Ken Hammond, USDA (pigs); PhotoDisc (corn);
Comstock (tomatoes)
Focus too much on the challenging issues that have faced North
American agriculture over the past several years and you might not
notice an important long-term development: the agricultural economies
of Canada, Mexico, and the United States are increasingly behaving
as if they form one market. Not only is U.S. agricultural trade
with Canada and Mexico on a clear upward trend, but firms are reorganizing
their activities around continental markets for both inputs and
outputs. For example, many North American pastures and feedlots
contain animals that have lived in more than one NAFTA country,
and U.S. consumers are purchasing fresh tomatoes and peppers produced
by their neighbors both to the south and to the north.
Trade liberalization under the Canada-U.S. Free Trade Agreement
(CFTA, implemented in 1989) and the North American Free Trade Agreement
(NAFTA, implemented in 1994) is just one factor behind the growing
integration of North American agriculture. To encourage this trend,
decisionmakers in both government and the private sector have pursued
greater institutional and policy coordination. Structural changes
within agriculture have also facilitated integration, as have continued
population growth and sustained periods of economic expansion, which
have boosted consumer demand and forced new economic arrangements
within the agricultural and processed food industries.
Generally speaking, integration with the United States is more
pronounced for Canada than it is for Mexico, due to Mexico’s
lower per capita income and the fact that U.S.-Canada economic relations
have been relatively close for a longer period of time than U.S.-Mexico
economic relations. And while integration characterizes much of
agriculture, it is lagging in some sectors. The high tariff and
quota barriers that govern U.S.-Canada dairy and poultry trade were
formally excluded from trade liberalization, and disputes concerning
U.S.-Mexico sugar and sweetener trade have left many formidable
trade barriers in place.
Mexican Livestock Industry Drives Integration of Grain Markets
The past 11 years (1994-2004) have seen a rapid integration of
North American grain markets. Since NAFTA’s implementation
in 1994, U.S. exports to Mexico, Canadian exports to the United
States, and U.S. exports to Canada have all more than doubled. U.S.
and Canadian markets were already well integrated at the beginning
of the NAFTA period, but over the short span of about a decade,
the grain and oilseed markets of Mexico and the United States have
achieved a level of integration that is starting to approach that
between Canada and the United States.
While NAFTA provides much of the legal framework for this growing
trade and has facilitated the development of cross-border supply
chains, the primary catalyst for this trade has been a dramatic
expansion of Mexico’s hog and poultry industries, driven in
turn by a rising demand for meat in that country. These industries,
in their drive to expand output and lower production costs, rely
heavily on U.S. feedstuffs—imports account for roughly half
of the feed ingredients used by Mexican poultry producers. Rising
pork and poultry production in Mexico has contributed to the doubling
of U.S. exports to Mexico of feed grains, oilseeds, and related
products since 1993. As a result, Mexico has experienced a marked
increase in per capita meat consumption. Broiler consumption rose
62 percent between 1993 and 2004, while pork consumption increased
41 percent. Canadian hog and cattle producers also rely on U.S.
feed products, but to a lesser extent.
In the coming decade, Mexico’s grain market is likely to
experience further integration with the United States. NAFTA allows
Mexico to apply a transitional tariff-rate quota to U.S. corn until
2008. In fact, Mexico has pursued a more liberal trade policy than
NAFTA requires, particularly with respect to yellow corn, so that
the country can benefit more fully from the integrated grain market.
With the end of the transitional restrictions, the composition of
U.S. grain exports to Mexico is likely to shift more toward corn
and away from sorghum.
Yellow corn, which is used in Mexico primarily for animal feed
and the manufacture of corn starch, continues to make up the bulk
of U.S. corn exports to Mexico. In recent years, the United States
has also exported to Mexico large quantities of cracked corn, which
consists of broken or ground kernels and is used as animal feed.
NAFTA treats cracked corn as a distinct commodity from corn, and
cracked corn is not subject to the trade restrictions that apply
to U.S. and Canadian corn in general and has enjoyed duty-free status
in Mexico since 2003.
Mexico is also a potential market for U.S. white corn, used in
Mexico to produce tortillas and other corn-based foods. But the
Mexican Government has encouraged the domestic production of white
corn by providing marketing payments to certain commercial producers.
As a result, U.S. white corn exports to Mexico have declined sharply
since 2000. Moreover, the Mexican Congress has mandated the application
of NAFTA’s over-quota tariff to white corn. This tariff, 54.5
percent for 2005, is far higher than the 2 or 3 percent that was
applied during much of NAFTA’s first decade (1994-2003).
Livestock Production Crosses International Borders
The principal drivers of integration in North American livestock
markets have been harmonization of sanitary standards and industrial
restructuring. As a result of these forces, many North American
pastures and feedlots now include animals that have lived in more
than one NAFTA country. Hog production in Canada and the United
States has become highly integrated over the past two decades, with
Canada shipping rising numbers of feeder pigs to the United States
for finishing (the last stage of production) and slaughter. Similarly,
Mexico is a net exporter of cattle to the United States, and this
trade consists primarily of feeder calves.
Mutual agreement on sanitary regulations is critical to increasing
integration in this market. Ultimately, the removal of tariffs and
quotas is meaningless to livestock and meat trade unless the sanitary
concerns of the importing country are satisfied. Consistent with
the principle specified by NAFTA and the World Trade Organization
that sanitary and phytosanitary standards should be applied on a
regional level, when possible, the NAFTA countries have sometimes
allowed livestock and meat imports from areas that are free of problematic
animal diseases, even if the disease in question is present in other
parts of the exporting country. For example, sanitary concerns have
traditionally limited Mexico’s ability to export pork and
poultry to the United States. In the future, such exports may grow
to significant quantities, as the United States has recognized Mexican
advances in controlling Classical Swine Fever and Exotic Newcastle
Disease on a regional basis. Mexico is already an important supplier
of pork to Japan, where sanitary standards are tightly defined and
strictly enforced.
The discoveries of Bovine Spongiform Encephalopathy (BSE) in Canada
and the United States in 2003 and 2004 have presented a serious
challenge to integration. Under normal conditions, the cattle and
beef sectors of these two countries are tightly integrated, with
production systems that cross international boundaries, important
foreign investments, and substantial two-way trade in both cattle
and beef. At present, there is an almost complete worldwide ban
on imports of U.S. and Canadian cattle, but the NAFTA countries
now allow imports of U.S. and Canadian boneless beef from cattle
less than 30 months of age. Such animals are considered to have
a minimal risk of transmitting BSE. In 2004, U.S. beef exports to
Mexico approached 107,000 metric tons, compared with 39,000 metric
tons in 2003, despite an interruption in trade due to the BSE discovery
in the United States.
Structural change has also accelerated integration. Restructuring
in the U.S. pork industry, for instance, helped to set the stage
for the complementary relationship between Canadian feeder pig production
and U.S. finishing and slaughter activities. Beginning in the 1980s,
many of the farrow-to-finish producers that traditionally populated
the U.S. Corn Belt exited the industry, to be replaced by larger
operations specializing in finishing. Consolidation also has led
to much larger packing and processing plants that use capacity more
intensively. Feeder pigs from Canada are critical to maximizing
the year-round use of these facilities. These structural changes
interacted with other factors that fostered Canadian hog production,
including elimination of Canada’s grain transportation subsidies
and an exchange rate that favored Canadian exports during much of
the 1990s.
For Mexican hog producers, the opening of their market to competition
from the United States and Canada coincided with heightened pressures
to expand and consolidate. Although Mexican pork production has
increased by more than 35 percent during the NAFTA period, imports
accounted for about 27 percent of Mexican pork consumption in 2004,
compared with 6 percent in 1996. Rising imports and economic restructuring
have provided the context for several allegations of dumping concerning
U.S. pork exports to Mexico, as well as the imposition of antidumping
duties on U.S. hogs from early 1999 to May 2003.
The Mexican poultry industry also is undergoing significant internal
changes. Three firms now account for about 60 percent of the industry’s
output and have captured the lion’s share of consumption growth
over the past decade. The largest of these producers is a Mexican
firm, while the second- and third-largest are affiliates of U.S.
corporations. Mexico’s poultry industry has faced less direct
competition from the United States than has its hog industry. About
two-thirds of Mexican poultry imports from the United States consist
of either turkey meat or mechanically deboned meat, neither of which
is produced in large quantities in Mexico. To give the Mexican poultry
industry additional time to adjust to integration, a temporary tariff-rate
quota for U.S. chicken leg quarters is in effect until January 1,
2008.
Imports Have Become More Important to Fruit and Vegetable Consumption
A key factor driving integration in North American fruit and vegetable
markets has been a growing demand on the part of U.S. and Canadian
consumers for year-round supplies of fresh produce. The share of
imports in U.S. fruit and vegetable consumption has grown steadily
since 1990. In 2003, imports from Canada and Mexico supplied about
12 percent of fresh or frozen vegetables and 7 percent of fresh
or frozen fruit, up from 6 percent for both groups of commodities
in 1990. Imports have also contributed to a shift away from processed
fruits and vegetables and toward fresh produce. In 2003, fresh produce
accounted for 47 percent of U.S. fruit and vegetable consumption,
up from 44 percent in 1990.
Given Mexico’s vibrant fruit and vegetable industry, it
should not be surprising that Mexican exporters have been major
beneficiaries from this trend. During the NAFTA period, Mexican
fruit and vegetable exports to the United States have more than
doubled, surpassing $3.8 billion in 2004. But, surprisingly to some
observers, Canada has emerged over the past decade as an important
supplier of fresh tomatoes, peppers, and mushrooms, in addition
to fresh and frozen potatoes, to the U.S. market. This phenomenon
has occurred thanks to the broader application of greenhouse technologies
in Canada, along with the completion of U.S.-Canada trade liberalization
for fruits and vegetables in 1998.
U.S. produce is already important in Canada and is becoming more
so in Mexico. Because of Canada’s cooler climate, U.S. producers
have been active in the Canadian market for some time, with fruit
and vegetable exports to Canada exceeding $3 billion in 2004. Elimination
of the remaining tariffs on U.S.-Canada trade has given Canadian
consumers tariff-free access to the full range of U.S. produce—facilitating
the growth in U.S. exports of strawberries, cherries, pears, carrots,
lettuce, and potatoes. U.S. participation in the Mexican market
is smaller, but the rapid expansion of the Mexican supermarket sector
is helping U.S. producers, many of whom have well-established procurement
relationships with retailers operating in Mexico. Apples, pears,
and grapes are currently the leading U.S. produce exports to Mexico.
Producer groups have played an important role in the integration
of the continental market. For example, produce companies from each
NAFTA country have formed the Fruit and Vegetable Dispute Resolution
Corporation. This private, nonprofit organization has created a
multistep dispute resolution system that begins with preventive
activities and cooperative problem-solving and then proceeds gradually
to more binding measures. In addition, producer groups have successfully
used negotiations to address dumping allegations. In cases involving
U.S. apple exports to Mexico and Mexican tomato exports to the United
States, producer groups have agreed to the suspension of the antidumping
investigations for long periods in exchange for a minimum price
for the commodity in question. Compared with the imposition of prohibitive
antidumping duties, such agreements are likely to facilitate higher
volumes of trade at lower prices, thereby improving consumer welfare.
Suspension agreements, however, address only a small fraction of
the trade remedy cases concerning agricultural trade within North
America.
Integration Also Encompasses the Processed Food Industry
Integration is not limited to production agriculture. North America’s
processed food industries are increasingly interwoven, and integration
between Canadian and U.S. food processors has reached a particularly
advanced stage. Canada-U.S. integration takes place through substantial
direct investment in each other’s industry, as well as large
and growing flows of intra-industry trade in a variety of intermediate
and final food products, including mixes, dough, bread, cookies,
pastries, pet food, and confectionery products.
Similar linkages connect Mexico and the United States, but these
investment and trade flows are much smaller relative to Mexico’s
population. Further increases in per capita income in Mexico, along
with additional improvements to the country’s transportation
and retail systems, are likely to advance the integration of U.S.
and Mexican processed food markets. In the meantime, one processed
item, beer, is Mexico’s leading agricultural export, with
sales to the United States approaching $1.2 billion in 2004.
U.S. firms undertake most of the foreign direct investment in
the North American processed food sector. In 2003, the stock of
U.S. direct investment in the Canadian and Mexican food industries
(excluding beverages and production agriculture) equaled $4.3 and
$1.7 billion, respectively. In contrast, the stock of Canadian and
Mexican direct investment in the U.S. processed food industry was
about $1.1 billion each. Sales associated with these investments
are substantial. In 2002, majority-owned affiliates of U.S. multinational
food companies had sales in Canada and Mexico of $14.5 and $6.7
billion, respectively. Together, these amounts were 136 percent
larger than U.S. processed food exports to Canada and Mexico.
Further Integration Is Possible
With the completion of NAFTA’s implementation less than
3 years away, many are thinking about additional steps that could
facilitate further integration. All three NAFTA countries are actively
pursuing additional free trade agreements with other countries.
The 3 countries are among 34 democracies in the Western Hemisphere
that are negotiating a Free Trade Area of the Americas, and each
of the 3 has completed or is negotiating free-trade agreements with
countries outside NAFTA. Each NAFTA country now has a free-trade
agreement with Chile, an outcome that is similar to what would have
resulted had Chile formally joined NAFTA. The NAFTA countries are
also seeking meaningful agricultural trade reforms through multilateral
negotiations at the World Trade Organization.
Two smaller efforts tailored specifically to agriculture could
also increase market integration. The first concerns the application
of trade remedies, such as antidumping duties and countervailing
duties. Although NAFTA created a dispute-resolution mechanism in
which national trade remedy decisions can be appealed before NAFTA
arbitration panels, the agreement generally preserves the autonomy
of each member country to implement its own trade remedy laws. Given
that commodity prices are volatile and sometimes fall below the
costs of production, some observers have suggested that the current
approach to allegations of dumping is inappropriate for agriculture,
especially since the North American countries have already removed
numerous obstructions to regional trade and investment. Canada and
Chile have pursued an innovative course with respect to trade remedies
by exempting all of their bilateral trade from antidumping duties,
as part of the Canada-Chile Free Trade Agreement.
The second area in which smaller constructive efforts could advance
market integration is regulatory coordination. Over the past decade,
the NAFTA countries have fine-tuned many of their sanitary and phytosanitary
measures so that they do not unnecessarily hinder trade. These efforts
have paid off in numerous small reforms that have opened doors to
new trading opportunities, and additional efforts in this area are
likely to have beneficial effects as well. Through the Security
and Prosperity Partnership of North America, signed by the leaders
of the NAFTA countries in March 2005, the governments of North America
have made a commitment to an even more ambitious agenda of regulatory
coordination, featuring common approaches to food safety, greater
coordination and information-sharing among testing laboratories,
and increased cooperation with respect to the regulation of agricultural
biotechnologies. Achieving these objectives will require a high
degree of cooperation and coordination among the three governments,
and the partnership is likely to serve as a model for similar endeavors
in the future.