Study on the Operation and Effect of the North American Free Trade Agreement

• U.S. exports of processed foods and beverages 59 to Mexico grew by 20 percent from 1993-1994 to a total of $2.4 billion. Because of the Mexican recession, U.S. exports dropped in 1995 to $1.65 billion. Exports then increased by 22 percent in 1996 to $2.0 billion.

• U.S. imports from Mexico rose from $1.1 billion to $1.8 billion over the same period.

• The NAFTA increased opportunities for U.S. processed food and beverage exports to Mexico.
  • Prior to NAFTA, Mexican tariffs were 10-20 percent, with only 12 percent of U.S. products entering Mexico duty free.

  • By contrast, close to 30 percent of Mexican products entered the United States duty free, and all but one of the remaining product categories faced low tariffs of between zero and 10 percent.

  • The positive effects of Mexican tariff reductions on U.S. exports will be greater in the future as Mexico phases out most remaining duties over the next six to nine years.

• The NAFTA has helped level the playing field for U.S. products. It removed Mexican import licensing requirements and required Mexico to make transparent its regulations for product testing, certification, and labeling. The NAFTA affords stronger trademark protection in Mexico, helping U.S. producers to differentiate products, demonstrate product quality and strengthen market share.

• From 1993 though 1995, annual U.S. investments in Mexico's processed foods sector fluctuated between $2.3 to $2.8 billion dollars. Capital expenditures by U.S. firms in the United States, which totaled $11.9 billion in 1995, far exceeded U.S. investment in Mexico. Foreign direct investment inflow to the U.S. was $5 billion in 1995.

• Between 1994 and 1995, U.S. employment in the sector grew by 15,000 workers to more than 1.5 million.

Background

The U.S. processed food and beverage industry accounts for more than one-sixth of the nation's industrial activity, with estimated shipments of $471 billion in 1996. The U.S. processed food and beverage industry is also a major participant in the global economy, accounting for about one-fourth of the industrialized world's total production of processed foods and beverages.

Recognizing that the U.S. domestic market is expanding slowly, growing only 3.7 percent annually since 1993, many U.S. food and beverage processors have emphasized export sales to rapidly growing foreign markets. Since 1993, exports have grown at an annual rate of 8.7 percent, reaching $29.7 billion in 1996. Exports now account for almost seven percent of shipments, up from 5.8 percent in 1993. Since 1993, total U.S. food and beverage imports have grown at an annual rate of 8.2 percent, reaching $26.5 billion in 1996.

Developments since NAFTA

Highlights of NAFTA Implementation: Tariff Cuts

Prior to NAFTA, 28 percent of U.S. imports from Mexico entered the United States duty-free and 12 percent of U.S. exports entered Mexico duty-free. As to the remaining imports, U.S. tariffs ranged from zero to 10 percent for virtually all processed foods, except for the 38 percent tariff on frozen orange juice concentrate. By contrast, Mexican tariffs on most processed foods and beverages were 20 percent. The NAFTA immediately eliminated tariffs on 3 percent of all U.S. exports to Mexico, and will eliminate tariffs on an additional 4 percent over a five-year period, 46 percent more over a 10-year period, and the remainder over a 15-year period.

Highlights of NAFTA Implementation: Elimination of Non-Tariff Barriers

The NAFTA eliminated and prohibited the reimposition of Mexican import licenses on processed food and beverages. Prior to NAFTA, Mexico used licenses to restrict imports of a large number of products such as powdered milk.

The NAFTA's rules regarding product standards also are of particular interest to the U.S. processed food and beverage industry because it depends on transparent requirements for product testing, certification, and labeling. In the past, Mexico's imposition of mandatory health regulations and labeling requirements impeded access to the Mexican market. The NAFTA's standards provisions require Mexico to employ transparent and non-discriminatory procedures for establishing product and labeling requirements, and to solicit and take into account comments from U.S. manufacturers prior to establishing new requirements.

The NAFTA provisions on intellectual property also are important to the processed foods and beverages industry, which relies heavily on trademarks to differentiate products, demonstrate product quality, and maintain market share. Also under NAFTA, Mexico recognized "Bourbon" and "Tennessee Whiskey" as distinctive products of the United States.

Trade Flows: U.S. Exports to Mexico

During the first year of NAFTA, U.S. exports of processed foods to Mexico grew 20.5 percent, reaching almost $2.4 billion. In 1995, exports to Mexico fell 31.3 percent due to the Mexican recession.

In 1996, while total U.S. processed food and beverage exports grew only 3.1 percent, U.S. exports to Mexico grew 21.7 percent, reaching $2.0 billion. Although most of the gains were in lower value-added items, future growth is expected in higher value-added items such as snack foods, as the Mexican middle-class recovers from the recession. By the end of 1997, U.S. exports to Mexico are expected to grow another 20 percent, once again reaching $2.4 billion.

Trade Flows: U.S. Imports from Mexico

Between 1993 and 1996, imports of processed food and beverages from Mexico grew 58 percent, reaching $1.8 billion. Mexico's share of the U.S. market rose modestly, most likely due to currency factors and the strength of the U.S. economy, since the U.S. did not make major changes in tariff levels during this period.

Investment

U.S. direct investments in the Mexican food and beverage industry totaled $2.3 billion in 1993, rose to $2.8 billion in 1994, and then declined to $2.3 billion in 1995. Currently, more than 25 percent of total U.S. direct investment in Mexico falls in the food and beverage sector. Capital expenditures in the U.S. by the U.S. domestic food and beverage industry increased from $10.1 billion in 1994 to $11.9 billion in 1995.

Employment, Earnings, and Productivity

Employment in the U.S. processed food sector was 1.5 million in 1995, reflecting a compound annual growth rate of 1 percent since 1989. From 1993 to 1995, employment in the Mexican processed food and beverage industry fell by more than 13,000 workers to approximately 340,000.

Between 1993 and 1995 (latest year available), productivity in the processed food and beverage industry was up by 4.1 percent, hourly earnings also grew by 3.8 percent.

• U.S. telecommunications equipment 60 exports to Mexico rose 35 percent in the first year after NAFTA, but were adversely affected by Mexico's recession in 1995, but then recovered in 1996 to pre-NAFTA levels. They continue to grow in 1997.
  • U.S. exports to Mexico in the first quarter of 1997 were 7 percent greater than U.S. exports to Mexico during the first quarter of 1993.

• Despite lower sales following Mexico's recession, the U.S. share of Mexico's import market climbed from 64 percent in 1993 to 85 percent in the first half of 1996.
  • This increase was largely attributable to tariff preferences conferred on U.S. exports by Mexican tariff reductions under NAFTA.

  • Under NAFTA, Mexico immediately eliminated 15 percent average import tariffs on more than 80 percent of U.S. telecommunications equipment.

• Imports from Mexico increased from $545.9 million in 1993 to $2.2 billion in 1996 in response to a rapidly growing U.S. market, displacing Asian imports in the United States.
  • Mexican imports tend to have a higher U.S. content than imports from other countries.

  • Virtually all Mexican telecommunications equipment entered the United States duty-free prior to 1994, thus the increase in Mexican imports was not attributable to NAFTA.

  • Mexico gained market share in the United States due in part to efficient U.S.-Mexican cross-border manufacturing operations that produce cost competitive products with high U.S.-content.

• U.S. employment has remained steady at 216,000 in the rapidly growing telecommunication equipment industry, reflecting substantial productivity gains.

Background The United States is the single largest market for telecommunications equipment in the world, with imports accounting for one-fourth of U.S. purchases. The sector has enjoyed strong growth over the past years, with domestic consumption rising from $37.6 billion in 1993 to $48.2 billion in 1996.

The U.S. share of Mexico's total telecommunications equipment market traditionally has been high, averaging more than 50 percent of Mexican imports. U.S. suppliers have maintained this strong presence in the Mexican market notwithstanding Europe's traditional dominance in certain subsectors due to Mexico's adoption of European standards for wireline equipment.

Developments since NAFTA

Highlights of NAFTA Implementation: Tariff Cuts

Virtually all Mexican telecommunications equipment exports entered the United States duty-free prior to NAFTA. By contrast, Mexico levied tariffs of 15-20 percent on telecommunications equipment imported from the United States. The NAFTA immediately eliminated Mexican import tariffs on exports of more than 80 percent of U.S. telecommunications equipment products. Remaining tariffs, currently ranging up to 14 percent, are being phased out over 10 years.

Highlights of NAFTA Implementation: Elimination of Non-Tariff Barriers

The NAFTA required Mexico to eliminate all performance requirements on maquiladoras immediately and strictly limit duty drawback. Additionally, restrictions on maquiladora sales into the Mexican market are required to be phased out over a seven-year period, by 5 percent per year. U.S. companies benefit from the elimination of these trade-distorting elements of Mexico's maquiladora policies, which have precluded sales of maquiladora products in Mexico.

In a significant change under NAFTA, a single lab can now certify a telecommunications product for sale in any of the three NAFTA countries. This change allows U.S. companies to reduce the total cost of exporting when they are able to use test equipment in U.S. labs for exports to Mexico.

Trade Flows: U.S. Exports to Mexico

U.S. telecommunications equipment exports to Mexico increased from $977.2 million in 1993, the year before NAFTA took effect, to $1.3 billion in 1994. This 35 percent increase was about 10 percentage points greater than the increase in U.S. telecommunications equipment exports to all countries that year. In 1995, however, U.S. exports of telecommunications equipment to Mexico dropped to $946.7 million, reflecting the sharp downturn in the Mexican economy and the effects of the peso devaluation. Exports began to rise again in 1996, reaching $961.2 million, representing six percent of total U.S. telecommunications equipment exports. First quarter 1997 figures place U.S. exports at seven percent above the comparable period in 1993.

The U.S. share of the Mexican market increased from 64 percent in 1993 to 85 percent in 1996. This increased market share is an indicator of the positive effect NAFTA had on U.S. competitiveness in the Mexican market. The NAFTA tariff cuts helped U.S. exporters gain an advantage over non-NAFTA producers.

Trade Flows: U.S. Imports from Mexico

While imports of Mexican telecommunications equipment grew during the 1994 to 1996 period, this equipment was largely duty-free prior to NAFTA. Mexican import increases parallel import increases from other parts of the world, reflecting the strong U.S. demand, which climbed from $37.6 billion in 1993 to $48.2 billion in 1996.

Mexico's share of U.S. equipment imports increased from 10 percent in 1994, to 14 percent in 1995, and once again in 1996 to 16 percent and displaced other suppliers, particularly Japan. Japan's exports to the United States dropped significantly from 1993 to 1996 as the yen appreciated and more competitors entered the market. Because the U.S.-content of Mexican imports tends to be larger than that of imports from other countries, increased telecommunications equipment imports from Mexico means greater exports by U.S. component manufacturers to Mexico.

Investment

Prior to NAFTA, Mexico had a history of discrimination and barriers against foreign investment, using direct restrictions and performance requirements to extract concessions. The NAFTA lifted most restrictions on foreign investment, including the 49 percent cap on foreign participation in the enhanced telecommunications services sector and provided greater protection for investors in all telecommunications services sectors, including basic telecommunications services.

No data are available regarding levels of investment in the U.S. or Mexican telecommunications equipment markets during the period 1993 to 1996.

Employment, Earnings, and Productivity

Employment in the telecommunications industry remained stable for the period 1992-1996. Because the telecommunications industry is technology-driven and historically have been subject to high productivity growth, employment levels have stayed relatively flat compared to more labor-intensive industries. In the United States, employment dropped from 235,000 in 1989 to 216,000 in 1992, and held steady at that level through 1996, notwithstanding mergers, consolidations, and downsizing.

Productivity in the U.S. telecommunications industry was up by 25.4 percent between 1993 and 1995 (latest year available) while hourly earnings were up by 7.7 percent.

• The United States is the largest intra-North American exporter of textiles and apparel, 61 accounting for $5.6 billion, or 45 percent of the total in 1996.
  • U.S. exports to Mexico between 1993 and 1996 rose by 79 percent, to $2.8 billion. Exports to Canada grew by 39 percent, rising to $2.7 billion.

  • Mexico's exports to the United States increased from $1.4 billion in 1993 to $4.2 billion in 1996. Canada's exports to the United States rose from $1.0 billion to $2.0 billion over the same period.

• Combined textile and apparel trade among the United States, Mexico, and Canada nearly doubled after NAFTA took effect, increasing from $6.4 billion in 1993 to $12.4 billion in 1996.
  • Imports from Mexico, though increasing, account for a very small percentage of the U.S. market -- less than 3 percent of total U.S. shipments in 1996.
• The NAFTA helped U.S. producers optimize production and manufacturing investment in North America, resulting in a shift of production from the Far East to North America, strengthening the industry's worldwide position.
  • Close to two-thirds of the value of U.S. textile and apparel imports from Mexico in 1996 were comprised of U.S. content, for example, formed and cut fabric.

  • U.S. imports from its NAFTA partners tend to have a much higher U.S. content than imports from outside the region, thus providing increased sales opportunities for U.S. producers. For example, textile and apparel imports from China, Hong Kong, and Taiwan have virtually no U.S. content.

  • The shift in production to North America has helped preserve jobs in the United States by increasing trade in products with high U.S. content. For example, simultaneous with the increase in imports from Mexico from 1993-1996, imports on a quantity basis from China decreased by 22 percent.

  • The U.S. textile and apparel industry invested an average of $4 billion annually in U.S. production over the past two years. By contrast, U.S. direct investment in place in both Canada and Mexico textile and apparel industries combined was $371 million in 1995.

• Because NAFTA encourages production sharing in the textile and apparel sector, Mexican plants purchase large quantities of U.S. components, allowing U.S. companies to increase exports, enhance efficiencies, and maintain jobs in the United States.

Background

The NAFTA has generated increased economic activity and enhanced export prospects for textile and apparel producers in the United States. The market opening and trade liberalizing provisions of NAFTA have begun to shift industry structure and trade patterns. Trade in textiles and apparel among the United States, Canada and Mexico has expanded substantially since the implementation of NAFTA.

The textile and apparel industry produces a wide range of products, including yarn, fabric, apparel, and a variety of home furnishings and industrial products. The combined value of shipments by the U.S. industry increased from $148 billion in 1993 to approximately $157.5 billion in 1996. Exports rose by 42 percent over the period, increasing from $10.1 billion in 1993 to $14.3 billion in 1996. Total imports increased from $41.6 billion in 1993 to $50.2 billion in 1996. 62

To be internationally competitive in the global marketplace, U.S. producers of textiles and apparel have improved their productivity, concentrated on specialized products, and established a presence in a growing number of foreign markets. The NAFTA has enabled U.S. producers to optimize production and manufacturing investments in North America, resulting in a shift of production from the Far East to North America and strengthening the industry's worldwide position.

U.S. trade with Mexico in textiles and apparel has been dominated for at least the past decade by production-sharing operations, under which component parts are manufactured in the United States and shipped to Mexican maquiladora facilities for assembly and re-export to the United States. In February 1988, the United States established with Mexico a preferential quota program ("special regime") for Mexican-produced textile and apparel products made from U.S. formed and cut fabric. Between 1988 and the initiation of NAFTA negotiations in 1991, this program enabled U.S. and Mexican producers to expand production sharing operations, which resulted in increasing use of U.S. components for Mexican-produced apparel products.

Developments since NAFTA

Highlights of NAFTA Implementation: Tariff Cuts

Prior to NAFTA, Mexico's average tariff on U.S. textile and apparel products was 16 percent, with rates as high as 20 percent on some products. By contrast, the average U.S. tariff on Mexican imports was 9.1 percent -- some 40 percent less than Mexico's average tariff. The NAFTA immediately eliminated tariffs -- ranging from 10 to 20 percent -- on over one fifth, or $250 million, of U.S. exports to Mexico, providing increased access for U.S. producers. By January 1, 1998, Mexico will have eliminated its duties on 93 percent of U.S. yarn and thread exports, 89 percent of U.S. fabric exports, 60 percent of U.S. exports of made-up textiles, and 97 percent of U.S. apparel exports. Mexico will eliminate its remaining tariffs by January 1, 2003. Under NAFTA, the U.S. will eliminate its tariffs over 5 years on 95 percent of Mexican fabric exports, 83 percent of made-up textiles, and 99 percent of apparel exports. The U.S. will phase out tariffs on more sensitive products over ten years.

While NAFTA guarantees U.S. textile producers preferential access to the Mexico market, it does not prevent Mexico from raising tariffs on products from outside the region. In fact, Mexico responded to the peso devaluation in part by raising duty rates on textiles and other manufactured products from non-NAFTA countries to 35 percent. At the same time, Mexico continued to apply its lower NAFTA rates to U.S. and Canadian imports.

Highlights of NAFTA Implementation: Elimination of Non-Tariff Barriers

Under NAFTA, Mexico must gradually increase the amount of maquiladora production that can be sold in the domestic market. Increased sales of textiles and apparel into Mexico's domestic market from the maquiladora operations will prompt greater demand for the American-made textile components from which such products are made.

The United States lifted its import quotas on North American-origin textiles and apparel when NAFTA went into effect. The United States is phasing-out its quotas on imports from most non-NAFTA countries under the Uruguay Round Agreement.

To qualify for special tariff and quota treatment, goods generally must be produced from yarn made in a NAFTA country ("yarn forward"). The NAFTA includes exceptions to this general rule, however, intended to give producers flexibility to import products when needed. One example is a system of "tariff preference levels" established in NAFTA under which yarn, fabric, and apparel that is made in North America but does not meet the yarn forward test may nevertheless be accorded preferential duty treatment up to agreed annual import levels.

Trade Flows

U.S. exports of textiles and apparel to Mexico increased by 79 percent between 1993 and 1996, increasing from $1.6 billion to $2.8 billion, despite Mexico's recession. The U.S. share of Mexico's textile and apparel imports rose from 68 percent in 1993 to 86 percent in 1996. U.S. shipments to Canada during the period rose by 39 percent to $2.7 billion. Mexico's exports to the United States increased from $1.4 billion in 1993 to $4.2 billion in 1996. Canada's exports to the United States rose from $1.0 billion to $2.0 billion during the period.

In 1996, U.S. exports to Canada and Mexico accounted for 38 percent of total U.S. exports, up from 34 percent in 1993, reflecting a combined export increase of 57 percent to NAFTA countries during the period. U.S. textile and apparel exports to Canada and Mexico were ten times greater than U.S. exports to China, Taiwan, Hong Kong and Korea combined, and two times as large as exports to Japan and the European Union combined.

The NAFTA has prompted a shift in the growth of textile and apparel trade from the Far East to NAFTA countries. The NAFTA has made Mexico and Canada the top two suppliers of textiles and apparel for the United States, benefitting U.S. producers whose fiber, yarn, and fabric is incorporated in their products. Between 1993 and 1996, total U.S. imports of textile and apparel products from China, Taiwan, Hong Kong and Korea -- the major Far East suppliers -- declined by 13 percent on a quantity basis while imports of textiles and apparel from Canada and Mexico more than doubled. Because NAFTA's strict rules limiting preferential duty and quota treatment to products made in North America -- and given growing regional integration in the sector -- these imports contain increasing amounts of U.S. textile components. This is not the case with imports from Asia, which use very limited quantities of U.S. components.

On a value basis, almost two-thirds of Mexico's textile and apparel exports to the United States are currently manufactured using U.S. component parts. In 1990, 42 percent ($287.0 million) of total U.S. imports from Mexico were assembled in Mexico from U.S. components. This share grew to 52 percent ($717.9 million) in 1993 and to 64 percent ($2.7 billion) in 1996. At the same time, imports from Mexico increased from 2.4 percent of total U.S. textile and apparel imports in 1990 to 9.2 percent in 1996 -- using growing volumes of U.S. components.

In 1993, the top suppliers of textiles and apparel products to the United States were China, Hong Kong, Taiwan and Korea. Together these countries accounted for 39 percent, or $14.1 billion of the total $36.1 billion of U.S. imports of textiles and apparel products, while Canada and Mexico accounted for seven percent, or $2.4 billion in 1993. By 1996, imports from Canada and Mexico increased 160 percent over their 1993 level and accounted for 14 percent -- or $6.2 billion -- of the $45.9 billion in total U.S. imports of textiles and apparel products. By contrast, combined imports from China, Hong Kong, Taiwan and Korea in 1996 had fallen $13.7 billion, or 3 percent below the value of 1993 imports. As a result, their combined share of the U.S. import market in 1996 was 9 percentage points below their 1993 level.

Investment

Since NAFTA went into effect, U.S. investment in the Canadian and Mexican textile and apparel industries has not changed significantly. Many U.S. apparel companies had begun using Mexico as an assembly base prior to the entry into force of NAFTA. The NAFTA's strict "yarn forward" rules of origin for most textiles and apparel mean that only those products that are made of fabric woven in North America from North American yarn qualify for preferential NAFTA tariff and quota treatment. Production sharing under NAFTA has been extremely beneficial to U.S. fiber, yarn, and fabric producers and has encouraged a shift in consumption towards NAFTA-made textiles and apparel with U.S. components -- and away from imported products with little or no U.S.-content.

Approximately 25 percent of the maquiladora plants are textile and apparel operations. Because NAFTA encourages production sharing in the textile and apparel sector, the Mexican plants purchase large quantities of U.S. components, allowing U.S. companies to increase exports and enhance efficiencies, thereby maintaining jobs in the United States.

While firms from other countries have also responded to the expanded market opportunities created by NAFTA, the United States remains overwhelmingly the largest foreign investor in Mexico's textile and apparel industry, accounting for a majority of 1995 foreign investment.

Employment, Earnings, and Productivity

The number of production jobs in the textile and apparel industries has been on a downward trend for nearly three decades, a development related to the effects of productivity improvements, international competition, and other factors. Between 1973, the peak year for textile and apparel employment, and 1993, the number of production workers in the U.S. textiles and apparel sector declined from 2.4 million to 1.7 million. Between 1993 and 1996, employment declined by 181,000, to 1.5 million workers. At the same time, productivity in the textile and apparel industry rose by 6.7 percent between 1993 and 1995 (the latest year available), and wages for production workers were up 4.1 percent.

Changing technology in the industry has altered employment patterns. The loss of apparel jobs has been primarily among assembly workers, while employment levels for more-skilled, higher-paying jobs -- such as cutting, computer-aided design and manufacturing, marketing and product development -- have remained relatively constant. Moreover, advances in productivity have to some degree allowed U.S. textile and apparel manufacturers to maintain output through automation and technological improvements, while requiring fewer workers. Increased competitiveness resulting from technological improvements and production-sharing has enabled the textile and apparel industries to increase their constant dollar value of industry shipments.

• U.S. agricultural exports 63 to Mexico increased from $3.6 billion in 1993 to $5.4 billion in 1996.
  • The United States is by far the largest supplier of agricultural goods to Mexico, with a 75 percent share of Mexico's imports.

  • The nearly 15 percent average annual growth rate for U.S. exports to Mexico compared favorably with a 12.4 percent growth rate for overall U.S. agricultural exports.

  • Combined sales to Mexico of twelve key commodities -- corn, soybeans, wheat, field seeds, vegetable oils, cotton, sugar and related products, barley, pulses (bean, peas, lentils), beef and veal, rice, and soybeans -- rose by $2 billion, up more than 150 percent.
  • U.S. imports from Mexico grew from $2.7 billion in 1993 to $3.8 billion in 1996, reflecting an 11.6 percent average annual increase, slightly above the growth rate of U.S. agricultural imports from all sources.

  • The NAFTA in isolation has had a positive overall effect on U.S. agriculture, reinforcing the trend toward greater integration of the North American agricultural marketplace and a more productive and efficient American agricultural sector.

  • U.S. exports to Mexico as a whole rose modestly as a result of NAFTA although certain commodities -- sorghum, cattle, beef, dairy products, apples, and pears -- benefitted substantially.

  • U.S. imports also rose due to NAFTA, but somewhat less.

  • The NAFTA also had a small, but positive impact on employment and investment in U.S. agriculture and rural areas.

Background

The United States is the world's largest and most competitive exporter of agricultural commodities, shipping over $60 billion dollars in agricultural goods during 1996 to countries around the world.

Agricultural exports were at record highs last year, with Canada and Mexico the second and third largest markets for U.S. agricultural goods, accounting for about 10 and 9 percent of U.S. exports, respectively. U.S. agricultural exports to North America have grown rapidly since NAFTA went into effect and, if recent trends continue, could reach $30 billion per year by 2005 -- up from $11.6 billion in 1996.

Developments since NAFTA

Highlights of NAFTA Implementation: Tariff Cuts

Most tariffs and other barriers to agricultural trade between the United States and Mexico were relatively low before NAFTA. The NAFTA will eliminate by 2008 all tariffs, quotas and licenses that restrict agricultural trade between the United States and Mexico. Prior to NAFTA, some U.S. exports did face high tariffs in Mexico. For example, vegetable oils, processed meats, and tree nuts were subject to tariffs ranging from 15 to 20 percent. Mexican tariffs on animal and vegetable oils and on farm animals and meat products were 12.0 and 6.5 percent, respectively, in comparison to U.S. tariffs of only 2.5 and 0.7 percent, respectively. (In one category, vegetable products, Mexico's average tariff was slightly lower than that of the United States -- 4.1 versus 5.6 percent.)

As a result of NAFTA, the United States and Mexico will eliminate all tariffs in their bilateral agricultural trade by 2004, except for those on a few products which will be phased out by 2008. The United States scheduled 15-year phase-outs of its tariffs on vegetables and melons. Products such as these are also protected against import surges by a special NAFTA agricultural safeguard provision.

Highlights of NAFTA Implementation: Non-Tariff Barriers

As required by NAFTA, the United States and Mexico eliminated all non-tariff barriers to bilateral agricultural trade when NAFTA went into effect. Prior to NAFTA, about 25 percent of U.S. agricultural exports to Mexico, by value, were subject to restrictive import licensing requirements. When NAFTA entered into force, Mexico immediately converted its import licensing regime for certain U.S. products -- such as wheat, grapes shipped during certain periods, tobacco, cheese, and evaporated milk -- into tariffs that Mexico must phase out by 2004. Mexico converted its licensing requirements for other products -- including corn, dry beans, poultry, barley and malting barley, animal fats, potatoes, and eggs -- to tariff-rate quotas (two-tiered tariffs, TRQs). The United States agreed to convert its import quotas for Mexican dairy products, cotton, sugar containing products, and peanuts to TRQs.

The NAFTA requires that imports of products subject to TRQs be duty free up to a certain import volume, but permits the imposition of high tariffs on quantities in excess of that volume. The Agreement requires both countries gradually to expand the "in quota" (i.e., duty free) quantity of each such product and to eliminate tariffs on the "over quota" quantity by 2004 or 2008, depending on the product.

The NAFTA also sets rules regarding the application of laws and regulations for the protection of food safety and plant and animal health (sanitary and phytosanitary measures, or SPS), requiring them to be based on scientific principles, risk assessments, and relevant international standards. However, NAFTA explicitly permits each government to set the degree of risk that it will tolerate, including by setting protection levels higher than those established under international standards. The NAFTA also requires the three parties to credit SPS measures applied by other governments when they are equivalent to their own.

Trade Flows

The NAFTA has had an overall positive effect on U.S. commodity markets, reinforcing the trend toward greater integration of the North American agricultural marketplace. U.S. agricultural exports to Canada and Mexico increased from $8.9 billion in 1993 to $11.6 billion in 1996, while U.S. agricultural imports from those countries grew from $7.3 billion to $10.5 billion. The NAFTA also has enhanced the competitiveness of U.S. agriculture by reducing border protection, and benefitted American consumers by affording them more open access to wider sources of supply. More open trade within North America has mitigated local production shortfalls caused by adverse weather, securing more stable supplies and reducing price volatility.

The relatively small tariff and non-tariff policy changes attributable to NAFTA to date are unlikely to have generated the magnitude of trade flows that occurred in some commodities. The Mexican peso crisis was the primary cause of the year-to-year variability in U.S.-Mexico agricultural trade since NAFTA went into effect, but weather-related production shortfalls, domestic agricultural policy changes, U.S. income growth, and changing technology all contributed to the growth in trade.

Trade Flows: U.S. Exports to Mexico

From 1993 to 1996, U.S. agricultural exports to Mexico rose from $3.6 to $5.4 billion. This increase reflected an average annual growth rate of nearly 15 percent, compared with a 12.4 percent growth rate for U.S. agricultural exports to the world as a whole. According to Mexican Government statistics, the U.S. share of Mexico's agricultural imports increased from 69 percent in 1993 to 74.9 percent in 1996.

A broad range of U.S. agricultural commodities benefitted from this export growth. Combined sales to Mexico of twelve commodities -- corn, soybeans, wheat, field seeds, vegetable oils, cotton, sugar and related products, barley, pulses (bean, peas, lentils), beef and veal, rice, and soybeans -- rose by $2 billion, up more than 150 percent. The NAFTA boosted U.S. exports to Mexico for a number of products, particularly those facing the highest pre-NAFTA trade barriers and experiencing the sharpest reduction in those barriers since 1993. Some of the biggest gains in U.S. exports to Mexico due to NAFTA were for sorghum, cattle, beef, dairy products, apples, and pears. 64 In addition, U.S. exports of grains and feeds increased by 33 percent from 1993-1996. Exports of corn grew by 1,267 percent from $75 million to $1 billion. Exports of soybeans increased 104 percent, to $88 million in 1996. And, U.S. exports of oilseeds grew by 13 percent over the same period.

While Mexico maintains prohibitively high over-quota tariffs to imports of U.S. corn, dry beans, and poultry, the Mexican Government elected not to apply those tariffs during the period. This policy resulted in substantial export increases for these U.S. products, which account for about 25 percent of all U.S. agricultural exports to Mexico.

The robust performance of U.S. agricultural exports to Mexico for the period overall masks the decline in exports during 1995 in the wake of the peso crisis. The collapse of the Mexican peso in December 1994 and the subsequent recession reduced Mexican consumers' purchasing power and increased the short-term price competitiveness of Mexican exports. U.S. agricultural exports to Mexico fell by 22 percent in 1995, largely offsetting gains from 1994. The Mexican economy began a strong recovery in 1996, and U.S. agricultural exports to Mexico rebounded, increasing almost 55 percent.

Overall U.S. exports to Mexico rose modestly as a result of NAFTA alone. 65 The direct effect was small because trade barriers were relatively low before the Agreement began, NAFTA has completed only the third year of a fifteen year liberalization schedule, and trade barriers are only one of many factors that influence agricultural trade.

Trade Flows: U.S. Imports from Mexico

U.S. imports from Mexico grew from $2.7 billion in 1993 to $3.8 billion in 1996. U.S. imports from all sources rose during the same period from $25 billion to $33.6 billion. The largest export gains for Mexico over the period were in fresh and processed tomatoes, 66 other vegetables, and peanuts. Much like U.S. exports to Mexico, U.S. imports rose modestly as a result of NAFTA. 67

Investment and Employment

The NAFTA in isolation has had a small, but positive impact on employment in the United States since its entry into force. 68 Moreover, three years into NAFTA, investment in U.S. agriculture and rural areas has increased slightly due to NAFTA. 69 As Mexico continues to open its agriculture market to U.S. products over the next eleven years as required by NAFTA, U.S. exports, employment, and investment in the agricultural sector will continue to grow.

In addition, as NAFTA increases North American integration in the agricultural sector, labor and capital will move from less productive to more efficient farms, firms, and industries. This dynamic process of market adjustment will continue throughout implementation of the Agreement. The strong export performance of U.S. agriculture thus far suggests that NAFTA is creating incentives for U.S. labor and capital to increase, and prosper, in the agricultural sector.

Footnotes:

59. This section covers the entire processed food and beverage group (SIC 20).

60. This section covers telephone and telegraph apparatus (wireline) (SIC 3661) and radio and television broadcasting and communication equipment (wireless) (SIC 3663), excluding camcorders and including optical fiber and coaxial cable.

61. The sectors covered by the term "textiles and apparel" for purposes of this section are textile mill products (SIC 22) and apparel (SIC 23).

62. 1996 shipments are estimated.

63. This section covers grains, oilseeds and oilseed products, livestock and livestock products, vegetables, citrus, fresh fruit, and other crops (including sweeteners).

64. USDA estimate. The ITC study examined seven agricultural groups and found that NAFTA had significant effects on two of these sectors - grains and oilseeds (wheat, corn soybeans, and other cash grains) and raw cotton. For both sectors, the ITC found that NAFTA in isolation increased U.S. exports to Mexico. The impact on investment, employment and other trade flows for these products and the other agricultural goods examined by the ITC was found to be negligible.

65. USDA estimate.

66. Tomato trade was not significantly affected by NAFTA. Tariff reductions on U.S. imports of winter tomatoes from Mexico have been very small to date, less than 1.5 percent on an ad valorem basis. The peso crisis, technological shifts in tomato production, and unusual weather in Florida were the major factors affecting U.S. tomato imports.

67. USDA estimate.

68. USDA estimate.

69. USDA estimate

Continue on to Chapter 3: Worker Rights