Farm Policy Notes

March 1, 1999
INFLUENCE OF NAFTA ON MID-SOUTH AGRICULTURE

Policy Summary

The removal of trade barrier between the United States, Canada, and Mexico under the North American Free Trade Agreement (NAFTA) has had positive impacts on U.S. agriculture in the aggregate. However, NAFTA poses challenges to specific regions and sectors such as Mid-South fruit and vegetable producers. NAFTA's treatment of agriculture is comprehensive and, with a few exceptions, provides for the eventual full liberalization of agricultural trade in the region. In addition to tariffs and quotas, NAFTA addresses export subsidies, import safeguards, rules of origin, and phytosanitary requirements.

U.S. Trade Patterns

Between the United States and Canada, tariffs on most agricultural products were phased out over a 10-year period, and were completely eliminated by January 1, 1998. Between the United States and Mexico, NAFTA eliminated all agricultural import quotas and most tariffs. Remaining tariffs on sensitive products, such as U.S. imports of horticultural crops, were permitted phase-out periods of 5 to 15 years.

Since the NAFTA was implemented, U.S. agricultural exports to Canada and Mexico have increased from $8.87 billion in 1993 to a record $11.6 billion in 1996. U.S. exports to Canada grew 5 percent per year between 1993 and 1996. Twelve commodities (corn, pork, cotton, orange juice, sugar, skins, beverages, soybean meal, wine, peanuts, seeds, rice) increased $382 million in 1996. U.S. exports to Mexico grew 15 percent per year between 1993 and 1996. Twelve commodities (corn, soybeans, soybean meal, wheat, seeds, vegetable oils, cotton, sugar, barley, pulses, beef, rice) increased $2 billion in 1996.

U.S. agricultural imports from Mexico and Canada totaled a record $33.3 billion in 1996. U.S. imports from Mexico increased 11.6 percent per year between 1993 and 1996. Twelve commodities (coffee, tomatoes, beverages, melons, orange juice, onions, cucumbers, strawberries, grapes, biscuits, peppers, molasses) increased $1.1 billion in 1996. U.S. imports from Canada increased 13.7 percent per year between 1993 and 1996. Twelve commodities (swine, pork, cocoa, potatoes, beef, biscuits, cattle, oats, barley, sugar, beverages, rapeseed) increased $1.1 billion in 1996.

The United States is a net exporter of vegetables towards the Canadian market, such as tomatoes, cucumbers, squash, eggplant, snap beans, and potatoes. The U.S. has also increased the export of temperate climate fruits such as apples, pears and peaches towards the Mexican market. Nevertheless, the fruit/vegetable trade balance with Mexico has been negative since the U.S. is a net importer of several vegetables such as tomatoes, bell peppers, cucumbers, squash, eggplant, broccoli, cauliflower and citrus.

Both short-run and long-run factors help explain the increase in vegetables imports from Mexico. Much of the increase in imports can be attributed to factors unrelated with NAFTA. The Mexican economic crisis had several short-run impacts on Mexican producers. First, the Mexican domestic market contracted drastically. Since producers in Sinaloa, the main producing area, can ship to either the domestic or export markets, reduced domestic market opportunities made the U.S. a much more attractive and critical market. In addition, the devaluation of the Mexican peso made prices in the U.S. more attractive to Mexican producers. The average input cost of Mexican vegetables increased 70 percent in terms of pesos in 1995, but fell 30 percent in terms of U.S. dollars. The combination of a stronger U.S. dollar and the Mexican recession that sharply reduced Mexican buying power in 1995 explains the drop in U.S. exports. It is expected that this situation will change with the recovery of the Mexican economy.

It is important to note that under NAFTA, the U.S. share of Canadian and Mexican total food and agricultural imports increased markedly, reaching an average 78 percent in 1997. As trade barriers continue to decline, the relative U.S. position in the Mexican-Canadian market should improve even more. Nevertheless, Mexico has always been a large exporter of fruits and vegetables to the U.S., well before NAFTA. Mexican exports consist primarily of counter-seasonal (winter) fruits and vegetables and tropical and semi-tropical fruits. Import competition from Mexican products occurs mainly in the winter months when the primary competition is restricted to Florida and California.

In summary, U.S. agricultural trade with Mexico is characterized by the following:

  • Mexico is the third largest market for U.S. agricultural products
  • The U.S. share of Mexican total agricultural imports has increased under NAFTA
  • Trade between the U.S. and Mexico on fruit and vegetables reflects the comparative advantage of Mexico in labor and certain production systems (i.e., vine-ripe tomatoes)
  • The peso devaluation and recession affected trade with the U.S., but trade is recovering in favor of the U.S.

Likewise, U.S. agricultural trade with Canada is characterized by the following:

  • Canada is the second largest market for U.S. agricultural products
  • The U.S. share of Canadian total agricultural imports has increased under NAFTA
  • Since 1990, the U.S. has always had a positive net trade balance with Canada.

New Developments

Finally, Chile has been invited to join NAFTA. This may bring major implications for U.S. fruit growers. Chile is a major supplier to the U.S. of winter fresh fruit and an important supplier of juices. Chile does not supply the U.S. market with many vegetable products, but it provides 19 percent of the total volume of U.S. fruit imports. Chile could be an important market for U.S. growers of peaches, plums, nectarines, cherries, and other stone fruits and nuts.

Impact on Mid-South Agriculture

What is the impact of the current situation of U.S. agriculture with respect to the NAFTA trade partners on the Delta States fruit and vegetable growers? Not very good, since the treaty has opened the border to products that are sold cheaper and are available almost all year round. Many fruit and vegetable growers in the Delta States had start to take action, diversifying or adopting new technologies in order to remain competitive in this difficult market. For example, acreage of grape, strawberry, and peach orchards in Louisiana and Arkansas have been decreasing for the last three years and being replaced by new or innovative crops. Mississippi growers are also reacting against the market uncertainty derived from excessive competition in some crops. Acreage statistics in Mississippi show that products such as tomatoes, peppers, cabbage, watermelon, cantaloupe, cucumbers, peaches and apples had seen their acreage drastically reduced during the last 3 years. Other products ,such as muscadines, onions, strawberries, beans, peas, squash, pumpkin that sell well at the local market, have not experienced reduced acreage. Finally, there are other crops that are blooming in Mississippi with possibilities of opening new export or local markets in which the producers have made investments in technology and research. These crops are greenhouse tomatoes, blueberries, pecan and sweet potatoes.

In conclusion, the Delta States fruit and vegetable growers have to deal with though domestic and foreign competition and unstable markets for their products. One approach for independent growers and Co-ops is form an industry strategic planning committee in order to improve the industry's competitiveness and economic viability. Such an approach is now being pursued by the Texas vegetable industry. Industry leaders, managers, support organizations and university extension faculty should also participate in developing such a program. In order to gather information, the following analysis can be made: strengths, weaknesses, opportunities, and threats, value chain analysis, competitor analysis, transaction cost analysis, and identification of success factors. This kind of effort will help ensure that the Delta States growers will prevail under the NAFTA agricultural trade liberalization doctrine.

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