INTERNATIONAL AGRICULTURE AND TRADE (NAFTA)--SUMMARY May 23, 1995 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. The complete text of INTERNATIONAL AGRICULTURE is available 2-3 working days following release of this summary. ----------------------------------------------------------------------------- Long-Term Trade Prospects Bright for NAFTA Partners, Despite Short-Term Uncertainties The North American Free Trade Agreement (NAFTA), which liberalizes trade among the United States, Canada, and Mexico, started its second year on January 1, 1995. The agricultural provisions of NAFTA call for the elimination of tariffs and non-tariff barriers among the members over 15 years, which should lead to increased trade in the future. All three NAFTA countries benefited from expanded trade in agricultural products during NAFTA's first year. The effects of the peso devaluation will reduce the U.S. agricultural trade surplus with Mexico in 1995, although the long-term prospects remain bright for all three NAFTA partners. Even prior to NAFTA, agricultural trade had been growing quickly among the United States, Canada, and Mexico, driven by income growth, producers' response to changes in government policies, and the search for more efficient means of supplying consumers. U.S. exports to North America have been growing faster than to the two other main buying regions, East Asia and Europe. In calendar 1994, U.S. exports to Canada and Mexico combined reached $10 billion (about 22 percent of total U.S. farm exports), while U.S, imports reached $8.1 billion (over 30 percent of all imports). Part of the reason was that all three NAFTA partners had strong economic growth, which translated into rising consumer demand. In calendar year 1995, U.S. exports to its NAFTA partners are expected to fall 9 percent to $9.1 billion due to decreased demand in Mexico. U.S. imports are expected to increase 7 percent to $8.7 billion in 1995, as the weaker peso makes imported products from Mexico relatively less expensive for U.S. consumers. While Mexico is currently in a recession, both the United States and Canada should experience relatively brisk economic growth in 1995 and beyond. The economic crisis in Mexico was caused by a growing current account deficit that eroded investor confidence in the Mexican government's ability to maintain the value of the peso in the pegged exchange rate system. The devaluation and subsequent floating of the peso, combined with the new Mexican austerity program, should lower Mexican imports and boost exports, reducing the U.S. trade surplus with Mexico. According to Mexican authorities, Mexican GDP is expected to contract 2 percent in 1995, but return to positive growth in 1996. NAFTA establishes the framework that will eventually result in free trade in agriculture and food products in North America. Therefore, the traditional role of border protection in supporting agriculture will decline, at least for the three NAFTA countries. As a result, all three NAFTA partners are changing their agricultural policies in an attempt to ensure the effectiveness of domestic support in a free-trading environment. How producers respond to the changing policies will be one of the primary determinants of future trade within NAFTA and between NAFTA and non-NAFTA countries. Mexico's PROCAMPO program, underway since 1993, is phasing out government support prices and providing direct payments to farmers. The peso devaluation has made support prices unnecessary for the time being because prices in pesos have risen above the support levels. While many of the changes in Mexico have an immediate effect (such as reducing consumer subsidies), others are being phased in (the producer support policies), or will take many years to show their effect (land reform). The future competitiveness of Mexican agriculture will depend to a large extent on new investment, technology adoption (both for inputs and techniques), and a reorganization of agricultural structures. In Canada, upcoming changes include elimination of the Western Grain Transportation Act (WGTA) freight subsidy for prairie grains and oilseeds on August 1, 1995. To compensate for the lost subsidy, the Canadian government will offer a one-time payment to prairie farmland owners, as well as expanded export credit guarantees to enable Canadian products to better compete on world markets. U.S. agricultural policy for the next 5 years will be largely determined by the 1995 farm bill currently being formulated. While the final shape of the legislation is not yet clear, there could be fundamental changes in the USDA crop and commodity programs. Reducing the Federal budget deficit is the most important force driving the 1995 farm bill debate. The reduction of border protection due to NAFTA reinforces the need to heighten the competitiveness of U.S. agriculture by encouraging innovation throughout the production and marketing chain in order to lower costs and respond to changing consumer demands. Negotiations with Chile on joining NAFTA will begin in mid-1995. Expanding NAFTA to include Chile will have only a small impact on total U.S. agricultural trade. With Chile as part of NAFTA, U.S. exports of wheat and corn are expected to increase. If phytosanitary regulations in Chile can be changed, exports of offseason cherries, nectarines, peaches, apricots, and grapes are also expected to increase. While Chile may join NAFTA in the near future, integrating other Latin American countries with NAFTA will be a more complex task. For example, the technical aspects of negotiating with a group of countries could lengthen the timeframe for integration. For the United States, agricultural production is expected to continue to grow through 2005, driven by strong export demand, moderate domestic income growth, and a slowly increasing population. For crops, productive capacity is projected to rise because of increases in resource and input use and gains in productivity. Most crop yields are projected to rise at or near their long-term trends. If the Conservation Reserve Program is extended, there will be only limited increases in land used forcrop production. Despite recently announced reductions in Canadian agricultural support programs, prospects remain bullish for most of Canadian agriculture and for Canadian agricultural exports over the next 10 years. The Uruguay Round agreement reducing agricultural export subsidies should buoy world prices and allow Canadian grain producers to recoup more from the world market than they are being required to sacrifice in domestic support. Elimination of the WGTA subsidy for transportation of western Canadian crops should encourage planting of higher value products such as canola and encourage the development of livestock feedlots on the prairies. In Mexico the outlook is for an expansion of the agricultural sector over the next decade. Income growth will increase demand for livestock products, boosting Mexican imports of meats, feed grains, and oilseeds well above the levels of recent years. However, in the short term, growth in Mexico's import demand for these products will be weaker than expected before the devaluation. Printed copies of NAFTA International Agriculture and Trade Report will be available in about 2 weeks. For more information, contact John Link (202) 219-0667, Constanza Valdes (202) 219-0919, or Daniel Plunkett (202) 219-0657. END-END-END