Despite Some Exceptions, USDA
Says NAFTA's Effects Positive

By Jose G. Peña
Extension Economist

According to a report submitted to the U.S. Congress by the Secretary of Agriculture in mid-August, the North American Free Trade Agreement has generally contributed to the expansion of U.S. agricultural trade with Canada and Mexico.

Yet, a great deal of misunderstanding and controversy remains over the trade agreement almost six years after it was enacted on January 1, 1994 and ten years after the Canada Free Trade Agreement was enacted. Most of the trade provisions established by these agreements have now been implemented.

According to recent agricultural trade statistics released by USDA, agricultural exports to these two countries have risen from an annual average of $7.4 billion during 1989-93 to $11.3 billion during 1994-98.

Imports/Exports

According to the report to Congress, NAFTA has had a relatively large proportional impact on several U.S. agricultural exports, including beef and processed tomatoes destined for Canada, as well as cattle, dairy products, apples, and pears destined for Mexico. Agricultural imports from Canada and Mexico have also increased, climbing from an average $6.2 billion during 1989-93 to $l0.5 billion during 1994-98. NAFTA has boosted U.S. imports of Canadian beef and Mexican peanuts more than 15 percent.

More general gains from the agreement include reorientation of trade in which regional, cross-border exchanges may replace less economical within-country exchanges. For example, it is more cost-effective to import feeder cattle from Northern Mexico, feed those cattle here, then export the meat and byproducts back to Mexico. U.S. businesses and rural communities benefit from this activity through the value that that is added to the imported cattle from Mexico, while at the same time generating additional income and jobs locally. Canadian slaughter cattle also are imported, processed in U.S. packing plants, and then the meat is exported back to Canada. This occurs concurrently as more cattle are being slaughtered in Canada and other meat products are being shipped to the U.S. market.

While NAFIA has facilitated agricultural trade and the balance of agricultural trade among NAFTA participants in favor of the U.S., the effect of these agreements remains a big controversy in the U.S. and foreign production agricultural sectors. The trade agreement comes up for discussion during most producer meetings and is being blamed for contributing strictly to the problems with the current financial crisis in agriculture. Producers want a level playing field and feel that NAFTA has tilted the playing field in favor of foreign producers with lower costs, less concerns for environmental protection and less government regulation to control the environment.

While NAFTA may be partially to blame for some of the current crisis, the U.S. agricultural sector has undergone dynamic changes in the 90s. Markets have changed from a very tight world supply/demand situation which attracted high prices in the early-to-mid 90s and which, in turn, attracted increased world production, to world production surpluses which caused markets to collapse during the last three years. High world prices and expanding foreign economies boosted U.S. agricultural exports to a record $60 billion in 1996. Since then, exports have declined eight percent to $55 billion in 1998 and are forecast to reach only $52 billion in 1999.

As the economies in Asian countries, Russia and other agricultural importing countries failed, demand for the increased production decreased substantially, thereby creating huge surpluses and collapsing prices. At the same time, high world prices for farm commodities influenced the passage of the Freedom To Farm Act of 1996 while world agricultural production was increasing to meet perceived increased demand.

According to Dr. Parr Rosson, Professor and Extension Economist-International Trade and Marketing, due to trade liberalization agreements such as the NAFTA, some U.S. producers have experienced more market access and rising exports for their products, while others have faced more import competition and lower prices. Along with new trade opportunities, some producers have experienced more risk associated with greater dependence on international markets, such as the 1995 Mexican peso devaluation and the subsequent economic recession which reduced the demand for U.S. exports.

It can be argued that without NAFTA, Mexico would likely have closed borders to U.S. goods during the peso crisis of 1995. It is also certain that without NAFTA access to Mexico and Canada, U.S. agricultural exports would have declined more than they have, worsening the problem for U.S. producers.

NAFTA Important To Texas

A good understanding of NAFTA and continuing strong trade relations with Mexico are important to Texas since more than half of the average trade of the last five years, ($55.7 billion average annual imports from Mexico and $47.2 billion exports to Mexico) pass through Texas.

For example, more cars are being assembled in Saltillo, Mexico today than were manufactured in Detroit during the peak of the Detroit car manufacturing era. In 1996 the largest portion of U.S. exports to Mexico were $4.18 billion in vehicle parts and accessories. That same year, the biggest imports from Mexico were $7.9 in cars and other vehicles. The infrastructure to support this assembly system has a large impact on the economy of Texas.

The economies of Canada, Mexico and the U.S., linked by NAFTA, are driven largely by the economy of the United States, both in terms of its size and the current state of continuing robust growth of the U.S. economy and consequent strong demand for imports. The size of the U.S. economy makes its output, employment and investments levels less sensitive than those of its partners to changes in the trade environment. Current rates of growth in U.S. output and employment absorb many downside effects of NAFTA, but also provide fewer opportunities for additional growth due to upside effects.

Conclusions

While NAFTA created one of the world's largest free trade areas, assessing trade impact is complex. Trade, employment, and economic activity are interdependent and trade gains will not be made without some costs, as labor-intensive agricultural sectors face more competition from imports and must adjust.

Overall, U.S. agriculture stands to gain more than it will lose as trade barriers are lowered. Dr. Rosson contends that due to the long transition to freer trade, the relatively low level of pre-NAFTA duties, and the complementary nature of trade in many sectors, NAFTA's impacts on most agricultural sectors will continue to be slight to moderate. Livestock, meats, feed grains, dairy, cotton, soft fruits, and processed foods are examples of U.S. sectors which will benefit. Some labor-intensive fruit and vegetable producers have been adversely affected by NAFTA and are adjusting to the impacts. Even U.S. vegetable producers will receive some benefits over the longer term as stronger economic growth in Mexico results in greater demand for many products. NAFTA also secures previous gains to trade that have already benefited many sectors of U.S. agriculture.