INTERNATIONAL AGRICULTURE AND TRADE--NAFTA--SUMMARY September 18, 1996 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 AND TRADE (NAFTA) will be available 2-3 working days following the release of this summary. NOTE: Tables in this report will not be formatted properly unless printed or displayed with both a fixed pitch font such as Courier and an 80-character line width to prevent line wraps. ------------------------------------------------------------------------------- NAFTA Spurs North American Trade Trade in agricultural products is expected to grow rapidly over the next decade both within the North American market and between North America and the rest of the world. Trade liberalization under the North American Free Trade Agreement (NAFTA) will continue to bolster the economic forces that are promoting trade growth, including favorable socioeconomic conditions, complementary resource endowments, and changing consumer preferences. By 2005, intra-NAFTA trade in agricultural products is projected to reach $30 billion, up from about $19 billion in 1995. North American exports to the rest of the world will also grow rapidly as strong economic growth and trade liberalization under the WTO expand markets. Now in its third year, NAFTA has produced a mixed agricultural trade picture for the United States. The reduction in tariffs and non-tariff barriers contributed to the 13-percent increase in U.S. agricultural exports to its NAFTA partners (Mexico and Canada) in 1994. In 1995, U.S. trade (exports plus imports) with NAFTA partners fell 8 percent, affected mainly by the deep recession in Mexico following the peso crisis. The 32-percent increase in U.S. agricultural imports from Mexico in 1995 was concentrated in a few key products (coffee, live cattle, tomatoes) where trade barriers were non-existent or already low before NAFTA. The 22-percent drop in U.S. exports to Mexico could have been steeper without NAFTA, because NAFTA limited the import-reducing policy responses Mexico could implement during a recession. NAFTA gave the United States and Canada an advantage over other traders in the Mexican market during the difficult period. According to Mexican import data, the United States gained Mexican market share in 1995. Based on trade data for the first 6 months of 1996, the United States will likely once again enjoy a large agricultural trade surplus with Mexico, which is suffering from a bad drought and still recovering from its financial crisis. Trade liberalization with Canada, which dates back to 1989, has also contributed to increased two-way trade. There have been several prominent trade disputes with Canada as well. The United States has enjoyed a small agricultural trade surplus with Canada in recent years, which may disappear in 1996. Agricultural trade issues within NAFTA during the past year range from allegations of unfair trade practices to phytosanitary concerns. As tariffs are reduced and eliminated under NAFTA, attention is increasingly focused on other potential barriers to trade, such as laws governing antidumping or countervailing duties. Beyond the World Trade Organization commitments, NAFTA does not provide for harmonized procedures or criteria for determining whether dumping has occurred or when and how countervailing duties should be set. However, NAFTA does lay out some rules for the process to be followed, such as publishing of notices and time limits. Some agricultural trade disputes may be settled under NAFTA provisions (sweet cherries, for example) and others under national laws (tomatoes). It appears that phytosanitary issues are becoming increasingly prominent (avocados, Karnal bunt). Competition is intensifying in specific commodity markets in North America due to trade liberalization and regional specialization. Regional markets are emerging in fruits and vegetables, animals and livestock products, and grains and feeds as producers take advantage of production complementarities and seasonal variations that reach beyond national boundaries. Examples of hot competition and regionalization include the North American meat markets, grain trade between the United States and Canada, vegetable markets in the United States and Canada, and in selling wheat and oilseeds to Mexico. One year ago, NAFTA was poised to expand its membership to include Chile as the next step toward hemispheric free trade. While the lack of fast-track negotiating authority in the United States has stalled NAFTA expansion, Chile has aggressively pursued bilateral ties that may set the agenda for regional integration for the next decade. Chile recently agreed to become an associate member of MERCOSUR (a trading group composed of Argentina, Brazil, Paraguay, and Uruguay), and is also negotiating economic cooperation agreements with Canada, the European Union, and other groups further afield. Over the last 5 years, Chile's free trade agreement with Mexico has led to increased trade between the two countries. Chile's deepening regional ties may be more important to the United States than any direct trade impact that would arise from Chilean accession to NAFTA. NAFTA (with some help from the Uruguay Round) eliminated quotason trade among the North American countries and replaced thequotas with a tariff-based system. For many sensitive products,tariff-rate quotas (TRQs) are in effect, permitting a specificvolume of imports at a reduced or zero tariff, and imposing ahigher tariff for greater quantities of imports. From an economics standpoint, the tariff-based system (including TRQs) is preferable to quotas due to improved economic efficiency and transparency. The operation and liberalization of tariffs, quotas, and tariff-rate quotas form the basis for many of the trade issues currently being disputed among the three NAFTA signatories. Because tariffs and quotas were also used to reinforce the operation of domestic supply control programs for many commodities, the liberalization of these trade instruments can also affect the operation of supply control programs. Printed copies of the NAFTA International Agriculture and Trade Report will be available in about 2 weeks. For more information, call Terri Raney (202) 219-1290 or Dan Plunkett (202) 219-0670. END-OF-FILE