The Economic Impact of NAFTA on Mexican Agriculture

Michael A. Hartmann

The Economic Impact of NAFTA on Mexican Agriculture

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Abstract

The North American Free Trade Agreement (NAFTA) has contributed to diminishing the Mexican economy because of its dependence on agriculture. Since the introduction of the treaty in 1994, Mexico has been struggling to find an answer to mounting trade deficits in the agriculture sector. However, if Mexico can successfully implement much-needed changes, Mexican farmers may be able to enjoy a prosperous future.

The Economic Impact of NAFTA on Mexican Agriculture

Introduction

The North American Free Trade Agreement (NAFTA) is a trade agreement that took effect in 1994, between the United States, Mexico, and Canada. Most American citizens take notice of the fact that Mexico has drained industrial and technical jobs from the United States in significant numbers. NAFTA has enabled companies in Mexico to obtain these jobs because companies can pay a Mexican worker less than 20% of the pay for the identical job in the United States. As American automotive manufacturers demand cheaper parts from their suppliers, the suppliers are forced to build plants in countries like Mexico while taking advantage of lower costs labor and free trade between the countries.

However, Mexico is not faring well in all business areas. There is one sector of the industry that even cheap labor cannot compete with the industrial muscle of the United States and Canada. Mexico’s once independent and stable agriculture industry has been trampled by their northern neighbors to the point that Mexico can no longer compete. The United States can sell corn other indigenous Mexican crops to Mexico at much cheaper costs than Mexican farmers can produce it, and in greater quantities. As the Mexican population expands, citizens are depending on corn at an increasing rate. Mexican farmers are giving up the industry or are living well below poverty. The country is attempting to offset the trading loss. However, matters may get much worse before they improve. A discussion of this economic dilemma with Mexico and NAFTA will be discussed as well as suggestions on what Mexico can do to improve its trade deficit without violating the NAFTA agreement.

NAFTA Overview

The North American Free Trade Agreement, or more commonly known as NAFTA, is a wide-ranging trade promise involving the United States, Canada, and Mexico in a free trade area. NAFTA was officially in effect on January 1, 1994. The agreement prescribed the instantaneous abolition of import taxes on half of all U.S. merchandise distributed to Mexico and progressively eliminating out further import taxes over an interval of almost 14 years. Trade limitations were to be done away with from numerous merchandise classes, including automobiles and automotive parts, computers, fabric, and agriculture. The agreement additionally safeguarded intellectual property rights such as patents, copyrights, and trademarks and set the framework of the elimination of boundaries on investment between the three nations. Requirements concerning employee and environmental protection were further added as an outcome of additional arrangements authorized during 1993 (Office of NAFTA and Inter-American Affairs, 2004).

Chapter 7 of NAFTA is known as the agriculture chapter. This text spells out the policies for the agricultural trade involving the three North American nations. It includes three discrete bilateral provisions for U.S., Canadian, and Mexican agricultural trade. This chapter’s objective is the liberalization of agricultural exchange and the decline, eradication, and synchronization of sanitary and phytosanitary (plant sanitation) procedures. Because of arranging a trilateral agricultural operational cluster, the NAFTA regulations strive to circumvent hindrances produced by phytosanitary procedures, to synchronize agricultural categorization and to widen grading and marketing benchmarks. Additionally, it promotes the purging of export subsidies and the exercise of domestic assistance programs that do not warp trade (Office of NAFTA and Inter-American Affairs, 2004).

NAFTA forbids the implementation of phytosanitary procedures as camouflaged obstacles to trade. However, there is no provision in NAFTA that inhibits any of the three countries from creating regulations to shield consumers from hazardous food or defend domestic harvests and farm animals from foreign infections, members are persuaded to implement international and regional regulations where fit. Providence, state, and local authorities are permitted to ratify standards more rigid than those accepted at the nationwide level, provided these standards are scientifically justifiable (Office of NAFTA and Inter-American Affairs, 2004).

The 14-year phase-out of tariffs under NAFTA is escalated as the period ends. The following is the schedule of tariff changes under the agreement (Office of NAFTA and Inter-American Affairs, 2004):

  • January 1994: The removal of Mexican duties on US sorghum, assorted citrus fruit, fresh strawberries, and oranges. In return, the removal of U.S. duties on Mexican corn, sorghum, barley, soy meal, apples, pears, peaches, fresh strawberries, beef, pork, and poultry, and oranges.
  • January 1998: Outdated tariffs under the Canada-United States Free Trade Agreement (CUSFTA) were done away with. The eradication of Mexican levies on US pears, plums, and apricots. Additionally, the removal of U.S. taxes on Mexican non-durum wheat, soy oil, and cotton was implemented.
  • January 2002: Marked the removal of Canadian agricultural dues on Mexican fish, meat, sugar, flour, dairy, and beer.
  • January 2003: Introduced the purging of Mexican tariffs on US wheat, barley, rice, dairy, soybean meal and soy oil, poultry, peaches, apples, frozen strawberries, hogs, pork, cotton, and tobacco. Furthermore, removal of US tariffs on Mexican durum wheat, rice, limes, winter vegetables, dairy products, and frozen strawberries was introduced.
  • October 2007: Marks the abolition US-Mexico sugar tariffs
  • January 2008: Removes US tariffs on Mexican frozen concentrated orange juice, winter vegetables and peanuts. At this time, Mexican tariffs on corn and dry beans will be eliminated.

NAFTA’s Impact on Mexican Agriculture

NAFTA’s accord on agriculture has delivered considerable sacrifices for food processing companies. Agricultural production has progressively more set focus on large-scale farms, factory-type livestock lots, and capital-intensive food manufacturing. As a result, this will place demands on small-scale farms, for the most part on subsistence domestic farmers in Mexico. Mexico has clearly been dealt the hardest blow to its agriculture market due to NAFTA (RMALC, 2004).

Recent studies have pointed out that Mexico has endured a net loss of profitability since the implementation of NAFTA. The number of agricultural exports improved by 63% between 1993 and 1996, at the same time as imports increased 87.4% in the same time frame. The livestock segment tapered 27%, as imports rose 4%, ensuing in a 108 million dollars trade shortfall in the segment in 1996. The agricultural trade tally recorded a loss of 740 million dollars in 1994 and 1.086 billion dollars during 1996 (RMALC, 2004).

The statistics illustrate that agricultural exports are not keeping up with the rise in imports so that Mexico’s reliance on food importation is in decline resulting in the unenthusiastic outlook on Mexican farmer’s agriculture outlook. This gives the impression that the Mexican agricultural infrastructure is falling apart. Many farmers and producers’ establishments, including added public associations and market analyst, are against the outcomes of the NAFTA discussions in this segment that had calculated that Mexican farmers would benefit from the treaty (RMALC, 2004).

Mexico’s economy heavily relies on agriculture. Agriculture produces 8 percent of Mexico’s gross domestic product (GDP) and retains about 22 percent of the labor force which is estimated to be 8 million personnel. In comparison to the United States, agriculture consists of merely 2 percent of GDP and provides work for about 2.7 percent of the labor force of around 4 million personnel. Despite having half the amount of farm labor, the United States has significantly more arable soil than Mexico. No more than 12 percent (143 thousand square miles) of Mexico is arable whereas 19 percent (1,118 thousand square miles) of U.S. land is arable. This difference points out that the United States is much more efficient than Mexico when labor is compared to the area (United States-Mexico Chamber of Commerce, 2005).

Mexican producers of agriculture find it unattainable to try to win against the industrious capability of the United States and Canada. This compromise was accomplished in exchange for more encouraging remedies for the fruit and vegetable segment; however, these Mexican exports are still held back by non-tariff barriers. These barriers include strict regulations by food regulators in the United States and Canada (RMALC, 2004).

By promising new market admittance and eliminating Mexico’s supply management of corn and its value foundations and additional food security policies, NAFTA unlocked Mexico to imports of corn purchased at subtle prices from U.S. and Canadian farmers who in the past had lower costs, given their vastly automated large-scale fabrication. The import cost at which goods trading corporations offered corn for trade in Mexico was well beneath the bottom price Mexican farmers had gotten before NAFTA. The results were that Mexican farmers who were incapable to contend with U.S. and Canadian producers gave up farming, and Mexico has turned out to be progressively more reliant on corn imports (RMALC, 2004).

Unequivocally conflicting to free trade supposition is that corn prices for Mexican consumers would lift regardless of the reality that corn growers received inferior prices. Additional outcomes were less extensively calculated. The introduction of the genetically equal monoculture corn from the United States and Canada is driving the genetic assortment of Mexico’s native corn mixture to the threshold of extermination (RMALC, 2004).

To make matters worse for Mexico, during negotiations for the NAFTA talks, supporters of the treaty emphasized that free trade would by design result to better environmental circumstances in all three countries, principally Mexico. By increasing incomes, they argued that NAFTA would produce the funds to underwrite environmental improvement. However, Environmental degradation has excelled. Additionally, information from Mexico’s National Institute for Statistics, Geography, and Information Systems (INEGI) detail how this environmental degradation has damaged the benefits of Mexico’s trade and industry intensification (Gallagher, 2004).

According to INEGI, amid 1985 and 1999 countryside soil erosion escalated by 89%, community solid waste production by 108%, water contamination by 29% and metropolitan air pollution by 97%. The organization’s investigations calculate approximately the economic costs of environmental degradation at 10% of Gross Domestic Product from 1988 to 1999, a median of 36 billion dollars in damage every year. The price of this damage engulfs the rate of financial growth, which has lingered at a median of 2.5% yearly over the identical time frame, or 14 billion dollars annually (Gallagher, 2004).

The Mexican government has been put under tremendous pressure to close the gap in the agriculture trade deficit. In 2003, Mexico’s President Vicente Fox reacted by singing a pact after farmers initiated recurring demonstrations against imports permissible under NAFTA. The pact has increased the concern for some U.S. farm clusters that Mexico’s President will give in to the pressure from its farmers to renegotiate NAFTA obligations on white corn and dry beans. Renegotiating the agriculture chapter has been a vital stipulation of small farmers throughout Mexico, mostly amongst maize farmers who survive mainly at subsistence levels. However, a Mexican study has emerged in opposition to renegotiating the agricultural chapter of NAFTA. It recommends in its place that the nation ought to build up a policy to craft its farming sector to be competitive (MPC, 2003).

North of the United States border, Canada’s overall agriculture trade is much more positively affected by NAFTA. Since the realization of the NAFTA, agricultural trade between Canada and the United States has improved by 82%, accomplishing in access of 25 billion dollars. Additionally, Canadian exports have matured by 92% to attain over 14 billion dollars. Some of the accomplishments for Canada under NAFTA include (Elliot, 2004):

  • A 700% increase in exports of soybean oil, a 400% increase in the exports of sunflower oil and a 44% increase in exports of canola oil to the United States
  • Canola exports to Mexico have more than tripled, oats exports have increased 700% and wheat exports have increased by 65%
  • A 200% increase of beef exports and an 87% increase in pork exports to the United States, and a 2500% increase in beef exports and a 300% increase of pork exports to Mexico
  • Pasta exports to the United States increased by 300% and malt exports have increased nearly 500%
  • Exports of frozen French fries to the United States increased 400%, and to Mexico, they are 10 times higher
  •  Exports to Mexico of dried beans increased 700%, dry pea and lentil exports increased 500%, and exports of frozen vegetables to Mexico increased by 78%

Since the United States and Canada are both able to mass produce agriculture, the two countries frequently clash with each other in regards to trade. Canada and the United States have taken up high profile trade disputes with each other. One of the biggest disputes is over wheat. Each country accuses the other of unfair practices and tariffs to hamper the success of trade. Lumber is another common dispute area (Elliot, 2004).

Improving the Outlook of Mexican Agriculture

Mexico’s failure to compete with the United States and Canada in the agriculture segment is embedded by many factors. While these elements are crucial to the survival of Mexican agriculture, they can be achievable under current NAFTA guidelines with the cooperation of Mexican farmers and the government. The following details an economic plan to assist in an improvement in the industry (Robinson, 2003).

Mexico’s dependence on a single free trade treaty with its partner’s highly productive agriculture segments has put them at a disadvantage competitively. Mexico endeavored to advance its economy lacking the assistance of its robust northern partners it and has fundamentally disastrous because of it. Mexico should broaden their market to diminish the reliance on the United States and Canada by moving ahead with bilateral trade pacts with other nations. Analysts furthermore state that added trade with the remainder of the world will aid Mexico to bolster its competitiveness to respond to the mounting competition from China. Agriculture companies in Mexico should support such pacts and focus on the products that are unique to Mexico (Robinson, 2003).

Worldwide manufacture of cereals, meats, cheese, sugar, and vegetable oils is expected to outpace utilization over the subsequent ten years. These should temperate intensification in trade and amplify across the board in world prices. Worldwide grain production is estimated to increase by up to 17% by 2013.Growth in world oilseed production is projected to be sluggish due mostly to some relief in the rate of Brazil’s productivity. Mexican companies should be able to take advantage of these forecasts by concentrating crops that will be high in demand in the ensuing years (Robinson, 2003).

Mexican marketers should push their products to make them more appealing to consumers around the world. Competition is intense, with today’s customers more meticulous and pushing higher quality and sensible prices of the products they buy. Hard-hitting and concentrated promotion will be the answer to success in this market. Five-star hotels, restaurant, and institutional trade, as well as targeted niche markets, will be majority positive for food at the upper end of the processed food segment. For example, Florida constantly markets the quality of their oranges. This promotion has caused a demand for Florida oranges (Robinson, 2003).

Mexico is presently facing various environmental troubles. One such problem related to their agriculture capacity is the country’s shortfall of available water resources for the population’s daily requirements. Its requirement for water sources has been on an unremitting growing demand in current decades because of populace growth and escalating per capita requirements due to modern technology. The central water hurdle facing the country in the will be how to supply a sufficient amount and quality of water in a sustainable and gainful manner for a diverse range of water applications for this rising population. The government, as well as regional agriculture producers, must invest in innovative means of supplying water to people and crops (Robinson, 2003).

The United States has an additional advantage due to the farm subsidies available that are lacking in Mexico. U.S. farmers can generate seven times as much as the Mexican market, with merely 2 million U.S. farmers. In contrast, Mexico has approximately 8.6 million farmers to produce agriculture. For the most part, the disparity within Mexico’s lack of production is pointed to the deficiency of improvement in technology as its hurdle to contending with the U.S. Others indicate that Mexico’s land restructuring of the 1930s is a large ingredient of the crisis. This restructuring restricted the quantity of land a farmer can own to 100 hectares and in the majority circumstances, much less. This has not added to the effectiveness in the agriculture market concerning tons of food created per hectare and per man-hour. Decades of disregard by Mexico’s government has additionally kept back Mexico’s farming systems and rendered them obsolete. The country must remove the land cap and allow farmers to own more land. Furthermore, the government must find ways to subsidize farming to get a jump start in the market (Robinson, 2003).

Conclusion

Mexico must invest in their farming technology, introduce new farmer land privilege laws, give support to agriculture subsidies, direct water sources, and to reshape their farming structure to improve the agriculture trade deficit. As their agriculture improves, their general economy will be greatly improved because of the dependency of the market. Those exporters who have kept a presence in the Mexican market and preserved contiguous relations with distributors, importers, retailers, and consumers will be in the best situation to benefit of the economic resurgence.

References

Elliot, I. (2004). Canada-U.S. wheat spat goes to NAFTA. Feedstuffs, 76, 46. Retrieved June 3, 2005, from Proquest database.
Gallagher, K. (2004). Paying for NAFTA. NACLA Report on the Americas, 38, 1. Retrieved June 3, 2005, from Proquest database.
MPC. (2003). Mexico’s president signs new farm policy pact. Feedstuffs, 75, 18. Retrieved June 4, 2005, from Proquest database.
Office of NAFTA and Inter-American Affairs. (2004). NAFTA text. Retrieved June 1, 2005 from http://www.mac.doc.gov/nafta/
RMALC. (2004). The impact of nafta on mexican agriculture. Retrieved June 2, 2005 from http://www.developmentgap.org/rmalcag.html
Robinson, L. (2003). NAFTA moves closer to free trade promise. Retrieved June 4, 2005 from http://www.txfb.org/TexasAgriculture/2003/011703/011703NAFTA.htm
United States-Mexico Chamber of Commerce. (2005). NAFTA: Agriculture. Retrieved June 7, 2005 from http://www.usmcoc.org/n8.html

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©2018 Michael A. Hartmann

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