Agriculture Casts a Long Shadow Across NAFTA

31 January 2017

Despite heavy opposition during its initial formation, the North American Free Trade Agreement (NAFTA) is now so woven into the fabric of the North American economy that, even a couple of years ago, few would have taken talk of renegotiation or member withdrawal seriously. With free trade pacts garnering broad bipartisan support in the United States until recently, a retreat from NAFTA was mostly viewed as a non-starter. That is, until two political outsiders, “The Bern” and “The Donald,” arrived on the scene during the 2016 US presidential primaries. Despite significant odds and strong opposition from policy makers, the die appears to have been cast. Last week, the 45th President of the United States defied skeptics and signed an executive order to pull out of the Trans-Pacific Partnership, with eyes on renegotiating NAFTA next.

Whether or not the Trump administration is merely seeking a reset on NAFTA (particularly related to the industrial sector) or a complete overturn is still a matter of intense debate. While the deal’s impact has been uneven across commodities and laborers within the trading bloc, it is nevertheless apparent that free trade, in aggregate, has been good for agriculture. In fact, the USDA estimates that every dollar of agricultural exports adds roughly $1.27 to the US economy, in turn supporting countless US jobs. Furthermore, a change to NAFTA (including the proposed 20 percent import tax) could have yuuge implications for North American agriculture, as tariffs in one area could lead to retaliation in other sectors (e.g. agriculture). Mexico, more specifically, is one of the United States’ top three export markets—valued at $17.7 billion in 2015, and over 70 percent of Mexico’s agricultural exports are destined for the US.

Given the growing chorus of protectionist movements in some countries, advocates of free trade, especially within agriculture, need to move beyond conceptual polemics in order to more effectively influence the narrative and shape the policies required to sustainably feed 9 billion people by 2050. What’s more, the singular focus on how NAFTA has impacted some parts of the labor market is obscuring the benefits that consumers are receiving in the form of greater variety and/or lower prices. As the drums of trade war start beating, NAFTA may collapse if the agricultural sector is unable to convincingly present the other side of the argument to the public. The clock is ticking...

Agriculture Value Added Vs. Agriculture Labor in the US and Mexico


NAFTA constitutes a trilateral trade bloc including Canada, Mexico, and the United States. Although NAFTA was in effect by January 1994, specific tariff line items within the agreement were rolled out gradually through 2008, when most tariffs were finally eliminated. For free trade advocates, the opening up of agriculture, textiles, and automobile manufacturing industries to trade liberalization was the primary motivation behind NAFTA. 

Agriculture Tariff Liberalization

Given that regional trade has expanded from $290 billion in 1993 to over $1.1 trillion in 2016, NAFTA has clearly accomplished its intended objective from a trade perspective. Moreover, gross national income per capita in international dollars (GNI) equivalent has more than doubled in all of the respective countries between 1993 and 2015. Of particular importance to the current debate over NAFTA is the fact that GNI actually rose slightly faster in the United States than in Mexico during the same time period. 

GNI in US Mexico and Canada

On the other hand, the benefits of the trade agreement have not been equally distributed within the continent’s economy, and workers in some sectors have struggled to capture the benefits of the free trade agreement. As the initial opponents of NAFTA pointed out, small farmers in Mexico had virtually no chance of competing with corn producers in Iowa, while workers in the US manufacturing sector faced steep wage differentials with their counterparts in Mexico where the per capita income was just 30 percent that of the United States. While most of the NAFTA debate has centered on manufacturing, the loss of nearly two million small farming operations in Mexico has long gone under-reported.

Regardless of the economic relationships between NAFTA countries, a countless number of the continent’s laborers have already been exposed to the onslaught of industrial automation, capital requirements inherent in modern agriculture production systems, and globalization (i.e. Asia) without the deal. Despite hand-wringing by American politicians over the impact of Mexico’s lower labor costs on the country’s manufacturing sector, trade data shows that competition with Asian producers has had a far greater role in the growing US deficit since 1994. 

Net Trade Value in Goods and Services Asia Canada Mexico US

To Workers on the Fault Line

These tectonic shifts in the continent’s economic-trade dynamics do little to console those personally impacted by the policies. Economists are still coming to terms with why manufacturing labor costs have barely converged between Mexico and United States over the past 20 some years as trade theory promised. If the free trade movement loses steam in North America during the coming decades, it will be because policy makers failed to effectively communicate the long-term benefits of NAFTA and to properly account for its distribution effects. Of course, politicians have encouraged mobility by supporting retraining programs and other safety net programs, but many haven’t prepared their constituents for the inevitable disruption of specific industries. Not only do few workers have the luxury of studying the conceptual benefits of free trade, but they can also be lulled into a sense of security after free trade deals are enacted, as the distributive impact of free trade agreements can take years to engender wage collapse and massive job cuts.

Beyond the distributive effect of free trade agreements, policy makers will also have to confront the growing belief that global trade is hitting a short-term ceiling. In theory, trade as a source of demand should generate greater economic output in aggregate as it rises, and therefore economists become deeply concerned when trade began growing faster than output. One key metric that economists use to track global trade is the ratio of trade-to-gross domestic product (the sum of exports and imports divided by gross domestic product indicates the openness of a country to international trade). There is growing concern that the ratio of global trade-to-GDP has plateaued, according to The Economist. One of the glaring outliers has been Mexico, whose ratio of trade-to-GDP has increased from roughly 56 percent during the depths of the global recession to nearly 73 percent in 2015.

Trade to GDP for NAFTA and BRICS

Agriculture Trade Defies Global Woes

Whether total global trade has peaked or not, the global agricultural sector still appears primed for growth, owing primarily to a global population explosion (i.e. latent demand) and production’s inherent dependency on specific climate and soil conditions. Notwithstanding short-term volatility in commodity prices and a temporary setback following the 2008 financial crisis, global export value of major agriculture and food-related items have continued to climb since China joined the WTO in 2003. 

Export Value of Agriculture-Food Items

Within the NAFTA bloc, Canada and the United States easily dwarf Mexico in the global agriculture export markets, yet trade flows within the region show a more balanced a picture. The value of agriculture-related items traded between the US and its respective partners was roughly equal in 2015. Even so, the trade flows within NAFTA offer a nuanced storyline at the commodity level, due to the interplay of comparative advantage and, to a lesser extent, lingering protectionism. Since tariffs on US maize imports were cut from their pre-NAFTA level of 200 percent, US exports of yellow corn to Mexico have increased by over 10-fold. Dairy, meat, poultry, planting seeds, food ingredients, sweeteners, and grain and oilseeds have also been big beneficiaries of NAFTA. In fact, on an export value basis, dairy, beef, pork, poultry, and prepared foods represented the top five types of US agriculture exports to Mexico in 2015. Although Canada is now the United States’ top agricultural export market by value, Canadian livestock and dairy industries remain protected from international competition.

US Exports of Agriculture Products to Mexico

From Mexico’s perspective, the country’s speciality crop growers (particularly those growing fruits and vegetables) and sugar industry have greatly benefited from NAFTA. At the same time, the country’s milling and food processors have also used increased access to US and Canadian markets to expand their output of food ingredients and processed food products, such as starches, flour, and tortilla products. Exports of snack foods, beer, and coffee are also a growing portion of the country’s exports. Largely due to NAFTA, over 70 percent of Mexico’s food and agricultural exports now end up in the United States.

US Imports of Agriculture-related products from Mexico

Peeling back the layers on NAFTA

The expansion of free trade in North America has unquestionably increased the variety of food and beverage products (e.g. avocados, bananas, mangoes, select beer) available to consumers, especially during the winter months for those in the northern part of the Americas. Given these tangible benefits, increased tariffs on food-related imports from Mexico will likely leave consumers in the US worse off either in the form of reduced consumption options or higher prices. In some cases, Mexican companies with an international presence can circumnavigate higher tariffs by simply expanding production within the United States. In other cases, where a crop can only be cultivated under specific climate conditions, domestic price elasticity will ultimately determine future trade flows. If Mexico retaliates to increased tariffs, the country’s consumers will also be major losers, as a significant proportion of US agriculture exports to Mexico are meat and dairy products or inputs for final processing/preparation (e.g. grains, sweeteners).

The impact on North American producers and trade flows will be greatly determined by import tariff levels and growth opportunities in alternative export markets. Nevertheless, a careful analysis of recent trade flows within NAFTA provides a clear picture of the likely winners and losers from a trade reset. Sugar, tortilla, and fruit and vegetable producers in Mexico would definitely suffer from higher tariffs, but small-scale growers of grains and oil crops and livestock producers could actually benefit from reduced supply from the US. Within the United States, sugar growers will see relief from reduced import competition, but processors of sweeteners, corn-soybean growers, apple farmers, and livestock producers will need to find new markets. On a net-net basis, higher per capita incomes in the United States will make a moderate increase in tariffs (10-20 percent) at most an inconvenience at the retail counter, and this tariff level is unlikely to dramatically alter import demand for Mexican producers. That said, US baking, milling, and food service industries will likely feel the squeeze of higher input costs. 

On the other hand, lower income levels in Mexico make it unlikely that consumers will be able to fully absorb higher meat-dairy-processed cereal prices that would result from tariff retaliation. Imports of dairy, meat products, and food-beverage ingredients from the US are likely to fall, benefitting other major producers such as Brazil. In comparison, US growers of grains and oil crops may have more headroom even after tariffs, owing to their lower cost of production relative to most Mexican farmers. 

US Grain growers has a strong comparative advantage


Although free trade is clearly beneficial to the global agriculture industry, the impact on specific industries and commodities is not always distributed equally. With populist movements gaining traction in the United States and Europe, politicians can no longer afford to fall back on platitudes such as those expressed by a former US Secretary of State: “NAFTA recognizes the reality of today's economy—globalization and technology. Our future is not in competing at the low-level wage job; it is in creating high-wage, new technology jobs based on our skills and our productivity.” 

As history has painfully taught us, however, a regional trade war is obviously not the answer, regardless of any short-term political benefits. Policy makers must seriously consider whether bilateral free-trade agreements, regardless of their long-term benefits, require occasional re-calibration to reflect global economic dynamics. Despite Mexico’s trade-to-GDP—mostly driven by non-ag products—reaching an all-time high in 2015, the country’s economy is facing structural challenges. GDP growth remains stagnant, and trade expansion isn’t delivering sufficient economic growth, which is showing up in not only Mexico’s domestic labor markets, but also within certain sectors of the US economy.

Since many of the long-term benefits of NAFTA are agriculture-related, it is vital that a holistic view of the trade agreement be presented to the general public. The pocket books and cupboards of US consumers have benefitted immensely from a greater variety and lower price of food imports. Meanwhile free trade has been a boon for much of the US farm-belt, as higher productivity outweighs the threat of lower labor costs south of the border. Tweaks may be required in some parts of the trade agreement, but let’s not simultaneously risk the deal’s long-term benefits. What’s certain is that the agri-food sector will need to redouble its efforts to have its voice heard amid the increasingly polarizing cacophony of geopolitical rhetoric.

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