IS U.S. AGRICULTURE A NAFTA WINNER OR LOSER?
Testimony to the Special House Select Committee on NAFTA and
GATT
Brownsville, Texas
September 21, 1994
Dr. Gary W. Williams
GWWilliams@TAMU.EDU
Professor of Agricultural Economics
Director, Texas Agricultural Market Research Center
Texas A&M University
NAFTA proponents claim that the agreement will expand trade,
boost economic growth, and lead to a net increase in employment in all
three countries. Critics warn, however, that lowering trade barriers
with a developing country like Mexico could encourage many
U.S. industries to move to Mexico to take advantage of low cost labor
and lax enforcement of environmental regulations. For agriculture,
proponents argue that NAFTA will open the door to a huge new market in
Mexico for U.S. agricultural and food products, especially feedgrains,
beef, and processed foods. Critics claim that the agreement will
primarily stimulate Mexican production and exports to the United
States and a relocation of U.S. agricultural production and processing
to Mexico. Which is it ... increased exports or lost production and
processing? A close look at NAFTA clearly indicates that NAFTA will
help boost exports and lead relatively few firms to simply pull up
stakes and relocate to Mexico.
Will NAFTA Boost U.S. Agricultural and Food Exports to Mexico?
Mexico may be a potentially huge new market for U.S. agricultural
and food products, but the NAFTA is not the primary reason, at least
not in the short run for at least two reasons. First, over the last
5-10 years, Mexico has unilaterally opened its markets which have long
been closed to international trade as part of an historic process of
sweeping economic reform. At the same time, U.S. agricultural and
food trade barriers are few. Consequently, relatively few explicit
agricultural trade barriers remain to be eliminated. The effects of
the unilateral opening of Mexican markets on U.S.-Mexico agricultural
trade became quite evident much before NAFTA was implemented. By
1993, Mexico had emerged as the third largest market for U.S.
agricultural exports, purchasing food and fiber valued at $3.6
billion, a 233% increase since 1986. And although imports of Mexican
food and agricultural products have increased as well, the increase
has been more modest, up just 30% since 1986 to $2.4 billion last
year. More importantly, the unilateral opening of the Mexican market
turned a $1.0 billion U.S. food and agricultural trade deficit in 1986
into a nearly $1.0 billion surplus last year.
The second reason that the impact of NAFTA on U.S.-Mexico
agricultural trade may be small in the short run is that the remaining
trade barriers are being eliminated slowly over 5, 10, or 15 years.
In addition, the agreement provides for special safeguards to protect
against import surges for some of the most important commodities
traded between the two countries.
The important question, then, is what the effects of NAFTA on
U.S.-Mexico food and agricultural trade might be over the long run.
The critical factor that will determine the answer to that question is
the future pace of economic development in Mexico. Increased market
efficiencies as economic restructuring continues in Mexico and growing
foreign capital investments in productive activities in the Mexican
economy have generated some economic growth and boosted per capita
incomes and purchasing power in Mexico.
Continued economic growth in Mexico would likely have three
general consequences for U.S. agricultural exports. First, continued
growth in per capita incomes will intensify Mexican demand for the
agricultural and food products that the U.S. is already exporting to
Mexico.
Second, economic growth in Mexico would be accompanied by an
inevitable switch from low-value subsistence foods like corn and beans
to higher value and more highly processed foods like meat and prepared
foods. This would help boost the value as well as the volume of
U.S. agricultural and food exports to Mexico and pay dividends to
U.S. producers and processors alike.
Third, income growth in Mexico would also likely restrict Mexican
agricultural and food exports to the United States. As Mexican
incomes grow, so will their demand not only for products imported from
the U.S. but also for products they are currently exporting to the
U.S., like fruits and vegetables. Consequently, given significant
economic growth, Mexico would find it increasingly difficult to fill
their own food needs much less export to the U.S. This is
particularly the case given the limited land area and water resources
available for agricultural production in Mexico and other
restrictions. It is entirely possible, for example, that Mexican
economic growth could be strong enough to turn Mexico into a net
importer of even fruits and vegetables over time.
NAFTA will serve a crucial role in fostering economic development
in Mexico. NAFTA will send a signal to the global community that
Mexico is a safe and profitable investment opportunity. NAFTA will
intensify demand for many Mexican produced goods, create opportunities
to attract private foreign capital, and invite expansion of
U.S. business activities in Mexico, all of which will create
employment opportunities and income in Mexico over time.
Will NAFTA Lead to the Relocation of U.S. Agribusiness to Mexico?
The more liberal trading arrangements between the U.S. and Mexico
under NAFTA have lead to fears that U.S. agribusinesses will relocate
to Mexico to lower costs with the intention of shipping their products
back to the U.S. market. Our research, however, indicates that
neither the patterns nor trends in agricultural production,
processing, or trade among NAFTA countries are likely be altered
significantly by the NAFTA. Any changes are more likely to result
from economic growth related to economic reforms in Mexico and growing
foreign capital investments.
U.S. Department of Agriculture data show that U.S. processed food
exports to Mexico have increased in recent years. The data also
reveal that capital investments by U.S. food manufacturing and
processing firms in Mexico are growing. These firms, however, appear
to be investing in Mexico primarily to take advantage of the growing
Mexican market and not to lower costs by relocating plants and
operations to Mexico. With some exceptions, the data indicate that
sales of U.S.-based food manufacturing and processing firms and their
affiliates in Mexico are directed primarily to local rather than to
U.S. markets. These firms and their affiliates are more concerned
about Mexico as a potential market for their products rather than as a
"platform" for export sales back to the United States. Increasing
competition with multinational corporations has created some incentive
for Mexican food processors to seek out joint venture opportunities
with U.S.-based food processors, particularly since the majority of
the competition is from Mexican affiliates of U.S. food processors
rather than direct exports from the United States.
Although NAFTA may be helping to attract foreign capital to
Mexico, much of the increased foreign investment is related to recent
changes in Mexican investment laws that ease restrictions on foreign
ownership of Mexican businesses and land. Foreign direct investment
in the Mexican agricultural production and food processing sectors,
however, still only account for less than about 5% of overall foreign
direct investment in Mexico.
Will U.S Agriculture Be a Net Gainer or Loser from NAFTA?
Research indicates that although U.S. agriculture as a whole will
be a NAFTA winner, some parts of U.S. agriculture could lose. The
most likely immediate gainers for U.S. agriculture include cattle and
hog feeders, meat processors, grain and oilseed producers and
processors, dairy producers and processors, producers of some fruits,
and manufacturers of a wide variety of further processed and
consumer-ready food products.. On the other hand, NAFTA is likely to
strengthen the competitive threat of several Mexican agricultural
industries, including labor-intensive melon, vegetable, and cow-calf
production.
Horticultural products: NAFTA will likely boost U.S. consumption
of traditionally imported, high-dutied, Mexican horticultural products
such as asparagus, tomatoes, lettuce, bell peppers, cucumbers, green
chilies, squash, avocadoes, grapes, guavas, and mangoes. Imports of
other Mexican horticultural products, such as broccoli, cauliflower,
melons, eggplant, onions, and okra, might also increase although the
U.S. may be at less of a competitive disadvantage and may even have
the advantage in some areas during certain times of the year. NAFTA
will certainly boost U.S. exports of primarily temperate-climate
products to Mexico such as potatoes, apples, pears, peaches, and
processed foods such as dried leguminous vegetables and corn. As
argued earlier, however, Mexican economic and per capita income growth
over time could outpace the ability of the Mexican fruit and vegetable
industry to supply the growing fruit and vegetable markets in both
countries - particularly if critically needed Mexican public and
private investments in infrastructure, processing capacity and
technology, distribution and transportation facilities, and irrigation
capacity are not made.
Citrus and citrus products: Because pre-NAFTA U.S. import tariffs
on these products were relatively low, NAFTA will have only a small
additional impact on U.S. imports of Mexican citrus. Non-tariff
issues such as phytosanitary regulations to control the spread of
insects, particularly the Mexican fruit fly, and pathogens harmful to
citrus, and differences in other grades and standards and food safety
regulations will continue to be the major policy issues facing fresh
citrus imports from Mexico. Increased capital investments in Mexican
citrus processing facilities as a result of a NAFTA could boost
U.S. orange juice imports from Mexico.
Grains: Mexico eliminated most of its tariff and non-tariff
barriers on grain imports prior to the implementation of NAFTA except
import restrictions on corn. NAFTA-induced economic growth, however,
would have a sizeable impact on U.S. exports of food grains like wheat
to Mexico. Also, increased Mexican demand for meat could stimulate
Mexican livestock feeding and import demand for U.S. sorghum and other
feedgrains.
Livestock and meat: Much before NAFTA was ever implemented,
Mexico had removed virtually all barriers to beef and live cattle
imports, stimulating growth in Mexican imports of U.S. beef. Imports
grew fast enough that Mexico slapped tariffs on fresh and frozen beef
in about November of 1992 which were eliminated by the NAFTA in
January 1994. Mexican imports of U.S. beef have recovered somewhat
since NAFTA was eliminated but remain below peak levels of 1991 and
1992. Economic growth in Mexico should further stimulate the demand
for beef and other meats in Mexico and provide incentives for both
additional U.S. meat exports to Mexico and the growth of meat
production in Mexico. Consequently, the most likely scenario for
cattle and beef is that Mexico will continue to specialize in feeder
cattle production and exports while the U.S. will continue to export
meat, breeding stock, and genetic material to Mexico. Fat cattle
trade in either direction will not likely amount to much.
Dairy products: Mexico had also substantially reduced dairy
product import barriers before NAFTA was implemented. Thus, the main
NAFTA impact on U.S. dairy exports will be through the food demand
expansion effects of Mexican economic growth stimulated by the
agreement. Even given an increase in Mexican milk output at an annual
rate of 5% (the approximate average annual growth rate over the last
30 years), annual Mexican consumption would far outstrip production if
Mexican economic growth pushed per capita milk consumption levels up
to U.S. levels by the year 2000. Substantial herd rebuilding has
occurred in Mexico since 1987, however, making long-term trade
prospects less certain. Nevertheless, a shift in Mexican dairy
product demand away from low- quality basic products such as non-fat
dry milk and filled cheeses to specialty products like ice cream and
fine cheeses is expected as incomes in Mexico grow.
Cotton: NAFTA provides Mexico with a relatively greater increase
in access to the U.S. cotton market than for the U.S. in Mexico.
Growth in Mexican incomes and increased cotton demand in Mexico for
the production of textiles and apparel for domestic and export sales,
however, will likely mean that cotton will continue to flow from the
U.S. to Mexico despite the NAFTA cotton provisions.
Sugar: NAFTA will have limited impacts on the U.S. sugar
industry. Under the agreement, if either country achieves net surplus
production status then that country can export up to 250,000 mt of
sugar to the other. Whether Mexico could meet the conditions to
export sugar to the U.S. has been the subject of some debate. If the
Mexican soft drink industry converted to the use of high fructose corn
syrup (HFCS), Mexico would have an estimated 500,000 mt surplus of raw
sugar, half of which could be exported to the U.S. under NAFTA. This
assumes, however, that HFCS can compete with raw sugar in Mexico and
that an economic incentive exists for Mexico to ship sugar to the U.S.
Mexico has exported raw sugar to the U.S. in only one of the last
three years and does not currently appear to have a clear advantage in
sugar production and export.
Is There Anything that Might Change the Outcome of NAFTA for U.S.
Agriculture?
Whether or not U.S. ultimately is a net gainer from NAFTA will
depend crucially on a number of factors, including: (1) Mexican
economic growth, (2) foreign investment in Mexico, (3) changes in
Mexican farm size and structure, (4) adjustments in Mexican labor
markets and, and (5) the availability of new production inputs in
Mexico. Unexpected changes in any of these factors could drastically
affect the outcome of NAFTA for U.S. agriculture.
Economic Growth in Mexico: Future growth in U.S.-Mexico
agricultural trade will depend crucially on the pace of economic
development in Mexico. A NAFTA that helps generate a sufficient rate
of economic growth in Mexico to sustain long-term growth in Mexican
employment and per capita income and, consequently, demand for
agricultural commodities could provide the basis for adjustments and
investments in U.S. agriculture to service the Mexican market. Such
growth would likely also stimulate domestic and foreign investment in
Mexican agricultural production and processing. There is no guarantee
that such growth will occur, however. Absent significant growth in
Mexican income and food demand, Mexican agricultural and food markets
would continue to be serviced mainly by local suppliers with little or
no significant increase in capital investments or technology
improvements despite NAFTA.
Foreign Investment: Foreign, private capital to lift Mexican
capacity, technology, and infrastructure constraints is needed for
Mexico to achieve its agricultural export potential. Also, such
investments are key to U.S. export potential to Mexico. Foreign
capital is an important source of expected growth in employment,
income, and, in turn, the demand for food in Mexico.
Mexican farm size and structure: Although popular in Mexico,
especially among the rural poor, the land tenure laws that created the
ejido system in the 1930s have been blamed for the poor performance of
the Mexican agricultural sector and are considered one of the biggest
constraints on productivity growth in Mexican agriculture. The
Salinas Administration recently pushed historic land reform
legislation through the Mexican Congress. If effectively implemented,
the legislation could promote increased production efficiency, growth
in farm size, a decline in the total number of farmers in Mexico, and
increased competitiveness of the Mexican farm sector.
Mexican labor markets and costs: The relatively low cost of
Mexican labor provides Mexico with a relative advantage in
labor-intensive industries like agriculture.
In fact, a short term effect of NAFTA may be downward pressure on
Mexican wage rates as increased agricultural imports from the United
States displace Mexican agricultural labor in import-competing
sectors. The consequence could be increased competitive advantage of
Mexican labor-intensive sectors like fruits and vegetables in Mexico
and greater pressure for migration of undocumented labor to the United
States. Over the longer run, if the NAFTA fosters sufficient economic
growth in Mexico to absorb the displaced labor, wage rates could
recover and eliminate the short-run Mexican gains from low-cost labor.
Again, however, the role of the NAFTA in generating economic growth in
Mexico is critical.
New Production Inputs: NAFTA will enhance the availability in
Mexico of critical agricultural inputs, such as new and used farm
equipment, spare parts, improved seeds and breeding stock, feeds and
additives for animal nutrition, raw materials, and technical
consulting to help lower production costs and improve land and labor
productivity. The Mexican Government has drastically reduced
government subsidies for irrigation, fertilizer, fuel and lubricants,
credit, and technical assistance. Also, the deregulation of the
Mexican banking industry has created a farm credit crisis. Credit to
finance agricultural operations in Mexico is expensive and scarce and
is a major constraint to expansion of productive activities in
agriculture. The net effect may be relatively less availability of
critical inputs to small farmers than to larger, commercial farms in
Mexico.
Conclusions
Unilateral Mexican trade liberalization and other Mexican
economic reforms over the last few years means that comparatively
little of U.S.-Mexico trade in agricultural and food products remained
to be liberalized when NAFTA was implemented in January of this year.
Consequently, in the short run at least, little additional growth in
trade of most agricultural and food products between the two countries
will occur as the direct result of the trade agreement. Continued
growth in U.S.-Mexico agricultural and food trade will depend
primarily on the pace of overall economic and per capita income growth
in Mexico as the result of continued economic reform and capital
investments in productive activities in Mexico.
Even if NAFTA achieved completely free trade between the U.S.
and Mexico, there would be little or no additional U.S. agricultural
exports to Mexico without growth in Mexican incomes and purchasing
power. Eliminating barriers to trade with a developing country like
Mexico simply opens the door to trade. Economic development is the
engine which could create a growing market in Mexico for
U.S. agricultural and food exports. The primary accomplishment of
NAFTA could simply be to allow the U.S. agricultural and food sector
to get its foot in the door to a potentially important market in a
developing country. As development occurs in Mexico over time, the
U.S. agricultural sector will have the advantage over its global
export competitors in access to a growing Mexican market.