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The Importance of NAFTA for the Agricultural Sector

Sebastien Pouliot (pouliot@iastate.edu)

The implementation of the North American Free Trade Agreement (NAFTA) in 1994 opened borders to trade between the United States, Canada, and Mexico. The agreement originated from the free trade agreement the United States and Canada signed in 1988. NAFTA eliminates almost all barriers to trade and investment between the three North American countries and includes provisions for the protection of intellectual property rights. Certain trade barriers for agricultural products remain under NAFTA—notably, products under supply management in Canada (dairy, eggs, and poultry).

President Trump pushed for the re-negotiation of NAFTA soon after his election. Canada and Mexico agreed and negotiations are currently ongoing. NAFTA has been effective for more than 20 years and the economies of the three North American countries have significantly changed since its inception. In agriculture, notable changes include the disappearance of the Canadian Wheat Board, the growth in the production of ethanol from corn, increased competition from the rest of the world, the signature of other trade agreements, and the increased integration of the economies of the three countries.

NAFTA has facilitated the integration of the agricultural sectors of the three countries with the gradual elimination of almost all tariffs and improved cooperation for the application and enforcement of sanitary and phytosanitary measures. NAFTA is so central to trade in North America that it is easy to forget how important this trade agreement is to the US economy and to the US agricultural sector. We briefly review in this article some statistics about agricultural trade between the United States, Canada, and Mexico and discuss key issues regarding agricultural trade.

Agricultural Trade Between Canada, Mexico and the United States

Trade flows of agricultural commodities between the United States, Canada, and Mexico are very large. In 2016, US agricultural imports from Canada totaled $24.9 billion while US exports amounted to $25.3 billion. In the same year, US imports of agricultural products from Mexico reached $24.66 billion and US exports to Mexico were $17.68 billion.

Figure 1
Figure 1. Value of states’ trade of agricultural products with Canada and Mexico in 2016 (in millions of dollars)

Figure 1 shows agricultural trade volumes with Canada and Mexico for individual states. As expected, larger states and states that share a border with Canada or Mexico tend to trade more. Canada trade flows are large for most states. Annually, all states except Wyoming and Kentucky exchange at least $10 million worth of goods with Canada through imports and exports. Mexico-US trade flows are larger for Southern states, in particular Texas and California. However, exports by Midwestern States—Iowa, Nebraska, Missouri and Kansas—to Mexico exceed $1 billion, but these states’ import flows from Mexico are small. Mexico imports large quantities of corn from Midwestern States.

Trade for Major Agricultural Product Categories

Figure 2
Figure 2. US trade of agricultural products with Canada in 2016

Figure 2 shows trade values for selected major agricultural product categories between the United States and Canada. Canada is a large importer of beverages, spirits and wine, fruits and nuts, miscellaneous edible preparations, and vegetables. The United States’ main imports of agricultural products from Canada are fish, meat, and preparations of cereals and flour. The trade values are large for the “Other” category because trade values between Canada and the United States are spread across several agricultural product categories, including live cattle and hogs.

Figure 3
Figure 3. US trade of agricultural products with Mexico in 2016

Figure 3 shows trade values for selected major agricultural product categories between the United States and Mexico. The United States’ main exports to Mexico are cereals and meat. The United States’ main imports from Mexico are beverages, spirits and wine, fruits and nuts, and vegetables, roots, and tubers. The “Other” is not as important for trade between the United States and Mexico as it is for trade between the United States and Canada. Trade between the United States and Mexico is concentrated over a smaller group of products.

Going Forward with NAFTA

Generally, NAFTA has been operating very well except for a few irritants. Trade talks are notoriously slow and agriculture is typically a major point of contention. However, agriculture may not be a major obstacle in the current NAFTA negotiations. Nonetheless, there are certain agricultural trade issues that are likely to be sensitive.

In Canada, products under supply management —dairy, chicken and eggs—are likely to remain protected if the outcome of recent trade negotiations are any indication. In 2016, Canada signed CETA, a free trade agreement with the European Union. Although the European Union attempted early in the negotiations to convince Canada to terminate its supply management programs, it only obtained small concessions on cheese imports. Likewise, in the Trans-Pacific Partnership (TPP), an agreement that will not include the United States, Canada agreed to minimal concessions regarding its supply management programs with import increases representing between 1.5 percent and 3.25 percent of domestic production.

Mexico and the United States were recently involved in a dispute over sugar. The dispute was resolved in June with Mexico agreeing to limit its exports of refined sugar to the United States. It is likely that Mexico is considering this as a temporary solution and will seek a permanent solution with NAFTA. Mexico is the largest importer of US corn and has been using its corn imports from the United States as a bargaining chip. Indeed, Mexico has threatened to buy corn from South America to replace its corn imports from the United States. Closing of the Mexican market to US corn would cause a significant decline in corn prices in the United States, which would be particularly painful for corn-belt states.

Many US farm organizations have voiced their support for NAFTA and this should facilitate negotiations on agriculture. There are sectors for which it might be harder to find common ground with Canada, like aircraft manufacturing and softwood lumber. An apparent concern for the current US administration is the trade deficit with Mexico. The United States imports a lot more from Mexico than it exports to Mexico. To trade experts, trade deficits and surpluses are normal outcomes of free trade, they reflect comparative advantages and certainly do not imply that a country is losing from opening trade with another country. There are more pressing issues. First, the rules of origin, or the percentage of NAFTA content for a product to be traded duty free, should not be used as trade barriers. Second, NAFTA must have an efficient dispute resolution mechanism to quickly and fairly resolve trade disputes and prevent the abuse of countervailing and anti-dumping safeguards.

The current negotiations will follow a tight schedule because of the elections in July in Mexico next year and mid-term elections in the United States a few months later. We should learn over the next six months what shape NAFTA 2.0 will take. A possible outcome to watch for is a bilateral agreement between Canada and the United States.