Since early in his campaign and now throughout his tenure, President Donald Trump has had multilateral trade agreements, and especially NAFTA, in the crosshairs. He has blamed trade as the main source of strife for the American worker and has railed against trade deals such as NAFTA for exporting jobs overseas. However, as most people involved with the food and farming sector know, American agriculture has benefitted greatly from international trade, and especially trade with Mexico. In today’s post, we’ll take a look at NAFTA and what it has meant for American producers and consumers of agricultural products.
The North American Free Trade Agreement
NAFTA, or the North American Free Trade Agreement, entered into force on January 1, 1994. It was both revolutionary and controversial for its attempt to balance the economic needs of a developing economy (Mexico) with that of two developed economies (the United States and Canada). Upon enactment of the agreement, tariffs for most products traded between the United States and Mexico dropped to zero, while others were phased out over time. For more information on NAFTA and multilateral trade agreements in Latin America, please see our blog post from last year, Three’s a Crowd.
Most scholars estimate that Mexico has been the primary beneficiary of NAFTA, while the US has benefitted nominally. A 2015 report from the Congressional Research Service estimates that NAFTA’s impact on the US GDP “was probably no more than a few billion dollars.” Furthermore, it is an oft-cited fact that the US currently carries a trade deficit with Mexico. But this can be seen as a benefit for US companies. As Joshua Meltzer and Dany Bahar from the Brookings Institute point out in their recent article on NAFTA, “Mexico has become part of North American supply chains, which gives US businesses access to lower cost inputs.”
Trump has been highly critical of NAFTA, going so far as to say during the first presidential debate, “NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” In particular, he has used the destruction of this decades old trade agreement as a rallying cry for the manufacturing sector – blaming the agreement for the export of American manufacturing jobs with little regard for how technology and gains in productivity have changed the face of manufacturing today. However, where agriculture is concerned, we see an industry that has embraced increased trade with Mexico, benefitting American farmers, ranchers, and consumers as a result.
NAFTA & Agriculture
The agricultural sections of trade agreements are notoriously difficult to negotiate as they speak straight to the nexus of food security, rural development, and economic inequality. NAFTA was no exception. In fact, under the agriculture title, a true multilateral outcome could not be determined so three separate bilateral agreements were established. Much of the criticism the agreement received was related to the effects that tariff free imports of agricultural products from the US would have on small farmers in Mexico who perhaps don’t have access to the same level of sophistication, or in some cases subsidies, as their counterparts to the north.
No matter your perspective, it is certain that NAFTA has supported the expansion of agricultural trade between Mexico and the US. Over the life of the agreement, US exports of agricultural products to Mexico have grown almost five times, from a value of $3.6 billion USD in 1993 to $17.8 billion USD in 2016, with values reaching around $20 billion USD a few years ago when commodity prices were higher. Of course, trade works both ways and over the same period, US imports of agricultural products from Mexico have grown from $2.7 billion USD in 1993 to $22.9 billion USD in 2016, an increase of over 800%.
While reviewing the numbers it is tempting to think that the US has ‘lost out’ as agricultural imports from Mexico now exceed exports. But the fact is that these billions of dollars of trade represent customers who now occupy an integral role in the commercialization of US products. Furthermore, trade is mutually beneficial precisely because it allows countries to specialize in a product where they have a competitive advantage. For example, the US corn industry now benefits from additional efficiencies and scale, knowing that billions of dollars worth of their product will be purchased by Mexican customers. On the inverse, Mexican tomato farmers have been able to benefit from selling additional product into the US. While this process is painful for the American tomato farmer, the overall system gains efficiencies and creates cheaper products for consumers on both sides of the border.
US Exports into Mexico
Today, agricultural exports into Mexico are spread across many categories, although a few hold a clearly dominant position. Corn is by far the most important export. With $2.6 billion USD worth of corn sent across the border in 2016, this commodity alone accounted for almost 15% of agricultural exports to Mexico. Soybeans, pork and pork products, dairy products, and prepared foods are next, each boasting exports worth more than $1 billion USD in 2016. Mexico has become a market on which many of these commodity groups depend. In the case of dairy, for example, about one quarter of exported US dairy products are destined for Mexico. The loss of this market would be simply devastating to the industry.
If tariff free access to the Mexican market were removed, a few things would likely occur. First, assuming that exports are not entirely prohibited, some product would likely still move, but at greatly reduced quantities. US producers would have to look across the global market for other homes for their product. In addition, Mexico would have to look elsewhere to meet their needs. In fact, over the last few weeks representatives from Mexico have been speaking with officials from Brazil and Argentina to determine what opportunity there is to supplant US supplies with South American product. Should the final tariff and logistical dynamics of a new agreement make trade with the US uncompetitive, Mexico has some important alternative suppliers located not too far away.
US Imports from Mexico
Looking at the import side of the equation, today US imports from Mexico are dominated by fresh vegetables and fruit, which together accounted for $10.7 billion USD, or 47%, of imports in 2016. Within the vegetables category, tomatoes are the most dominant, with almost $2 billion USD in imports, followed by peppers, cucumbers, and asparagus. The fruit category was led by avocados, with $1.7 billion USD in imports, followed by berries then lemons and limes. Consumers across the US have become accustomed to enjoying strawberries during wintertime and guacamole with their Chipotle burrito whenever they like. It is important to understand that many of these consumption occasions exist precisely because NAFTA has made these products affordable to American consumers
Similar to the case of exports, if tariff barriers were erected to product entering the US from Mexico, say the 20% that Trump has proposed, US imports of agricultural products would drop dramatically. Some products that have a high enough value would still enter the country, but consumers can expect to see dramatic price increases for these products at restaurants and grocery stores. Importers may see if there is an opportunity to bring these products from other places, say from within Central America where an FTA also exists, though of course the proper geography is critical to availability of these products. At the same time, Mexico will have to seek additional markets for their goods, perhaps aided by new trade agreements that they are currently negotiating, including with Europe.
It is impossible to predict how these trade wars might play out, or even whether Trump will indeed follow through on his promise to renegotiate the North American Free Trade Agreement. Although the agreement is not perfect, and has not enriched everyone equally, American agriculture has been a major beneficiary of NAFTA and global trade at large. The dismantling of NAFTA would have negative repercussions for America’s agricultural producers as well as consumers, all of whom have become well accustomed to the benefits of living in a globalized world.