NAFTA's impact profound

by Chris Lyddon
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Grain trading in North America has been hugely affected by the North American Free Trade Agreement (NAFTA). In a 14-year process, from 1994 to 2007, barriers to agricultural trade between the NAFTA countries, the U.S., Canada and Mexico were removed.

“The NAFTA countries have completed a remarkable two decades of agricultural trade liberalization,” the USDA’s Economic Research Service said in a report, “NAFTA at 17,” published earlier this year.

Bruce Burnett, the CWB’s director of weather and market analysis, highlighted the agreement’s effect on trade disputes.

“From a grain trade point of view, parts of the agreement basically have provided some methodology for dispute settlement in terms of trade cases brought against, in particular, Canadian grain going into the U.S.,” he told World Grain. “It has provided a mechanism to challenge those in government, tariffs or whatever has been done to ban imports from Canada.”

However, there are still problems. “A lot of the regulations in each country — Mexico, Canada and the U.S. — are still basically intact. For instance, right now because of some of the concerns about terrorism, there are requirements for notification to the U.S. government of shipment. There are all sorts of other little things in the way.

“There really hasn’t been a harmonization from that point of view. I think the governments are committed to doing that, but it’s not necessarily the case.”

That means that non-tariff barriers still affect the grains and other sectors.

One example of the type of disagreement which still occurs in NAFTA was a cross-border dispute over long-haul trucking which was ended recently by a bilateral deal.

“This dispute has cost U.S. businesses more than $2 billion,” said Agriculture Secretary Tom Vilsack in a statement on the deal. “For U.S. farm exports to Mexico, exports of affected commodities were reduced by 27 percent.”

He noted the importance of the Mexican market to U.S. agriculture. “Mexico is U.S. agriculture’s third-ranked trading partner, buying $14.5 billion of U.S. farm goods last year. Already in 2011, exports to Mexico are up nearly 25%,” he said. “Today’s agreement will allow America’s farmers and ranchers to continue to lead the way to America’s economic recovery.”

The ERS report explained the background. “The Mexican government imposed retaliatory import tariffs in March 2009 (and expanded its coverage in August 2010) on a number of agricultural and non-agricultural products from the United States in response to U.S. noncompliance with NAFTA’s trucking provisions,” it said. “These newly erected trade barriers have hindered some U.S. agricultural exports to Mexico, illustrating the importance of NAFTA’s provisions to U.S. agricultural exporters and Mexican consumers.”

According to ERS, Mexico is the second largest agricultural trading partner of the U.S., after Canada. By 2010, Mexico accounted for 14.6% of U.S. agricultural exports and 13.6% of imports. It put the rate of expansion of U.S. agricultural exports to Mexico between 1993, the year before NAFTA implementation, and 2010 at a compound 8.5%, while imports grew at 9.9%.

“U.S.-Mexico agricultural trade is largely complementary, meaning that the United States tends to export different commodities to Mexico than Mexico exports to the United States,” ERS explains on its website. “Grains, oilseeds, meat, and related products make up about three-fourths of U.S. agricultural exports to Mexico.

“Mexico does not produce enough grains and oilseeds to meet internal demand, so the country’s food and livestock producers import sizable volumes of these commodities to make value-added products, primarily for the domestic market. Roughly two-thirds of U.S. agricultural imports from Mexico consist of beer, vegetables and fruit. These imports are closely tied to Mexico’s historical expertise in producing alcoholic beverages and a wide range of fruits and vegetables, along with a favorable climate whose growing season largely complements that of the United States.”

Trade liberalization between the U.S. and Canada has a longer history, having started with the Canada-U.S. Free Trade Agreement (CUSTA), which was implemented in 1989 and subsumed by the North American Free Trade Agreement (NAFTA) in 1994.

“Between 1988 (the last year prior to CUSTA’s implementation) and 2010, U.S. agricultural exports to Canada expanded at a compound annual rate of 7.6 percent, while agricultural imports from Canada grew at a rate of 9 percent,” ERS said. “Much of Canada-U.S. agricultural trade consists of intra-industry trade, meaning that within certain sectors each country exports products to the other.”

The “NAFTA at 17” report highlights the integration in the grains sector. In general, it notes important cross-border investments in grain milling and sizable increases in U.S. exports to Mexico and Canadian exports to the U.S., as well as expanded biofuel production which has increased demand for certain grains and oilseeds.

It describes the degree of integration between the grain sectors in the U.S. and Mexico as high, with strong linkages between U.S. grain and oilseed farmers and Mexican hog and poultry producers. It also notes Mexican direct investment in the U.S. baking and tortilla industries.

ERS also describes the degree of integration between the U.S. and Canada as high, except for wheat, with a growing two-way trade that encompasses bulk commodities, feed ingredients and processed foods.

PROCESSING SECTOR INTEGRATION

The report also shows how the processing industries have become integrated under NAFTA.

“For instance, in 2002 and 2008, the Mexican baking company Grupo Bimbo acquired some of the U.S. interests of a Canadian food conglomerate, George Weston Ltd., that once had been owned by U.S. companies, And in 2010, Grupo Bimbo purchased Sara Lee’s fresh bakery business for $959 million,” it said. “Food sales associated with U.S. direct investment in Canada and Mexico are substantial. In 2008, majority-owned affiliates of U.S. multinational food companies had sales of $27.6 billion in Canada and $10.9 billion in Mexico. Together, these sales were 123% larger than the value of U.S. processed food exports to Canada and Mexico.”

The integration of industries in the three countries has meant big increases in grain trade. For example, poultry and hog producers in Mexico have relied on U.S. feed to help them expand to meet increased Mexican demand for meat.

“As a result, U.S. exports to Mexico of feed grains, oilseeds and related products have increased by 134% during the NAFTA period,” it said. That meant an increase to an average 19.5 million tonnes a year from 2006-10, compared with 8.3 million tonnes from 1989-92.

“Duty-free access to U.S. feedstuffs enables Mexican livestock producers to expand output, lower their costs of production, and compete more effectively with meat imports, and it has made possible a substantial increase in Mexican meat consumption,” the ERS said. “Between 1993 and 2010, per capita consumption of broiler meat in Mexico rose from 16 to 30 kilograms (an 86% increase), while per capita consumption of pork climbed from 10 to 16 kilograms (a 55% increase).”

Poultry and hog producers also use U.S. feed, mainly corn and soybean meal.

"Expanded use of corn by Canada’s ethanol producers is boosting demand for corn, even though livestock numbers in Canada are decreasing,” ERS said.

Despite the huge rise in trade flows, with U.S. maize exports to Mexico quadrupled over the life of NAFTA, rising demand has meant an increase in Mexican maize production.

“During 2005-09, average annual production was 61 percent higher than the corresponding average during 1984-93,” ERS said. “Much of this increase stems from the devotion of more irrigated land to corn and the cultivation on those lands of new hybrids that provide yields comparable to those in the United States.

“Rainfed cultivation of corn also has trended upward, due in part to yield improvements. Rainfed lands account for about 55 percent of Mexican corn production, and a year with unusually dry weather can negatively affect the country’s total corn production, as was the case in Mexico’s 2009 agricultural year.”

Growth in trade in wheat and wheat products has been less dramatic, and the ERS identified several contributing factors. “The wheat trading practices of the Canadian Wheat Board continue to be an issue of contention for the United States,” it said.

The CWB, however, is not the only issue.

“While many of the Canadian regulations that discriminated against U.S. grain at Canadian grain elevators and within the Canadian rail transportation system have been amended during the CUSTA-NAFTA period (e.g., Canada Grain Act, Canada Transportation Act, and removal of the Kernal Visual Distinguishability requirements), Canada continues to require that seed be registered for use in Canada,” it said. “This regulation limits the ability of Canadian farmers to grow U.S. seed varieties.”

A MAJOR ACHIEVEMENT

However, the ERS took a positive overall view of the effects of NAFTA on the grain sector.

“Creation of an integrated North American market in grains, oilseeds and related products is one of NAFTA’s major achievements,” it said. “For Mexico, NAFTA marked a transformation from the strict administration of imports via licensing requirements and the provision of guaranteed prices to domestic producers of many field crops to a system featuring duty-free trade with the United States and Canada and a mix of domestic agricultural supports similar to those in the United States.

“For the United States and Canada, trade liberalization of grain and oilseeds under CUSTA and NAFTA primarily involved the elimination of minor tariffs on bilateral trade. The major exceptions to this pattern concern wheat and wheat products.”
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