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Tamrc Report /f7 tp-q:;)__ r TAMRC REPORT U.S.-MEXICO AGRICUTLURAL TRADE AND MEXICAN AGRICULTURE: LINKAGES AND PROSPECTS UNDER A FREE TRADE AGREEMENT B. Kris Schulthies and Gary W. Williams* _IAMRC International Market ~esearch Report No. /M-6-92 July 1992 TEXAS AGRICULTURAL MARKET RESEARCH CENTE~EPORT Department of Agricultural Economics Texas Agricultural Experiment Station Texas Agricultural Extension Service L Texas A&M University ~ . College Station, Texas LIBRARY---, JAN 2 7 1994 GIANNINI FOUNDATiON OF I AGRICULTUR/"'L ECONOMICS l U.S.-MEXICO AGRICUTLURAL TRADE AND MEXICAN AGRICULTURE: LINKAGES AND PROSPECTS UNDER A FREE TRADE AGREEMENT B. Kris Schulthies and Gary W. Williams* _IAMRC International Market ~esearch Report No. /M-6-92 July 1992 * Schulthies is T AMRC Research Associate and Williams is Professor of Agricultural Economics and TAMRC Coordinator, Texas Agricultural Market Research Center, Department of Agricultural Economics, Texas A&M University. This research was supported in part under a contract with the Office of Technology Assessment, Congress of the United States. U.S.-MEXICO AGRICUTLURAL TRADE AND MEXICAN AGRICULTURE: LINKAGES AND PROSPECTS UNDER A FREE TRADE AGREEMENT Texas Agricultural Market Research Center (TAMRC) International Market Research Report No. IM-6-92, July 1992 by Mr. Kris B. Schulthies and Dr. Gary W. Williams, Texas Agricultural Market Research Center, Department of Agricultural Economics, Texas A&M University, College Station, Texas 77843-2124. This report draws heavily on the TAMRC U.S.-Mexico Free Trade Issues for Agriculture Research Reports series, IM-1-91 through IM-13-91. Please refer to the reference section for full citations. ABSTRACT: A U.S.-Mexico FfA along with recent, historic changes in Mexican government policy affecting agriculture .are likely to have important implications for agriculture far beyond any impacts on trade flows between the two countries. After providing some background on U.S.-Mexico agricultural commodity trade flows and barriers, this paper discusses the future prospects of agricultural trade between the two countries with and without an FfA. Then, the interdependent relationship between likely changes in U.S.­ Mexico agricultural trade over time and key Mexican agricultural and agribusiness forces is explored in some detail. These forces include Mexican agricultural poliCies, Mexican farm size and structure, Mexican agricultural labor, Mexican infrastructure, foreign direct investment (FDI) in Mexican agricultural production and processing, Mexican agribusiness strategy, and technological change in Mexican agriculture. The Texas Agricultural Market Research Center (TAMRC) has been providing timely, unique, and professional research on a wide range of issues relating to agricultural markets and commodities of importance to Texas and the nation for more than two decades. TAMRC is a market research service of the Texas Agricultural Experiment Station and the Texas Agricultural Extension Service. The main TAMRC objective is to conduct research leading to expanded and more efficient markets for I;exas and U.S. agricultural products. Major TAMRC research divisions include International Market Research, Consumer and Product Market Research, Commodity Market Research, and Contemporary Market Issues Research. U.S./MEXICO AGRICUTLURAL TRADE AND MEXICAN AGRICULTURE: LINKAGES AND PROSPECTS UNDER A FREE TRADE AGREEMENT EXECUTIVE SUMMARY A U.S.-Mexico free trade agreement (FTA) along with recent, historic changes in Mexican government policy affecting agriculture are likely to have important implications for agriculture far beyond any impacts on trade flows between the two countries. After providing some background on U.S.-Mexico agricultural commodity trade flows and barriers, this paper discusses the future prospects of agricultural trade between the two countries with. and without an FTA. Then, the interdependent relationship between likely changes in U.S.-Mexico agricultural trade over time and key Mexican agricultural and agribusiness forces is explored in some detail. These forces include Mexican agricultural policies, Mexican farm size and structure, Mexican agricultural labor, Mexican infrastructure, foreign direct investment (FDI) in Mexican agricultural production and processing, Mexican agribusiness strategy, and technological change in Mexican agriculture. The salient conclusions from each of these parts of the paper are summarized here. U.S.-Mexico Agricultural Commodity Flows and Trade Barriers As background to a discussion of the likely effects of U.S.-Mexico agricultural trade, a brief overview of Mexican agriculture is provided followed by a discussion of current trends in U.S.­ Mexico agricultural trade and the major barriers currently impeding the free flow of agricultural commodities between the two countries. Overview of Mexican Agriculture: In many ways, the evolution of U.S.-Mexico agricultural trade over time is a reflection of the dynamics of Mexican economic policy as defined by the particular characteristics of the Mexican agriculturalsector. Key aspects of Mexican agriculture that have helped shape U.S.-Mexico agricultural trade and discussed in detail in the report include: (I) the role of agriculture in the overall Mexican economy, (2) the pattern and composition of Mexican agricultural production, (3) the Mexican climate and agricultural resource base, and (4) the Mexican land tenur~ system. Current Trends in U.S.-Mexico Agricultural Trade: Mexico is the third largest foreign importer of U.S. agricultural products behind Japan and Canada and the second largest foreign supplier of agricultural products to the U.S. behind Canada. The U.S., however, is far more important to Mexico as an agricultural trading partner, both as a supplier and a purchaser, than is Mexico to the U.S. ·Mexico purchased just 6% of total U.S. agricultural exports in 1989. On the other hand, the U.S. purchased 79% of all Mexican agricultural exports in that year. • Meat and meat products were the largest U.S. agricultural export to Mexico in 1990 (in U.S. dollar vaiue) but Mexico accounted for only 9% of U.S. meat and meat product exports in that year. Mexico also took only 17% of U.S. seed exports in 1990, 22% of U.S. live animal exports, and 22% of U.S. dairy product exports. Sorghum is the major commodity for which Mexico dominates U.S. exports. Mexico took 43% of U.S. sorghum exports in 1990. 111 • On the import side, Mexico is also only one of many foreign suppliers of U.S. agricultural commodity imports. Even for horticultural products, the largest U.S. agricultural import from Mexico, only slightly over a third of U.S. imports came from Mexico in 1990. Only 20% of U.S. coffee imports came from Mexico, 36% of U.S. live animal imports, and 10% of U.S. fruit juice imports. • In contrast, about 95% of Mexican horticultural product exports went to the U.S. in 1990, 75% of Mexican coffee exports, 50% of Mexican live animal exports, 98% of Mexican malted beverage (beer) exports, and 56% of Mexican sugar exports. • Likewise, the U.S. accounts for a dominant share of the major agricultural commodities imported by Mexico. The U.S. supplied 95% of the grains imported by Mexico, 80% of the oilseed imports, 44% of the dairy product imports, 92% of the vegetable oil imports, and 81% of all other agricultural products imported in 1990. Barriers to U.S.-Mexico Agricultural Trade: Both the U.S. and Mexico utilize a wide variety of policy instruments that directly and indirectly affect agricultural trade between the two countries . .r • Principal U.S. agricultural policies that directly affect agricultural commodity trade with Mexico include export subsidies of various types, import tariffs, particularly for fruits and vegetables, and section 22 import quotas primarily for sugar, cotton, and beef. • A number of other U.S. policies and regulations intended to achieve largely unrelated objectives also affect U.S.-Mexico agricultural trade, including target prices and deficiency payments primarily for grains and cotton, sanitary and phytosanitary regulations, animal health regulations, chemical use/food residue/insect and disease control regulations, and others. Mexican fruit and vegetable producers also complain that U.S. marketing orders restrict the free flow of their commodities to the U.S. • Principal Mexican agricultural policies affecting trade with the U.S. include guaranteed prices for basic crops like corn and beans and associated import licensing requirements, import tariffs on various commodities, and a few minor export taxes. Although Mexico also has many health, sanitary, chemical use, and related regulations, they are generally less stringent than those in the U.S. and, therefore, not considered to be directly trade restricting. Future Prospects for U.S.-Mexico Agricultural Trade Unilateral moves by Mexico to open its economy and reduce trade barriers have already contributed to a significant increase in U.S.-Mexico agricultural trade. Undoubtedly, a U,S.-Mexico FTA would further the ongoing process of liberalization and push the volumes and composition of U.S.-Mexico agricultural trade in directions consistent with current trends with some exceptions. The prospects for future U.S.-Mexico agricultural trade are analyzed assuming first that current trade trends prevail and no further liberalization of agricultural trade between the two countries occurs and then that a U.S.-Mexico FTA eliminates existing agricultural trade barriers. U.S.-Mexico Agricultural Trade Prospects
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