Mexico, NAFTA, and Agriculture A Recap of Recent Events

1. Mexico, NAFTA, and Agriculture A Recap of Recent Events Prepared by the Office of Agricultural Affairs March 2004

2. Mexican Demographics Affect U.S. Agricultural Exports • Population of over 100 million • 50% of population under 25 • 79% urban • GDP per capita: $6,884 • Income distribution: • Wealthy – 5% • Middle – 55% • Lower – 40% • 12% arable land, of which 2.6% is irrigated

3. Key Economic Indicators ($ billion)

4. Mexico’s Agricultural Challenges • Half of producers grow crops on farms of five hectares or less. • Nearly 80 percent of Mexico’s farmers produce cereals and legumes, the least profitable crops. • There are an estimated 25 million rural poor. • One agricultural leader says that 15 percent of Mexico’s farms are world-class, 35 percent could be, and 50 percent will never be. • Rural development policies have not sufficiently focused on creating off-farm opportunities.

5. More Challenges • Many of Mexico’s agricultural producers are tied to a communal land system that prevents farmers from holding title to their land. • In real terms, agricultural lending dropped 77 percent between 1994 and 2001. • In real terms, agricultural spending dropped 50 percent between 1994 and 2001.

6. Fuel for the Political Fire • After the current U.S. Farm Bill was announced, many in Mexico asked how Mexico’s small agricultural producers could be expected to compete with their neighbors to the north. • Especially when the NAFTA eliminated all remaining agricultural tariffs and tariff-rate quotas on January 1, 2003, except for restrictions on corn, dry beans, and powdered milk which will be in place through 2008.

7. Both Issues, But Particularly the NAFTA, Were Seized by Opposition Political Parties • Opposition political parties seeking to strengthen their Congressional representation during 2003 mid-term elections used the “crisis in the countryside” as a way of energizing longstanding political relationships with rural farm groups. • The public debate was spirited and long. Many in Mexico seemed convinced that the NAFTA and U.S. Farm Bill were responsible for the poverty and lack of opportunity in Mexico’s rural areas.

8. The Fox Administration Takes Key Steps to Aid Mexican Agriculture • In response to pressure from agricultural groups, the Fox Administration announces two key policy initiatives. • The announcement of an “Agricultural Armor” program on November 18, 2002 • The signing of a National Agriculture Agreement on April 28, 2003

9. Key Provisions of the National Agriculture Agreement and Agriculture Armor Program • Evaluate effects of NAFTA and U.S. Farm Bill. • Seek consultations with the U.S. and Canada to change market access provisions for white corn and dry beans. • Simplify Mexico’s dumping procedures (WTO dispute panel requested) • Mirroring of U.S. and Canadian technical requirements. • Increase technical and social assistance.

10. The Political Pressure Manifested Itself in Less Transparent Ways As Well • Numerous and shifting technical requirements on U.S. poultry exports • Antidumping and safeguard investigations against U.S. pork and beef • Antidumping tariffs on U.S. apples • Excessive inspection of U.S. fruits and vegetables • Drug residues, heavy metal testing on meat • Ill-conceived January 2003 ban on dry bean imports pushes agriculture relationship to its low point.

11. High Level USDA, USTR, and FDA PolicyTeam Comes to Mexico • In April 2003, high level policy team comes to Mexico City in a last ditch effort to right the relationship. • Since the meeting, Mexico has addressed a number of important trade issues. • Antidumping tariffs on live hogs lifted. • 5-year poultry safeguard agreement signed, which sets a tariff-rate quota on U.S. chicken leg exports and eliminates onerous Mexican technical requirements. • Unreasonable phytosanitary requirements on dry beans lifted. • California stone fruit protocol signed. • Heavy metal testing on meat stopped and Salmonella testing proposal stalled

12. Things Are Relatively Quiet for Now… • After the signing of the National Agriculture Agreement, Agriculture was not a major issue during the July 6 Lower Chamber elections. • Anti-NAFTA representatives gained a significant number of seats. • Recent budget does not contain big increases in agricultural spending and members of Congress could call for protectionist measures. • Budget continues the 20 percent use tax on HFCS and a proposal to limit corn imports was overturned in the Senate.

13. Most People in Mexico Agree that That NAFTA Has Been Good for Mexico • 20 Percent of Mexico’s GDP is attributable to NAFTA. • Mexico has an overall trade surplus of $37 billion with the United States. • Mexico’s exports have grown 152 percent since the inception of NAFTA compared to growth of 80 percent following its GATT accession. • Export jobs pay 37 percent more on average.

14. Mexico Maintains an Overall Trade Surplus with the United States

15. Certain Agriculture Sectors Have Benefited From NAFTA • Total U.S/Mexico agricultural trade has doubled to $15.3 billion in 2003. • Mexico has maintained a consistent agricultural trade deficit of around $1.5 billion. • Mexico’s exports of horticultural products have increased 120 percent since the start of NAFTA. • Production of major products has increased such as pork (up 24 percent), beef (up 13 percent), chicken (up 60 percent), sorghum (up 85 percent), fruit (up 27 percent), and vegetables (up 36 percent)

16. The United States Enjoys an Agricultural Trade Surplus with Mexico

17. Mexico’s NAFTA Experience Appears to Have Affected WTO Trade Positions • Mexican officials have expressed support for the U.S. position on eliminating export subsidies • But, on the subjects of domestic support and market access has adopted a you get rid of your subsidies and open your markets, and we’ll be happy to do the same position.

18. Conclusions - Cautious • New members of Congress could be unpredictable. • Growing farmer group frustration over the implementation of Agriculture Agreement could spill over into trade issues, tempting the Fox Administration to implement politically popular anti-trade measures. • There are still a large number of agricultural trade issues that need to be resolved. • BSE, Avian Influenza • Pork and beef dumping and safeguard investigations • Proposal to detain two percent of all meat shipments • Proposal to test raw meat for Salmonella • Biotechnology • Apple dumping

19. Conclusions – Positive • Sound macro-economic policies • Better bank regulation • Improved managementof exchange rate • Increased democracy • Population growth • Mexico's increased focus on exports • Full implementation of NAFTA for most products, 2003 • Dynamic tourism, restaurant & retail sectors • U.S. competitive advantages

20. Next Steps • Rural development, USAID spending $10 million on rural development projects. • Partnership for Prosperity. • Harmonization of standards. • Put January 1, 2008 on your calendars.