A trade agreement’s effectiveness can be measured by the amount of market integration because specialization in labor and capital leads to more efficient use of resources. Agricultural producers benefit from their relative strengths and respond to changing economic conditions by expanding sales areas, achieving economies of scale and possibly accessing cheaper inputs. Producers also face new competition from producers who did not previously have access to major markets. New opportunities are created for direct foreign investment. Consumers get access to a greater variety of food products and offseason supplies of fresh fruits and vegetables. More competition also expands consumers’ purchasing power.
The report assigns three levels of market integration – high, medium and low – to the various segments of agriculture. A high rating means that almost all barriers to trade and investment have been removed and the remaining ones do not prevent substantial cross-border flows of trade and investments. A medium rating means that one or more significant barriers to trade and investment remain that could be removed. A low rating means that government policies, including appropriate sanitary barriers, are clearly preventing markets from integrating.
Grains and oilseeds markets are highly integrated except for wheat with Canada where the Wheat Board maintains its single buyer status. Livestock and poultry markets are split with a high degree of integration of U.S. producers in the Mexican market, but Mexican producers less integrated into the U.S. due to animal diseases. The U.S. and Canada are highly integrated in pork and beef, but integration is low in poultry and dairy because Canada excluded them from the agreement. Fruits and vegetables are highly integrated across the countries with some exceptions. U.S.-Mexican integration for sugar and sweeteners is medium as the 14 year integration period ended in 2008, while integration with Canada is low because U.S. imports from Canada were excluded. Cotton, textiles and apparel are highly integrated across the countries as Canada has stopped importing and milling cotton and the U.S. supplies cotton to Mexico. Processed foods are highly integrated between the U.S. and Canada, but are only medium integrated with Mexico.
The low integration of the U.S. with Canada on poultry and dairy and Canada with the U.S. on sugar shows how government policies for some products deny the benefits of market integration to producers and consumers while allowing the benefits to accrue for other products. Markets would integrate in those areas to the benefit of producers and consumers if not prevented by government policies.
The medium integration of Mexican meat and poultry with the U.S. shows how sanitary regulations sometimes prevent producers from accessing other markets. That is why it is critical to accurately distinguish proper barriers based on science versus those that are smokescreens for protectionism. The U.S. has worked hard to approve Mexican imports from areas where diseases have been controlled while restricting imports where problems continue. Regionalization has also worked to the advantage of the U.S. when low-pathogenic avian flu was discovered in Arkansas and poultry shipments from other states were allowed to continue.
Integration of the fruit and vegetable markets for the three countries shows both opportunities and challenges. U.S. imports from Mexico more than tripled since NAFTA began to $5.6 billion in 2008 as the industry has increasingly oriented toward the U.S. market. U.S. exports to Mexico also tripled at a much lower level of $1.0 billion in 2008. Canada has become an important supplier for the U.S. in fresh greenhouse tomatoes, peppers and cucumbers. U.S. fruit and vegetable exports to Canada are just short of $4.0 billion per year. The U.S. and Canada have an arrangement to overcome trade concerns for Canadian potatoes entering northeastern markets. Private companies and government food agencies continue to search for the right combination of production practices and regulatory oversight to ensure plentiful supplies of high quality products at reasonable prices. Mexico and Canada supplied in 2007 about 13 percent of the fruit and 11 percent of the vegetables available in the U.S. compared to 6 percent for each in 1990.
Integration has not resulted in production increases in one country at the expense of another. For example, U.S. exports of corn to Mexico were 9.3 million tons in 2008, almost four times the annual shipments in the decade before NAFTA. For most of the transition period Mexico allowed more corn imports than the required minimum. Production in Mexico increased by 73 percent compared to the yearly average for the decade before NAFTA to a record 23.5 million metric tons in 2007.
The free flow of direct foreign investment has also resulted in capital flows for agricultural processing and consumer marketing. In 2005, Mexican and Canadian affiliates of U.S. companies had sales of processed food products in the two countries of $23.4 billion compared to U.S. exports of processed food products to the two countries of $13.2 billion.
The report ends with ideas on extending the gains from NAFTA with a NAFTA Plus effort. One approach is a customs union with free internal trade and a common set of external tariffs to eliminate producers in one country having a different set of market signals to import inputs. The U.S. has lower agricultural import tariffs with a few exceptions like peanuts, sugar and crude soybean oil. Rules of origin under NAFTA would be eliminated. The other approach is to make selective changes in the existing agreement like the much discussed labor and environment agreements. Sanitary and phyto-sanitary rules have already been fine-tuned to further increase trade. Both approaches could provide further benefit for producers and consumers.