA ended. The safeguard TRQ was not required under NAFTA, but was a compromise that reduced tensions in the transition period. Chicken leg imports from the U.S. under the TRQ were 173,000 metric tons in 2007 and grew to 256,000 metric tons in 2010. Before 2010 ended the Mexican chicken producers were complaining about imports, and the Mexican government launched its investigation on antidumping in February 2011.
Media reports last month indicated that private talks on ending the dispute broke off without an agreement. The U.S. industry tried to negotiate another multi-year TRQ that would maintain much of the market without the need for expensive trade litigation. About the same time, 16 U.S. Senators wrote U.S. Trade Representative Ron Kirk arguing that the Mexican government’s analysis was flawed using average cost of production and assuming that all parts of the chicken should be priced the same. The dispute is now in the hands of Mexican officials. They could have immediately imposed tariffs and are expected to take action within the next month.
Exports of chicken leg quarters from the U.S. to Mexico should be a non-issue. The economics of two-way trade clearly indicate that leg quarters would naturally move from the U.S. to Mexico. Fiddling with numbers to ‘prove’ dumping makes a mockery of NAFTA and the WTO agreement. The Mexican government needs to reject the efforts of domestic chicken producers to deny consumers the choice to purchase products that best meet their needs at affordable prices.
There is another approach to the issue that the U.S. government and chicken industry must also recognize. The Mexican industry could produce the whole birds and export breasts to the U.S. while retaining the leg quarters for their domestic market. That has not happened because of concerns about quality and food safety. Exotic Newcastle Disease (END) and Avian Influenza (AI) are the two big disease issues in poultry trade. NAFTA and WTO rules require the regionalization of a country when possible for trade-related sanitary and phytosanitary standards. This allows exports from regions within a country that are free of an animal disease even if the disease is present in other parts of the country. Mexico is committed to developing export markets and improving its production and processing capabilities. The U.S. has to consider the possibility of imports from Mexico
The entire antidumping mentality, in all industries, not just agriculture, is due for reconsideration. It is included in the WTO Doha Round agenda, but was not given much attention when serious discussions were active a few years ago. Antidumping actions are one of the factors slowing down trade.
While U.S. chicken meat producers have a stake in trade of leg quarters, Mexican consumers have an even bigger stake as all chicken prices will increase and some consumers will have to eliminate chicken from their diets. NAFTA should facilitate trade, not prolong past trade inhibiting practices.
Ross Korves is an Economic Policy Analyst with Truth About Trade and Technology