NAFTA: a win-win proposition for U.S. producers - North American Free Trade Agreement - FAS' Commodity and Marketing - Interview

AgExporter, Jan, 2004

To get an overall picture of how well NAFTA (the North American Free Trade Agreement) has worked, AgExporter interviewed Michael Dwyer, chief economist with FAS' Commodity and Marketing Programs area. Here are his insights on NAFTA's overall impact on U.S. agricultural trade, and on the economic fundamentals and comparative advantages that will shape future commerce trends among the three partners.

AgExporter: What do you think NAFTA has done for U.S. agricultural trade with Canada and Mexico? How do you see its future?

Michael Dwyer: While there have been bumps in the road, a review of the past 10 years shows that NAFTA's success has been quite remarkable for U.S. agriculture. Overall, worldwide U.S. agricultural exports rose by about $6.9 billion between 1994 and 2002. Of that, $5.8 billion has been to Canada and Mexico. It's hard to overlook those statistics. With fewer trade barriers and food demand continuing to expand, particularly in Mexico, the future of U.S. exports to our NAFTA partners also looks outstanding.

Since 1994, Canada and Mexico have been our two top growth markets in the world-by a wide margin. Exports to Canada rose by about $3.1 billion over those years, while sales to Mexico rose about $2.7 billion. U.S. exports to the rest of the world rose by only $1.1 billion.

In the case of Canada, 70 percent of our exports are in the consumer-oriented HVP (high-value product) category. This includes horticultural products, meat and dairy products, snack foods, beverages and other grocery products. Corn and soybeans are the main export items in the smaller bulk commodity category. Most of these products have grown sharply since the U.S.-Canada Free Trade Agreement and NAFTA were signed. In fact, exports of many items are currently at record highs.

Exports to Mexico are more diversified than they are to Canada--with 39 percent being bulk commodities, 39 percent consumer-oriented HVPs and 22 percent intermediate HVPs (semi-processed products). Mexico is one of our largest export markets for each category. Growth in corn, soybean and wheat exports has done particularly well. Growth in cotton sales to Mexico has also been very impressive, due to the country's rising consumer and export demand for its textiles and apparel.

However, the biggest surprise has been the strong growth of many of our consumer-oriented HVPs to Mexico. Before NAFTA, U.S. exports of these products were severely limited by trade barriers and weak demand. Today, courtesy of the lower market access barriers and more vibrant Mexican economy that have resulted from NAFTA, Mexico ranks as one of our top export markets for a wide range of HVPs, including meats, fresh and processed horticultural products, pet foods and grocery products.

An interesting angle on the NAFTA success story concerns our market share in both Canada and Mexico. From the 1990s up until recently, our share of world agricultural trade had been slipping. However, thanks to the increased competitiveness of U.S. exports brought about by the reduction in market access barriers, our market shares in Canada and Mexico have grown, while our shares in most of our other major markets fell. Our share of Canada's agricultural imports has climbed to 65 percent, and our share of Mexico's imports is 75 percent. This means 75 cents of every dollar's worth of Mexican imports of agricultural products comes from the United States-up from 70 percent a decade ago.

AgExporter: What are the demand fundamentals likely to be?

Dwyer: They continue to look promising. Real economic growth in Canada is projected at roughly 3 to 3.5 percent a year over the next 10 years. The Mexican economy is expected to grow by 4 to 4.5 percent a year as the country continues to industrialize, benefiting from foreign investment inflows and trade liberalization. As Canadian and Mexican incomes grow, their food demand responds. This is particularly true in Mexico, where food demand is more sensitive to changes in income than in a more mature market like Canada.

In addition to these income gains, there are issues related to population and demographics. Mexico has a population of 105 million, and it is expanding by 1.5 to 2 percent a year. Mexico's middle class is expanding even faster, which is an important demand determinant with implications for the types of foods consumed--a greater emphasis on meats, fruits and processed foods. Canada has 32 million people, but its population is only growing by 0.5 percent a year. In Canada's case, most of the increases in food demand are coming from income growth and the accompanying increase in the demand for more healthful and upscale food products.

These demand factors, coupled with fewer market access barriers, mean consumers in both countries will want and will have increased access to the same U.S.-made food products as American consumers. These factors benefit most products but will particularly favor consumer-oriented HVPs, which include most of the fastest growing exports to Canada and Mexico over the past 10 years. And I see no reason why that trend would change as we move forward.