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NAFTA and the Small Mexican Farmer

Daryll E. RayDaryll E. Ray

Director, Agricultural Policy Analysis CenterDirector, Agricultural Policy Analysis Center

Melissa B. Cooney, Graduate Research AssistantMelissa B. Cooney, Graduate Research Assistant

University of TennesseeUniversity of Tennessee

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History of NAFTA

GATT – General Agreement on Tariffs and Trade (1946)

Direct result of the 1930s and WWII • Conflicts over trade seen as one cause of war• International interdependence seen as inhibiting

war

Restructuring world economy based on comparative advantage and free trade • Tariffs detrimental to all parties• Tariffs should be eliminated

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History of NAFTA 1970s and 1980s

• Economic problems in the U.S.• Stagflation

1980s to early 1990s • U.S. needed new markets to grow economy• Fall of Soviet Union• Mexico’s debt crisis and stagnant economy• Mexico joins GATT in 1986

January 1, 1994 • U.S.-Canada agreement expanded to include

Mexico - NAFTA

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NAFTA’s Provisions for Free Trade

Objectives

• Eliminate barriers to trade

• Promote fair competition

• Increase investment opportunities

• Protect intellectual property rights

• Establish a framework for future agreements

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The Argument for NAFTA

Economic theory

Adjustment periods

Comparative advantages of U.S. & Mexico

• U.S. in grain production, animals and animal products, and oilseeds

• Mexico in vegetables, fruits, fresh flowers, and beverages

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The Argument against NAFTA

Mexico’s “comparative advantage” is only for very specialized products that are capital intensive, few producers, and have higher risk and costs

Not self-sufficient Large, efficient agribusinesses with access

to technological advances benefit from NAFTA

Economic models do not account for social welfare

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NAFTA By the Numbers By the numbers, NAFTA is a success for Mexico 1994 – 2000: Total trade volume has increased from $297

billion to $676 billion Mexico exported $154 billion to NAFTA partners in 2000 Growth in Mexico’s exports has contributed to more than

half of the real GDP growth in Mexico Investment in Mexico has grown by 72% 2.7 million new jobs generated in Mexico More than half of those new jobs were related to export

activity Manufacturing exports pay nearly 40% more than other

manufacturing jobs

Source: NAFTA at Seven, 2001. Pettigrew, Zoellick, and Derbez

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A Growing Dependency

Source: Office of Trade and Analysis, US Department of Commerce

US-Mexico Agricultural trade

0

1

2

3

4

5

6

7

8

1995 1996 1997 1998 1999 2000 2001

Valu

e (in

bill

ions

of U

SD)

US Ag Exports

US Ag imports

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A Growing Dependency

Source: Office of Trade and Analysis, US Department of Commerce

US - Mexico Agricultural Balance of Trade

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

1995 1996 1997 1998 1999 2000 2001

Val

ue

in B

illi

on

s o

f U

SD

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NAFTA and Agricultural Trade

Agricultural exports from Mexico to US totaled ~ $4.7 billion in 1998, up from a stagnant $2.5 billion prior to NAFTA.

Mexican agricultural exports have grown about 11.5% per year.

Vegetables ~ 13% annual increase

Fruits ~ 17% annual increase

Beverages~ 28% annual increaseSource: US-Mexico Chamber of Commerce, 1999

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Agriculture under NAFTA Immediately eliminated most non-tariff

barriers and many tariffs Phasing out all tariffs and Tariff Rate Quotas

(TRQs) over 10-15 years

i.e. Between US and Mexico:

Wheat 2004

Sugar 2007

Corn 2008

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Take Corn: What NAFTA was Supposed to do?

Reduce domestic price of corn

Output will decrease

Labor, land and capital are reallocated

Marginal lands left fallow

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The Importance of Corn in Mexico

Originated in Mexico over 7000 years ago Pre-NAFTA:

Over 3 million producers =

8% of population

40% of people in agriculture

60% of cultivated land

Nearly 60% of output by value

Source: The Environmental and Social Impacts of Economic Liberalization on Corn Production in Mexico.Alejandro Nadal, 2000.

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Corn Diversity

41 landraces, thousands of varieties

Poor producers with low yields could

compete in the Mexican domestic market.

1.8 million corn producers use locally

adapted varieties (80 % of the corn

cultivation)

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Failure to impose the TRQ

2-level pricing: Low tariff up to a certain quota, high tariff after passing the quota

15-year transition period shortened to three years because Mexican government never implemented the TRQ

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Mexico imports of US corn

Imports increased

14-fold

Corn production and Imports from US

0

3

5

8

10

13

15

18

20

1992

1993

1994

1995

1996

1997

1998

1999

2000

Mill

ions

of m

etric

tons

Domesticproduction

Importsfrom US

Source: APAC, Centro de Estadistica Agropecuaria

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Area under corn cultivation

Source: Centro de Estadística Agropecuaria Sistema de Información Agropecuaria de Consulta

Planted area of Corn in Mexico

0123456789

10

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Hec

tare

s, in

Mill

ions

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Corn production in Mexico

Source: Centro de Estadística Agropecuaria Sistema de Información Agropecuaria de Consulta

Volume of Corn Production

0

3

5

8

10

13

15

18

20

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Mil

lio

ns

of

To

ns

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What has happened

Corn production has remained fairly stable but area under cultivation has increased.

Went from 60% of cultivated land yielding 60% of Agricultural output value to 67% yielding 36% of value of output.

Environmental damage by both large and small farmers.

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What has happened Tortilla prices increased

Elimination of guaranteed price floor subsidy

Urban migration

Further Dependency

Source: Down on the Farm: NAFTA’s Seven-Year’s War on Farmers and Ranchers in the US, Canada and Mexico. Public Citizen 2001

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Conclusions NAFTA has obviously benefited

Mexico’s overall economy

GDP levels from $314.5 billion in 1991 to $617.8 billion

Small farmers lose out big time

GDP is not only measure of well-being

– Access to food & adequate housing

– Health services and education, etc.

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To receive an electronic version of our weekly ag policy column send an email to: dray@utk.edurequesting to be added to APAC’s Policy Pennings listserv

Weekly Policy ColumnWeekly Policy Column

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Agricultural Policy Analysis CenterThe University of TennesseeDept. of Agricultural Economics310 Morgan HallKnoxville, TN 37996-4519

dray@utk.edu(865) 974-7407 phone(865) 974-7298 fax

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Maquiladoras in Mexico

Source: Maquila online directory

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Maquiladora map

As of Jan. 2001

> 601 (1280)

251 – 600

101 - 250

76 – 100

26 – 75

1 – 25

0

Source: Instituto Nacional de Estadistica, Geografia, e Informacion

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Maquiladora working conditions

Discrimination against women Poor working conditions Low wages No union representation Slum communities

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The Link between Corn Producers and Maquiladoras

Pre-NAFTA: ~3 million corn producers

2002 ~ 2 million corn producers

Pre-NAFTA (1990): 449,519 maquila workers

(1995): 629,481

(2000): 1,277,727 Source: Border Maquiladoras, an Overview. Frontera Norte Sur, Sept 2000

As of Feb 2003: 1,047,587Source: Maquila Online Directory