Toward a More
Open Agriculture in
North America

Thomas Grennes
North Carolina State
University

Introduction

THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) can be expected to increase the average incomes of residents of the United States, Mexico, and Canada. By increasing net wealth, the trade agreement can be distinguished from tax and transfer programs that merely take from one group and give to another. This chapter will analyze the effect of NAFTA on trade and specialization in the agricultural sector. In addition to the benefits from creating additional trade, the possible disadvantages of trade diversion will also be analyzed. The effect of freer trade on worker displacement and the environment will also be considered.

Distinctive Features of Agricultural Trade Policy

The agricultural sector has particular significance in NAFTA and the Uruguay Round of GATT negotiations because agriculture has been left out of previous rounds of trade liberalization. As a result, the average level of protection in agriculture is higher than in other sectors of the economy in the high income countries of OECD.

Agriculture is also distinguished by the form of its trade protection. Import quotas are more important here than in other sectors of the economy. The United States has requested waivers from the GATT rules for its agricultural import quotas every year since the 1950s. The quotas are authorized by domestic legislation (Section 22 of the Agricultural Adjustment Act of 1933) to restrict imports that would interfere with domestic price support programs (Johnson 1973, p. 34). Prior to the recent market-oriented reforms in Mexico, 100 percent of import categories were covered by licensing. The coverage of licenses has been reduced substantially, but the use of licenses for agricultural products remains more important than for other products (Grennes et. al.).

Non-border instruments of protection are more common for agriculture than for other products. Prices of final products have been controlled at the consumer and producer levels, and many input prices have been controlled as well. Production and marketing controls have been used, and land use has been restricted. Marketing orders in the U.S. restrict the size and grade of products that can be offered to consumers. The Mexican agricultural agency, CONASUPO, intervened at all levels of agricultural activity including the farm level, food processing, and retail sales.

Another distinctive feature of agriculture is the importance of border regulation to protect human health and the health of domestic plants and animals. An ongoing trade policy issue is whether sanitary and phytosanitary measures at the border serve legitimate domestic purposes or whether they are being used as non-tariff barriers to trade. One standard for legitimacy is whether imports and domestic products are treated equally. Even if equal treatment is given, differential standards across countries give rise to complaints of unfair trade by producers in the country where standards are higher (K. Anderson). In particular, American producers have complained about unfair competition with Mexican growers who can legally use DDT and other chemicals that are illegal in the U.S.

Specific Features of the August 1992 Agreement Affecting Agricultural Trade

The agricultural sector is politically sensitive to liberalization, and this was acknowledged by the longer transition period (15 years) granted for certain products both for the U.S. and Mexico. Special treatment was given to sugar, frozen orange juice concentrate, peanuts, and certain fruits and vegetables (asparagus, broccoli, cantaloupe, and cucumbers) for the U.S. and for corn, dry beans, and milk powder in Mexico. Corn is important in Mexico both as a food staple and as a major source of income for some of the poorest farmers. Land tenure is also politically sensitive because the ejido system is associated with land reform and peasants' rights achieved by the Mexican Revolution. Mexican agriculture is also significant as the main source of illegal migrants to the United States. The fact that Mexico and Canada signed a separate bilateral agreement on agriculture is further evidence of the special features of the sector.

The U.S.-Canada free trade agreement remains in effect for those two countries. Canada and Mexico signed a separate bilateral agreement that excluded certain products (dairy and poultry) from liberalization.

The features of the agreement announced August 13th were not significantly different from what was expected at the time negotiations began in June 1991. The United States and Mexico agreed to eliminate all tariffs, import quotas, and licenses on all agricultural products beginning January 1, 1994. The barriers would be phased out over a period of up to 15 years that would vary by product. No changes in domestic policies, including U.S. marketing orders and deficiency payments, would occur.

All import licenses and import quotas would be eliminated, including products covered by Section 22 of the Agricultural Adjustment Act (sugar, peanuts, cotton, and dairy products). The current quotas would first be converted into tariff quotas, and then the quotas would increase each year until they were no longer binding. Under a tariff quota no tariff is levied on the first Q units of imports, but a tariff is applied to each unit beyond Q. The initial tariff-free quantities and tariff rates applicable to additional quantities were chosen to approximate the current levels of protection of existing quotas. The United States will retain a global quota on sugar, and planned increases in the Mexican sugar quota would be offset by a reduction in the quota for the rest of the world.

Sanitary rules would be based on scientific evidence and trade disputes would be evaluated by trade panels composed of representatives of the three countries. The countries agreed to eliminate export subsidies (except to counter subsidies by non-member countries) and to structure domestic policies so they would not distort trade. It will not be easy to continue current domestic policies and avoid trade distortion. If per unit production subsidies stimulate grain production in the U. S., they will increase U.S. exports. U.S. grain programs have paid per unit deficiency payments based on the difference between a target price and the market price. As long as payments (current or expected future) to farmers increase with current output, production will be stimulated and trade will be distorted. However, if payments were based entirely on historical output (past acreage and past output per acre), deficiency payments would be equivalent to lump sum payments, and they would have a neutral effect ("decoupled") on production and trade (see Grennes 1988a, 1988b).

A characteristic of all free trade areas is that traders have an incentive to import into the member country with lower tariff rates and re-export to the member country with higher tariffs against non-members. This problem does not exist with a customs union. Rules of origin are designed to discourage re-exports. For example, frozen orange juice concentrate can be imported duty-free to the U.S. from Mexico only if it is entirely made from NAFTA orange juice. For peanuts, the rules of origin are more restrictive for U.S.-Mexican trade than for U.S.-Canadian trade. In the latter case, peanuts could be imported by Canada from non-member countries and re-exported duty-free to the U.S. as peanut butter. However, peanut butter can be exported from Mexico to the U.S. duty-free only if the peanuts are certified to be entirely of North American origin.

The problem is a general one. If the domestic price for a product is kept above the world price by domestic policy, agents have an incentive to import the product in some form. In the case of sugar, the domestic price of which has been as high as five times the world price, imports of sweetened products have increased significantly. At one point it was profitable-and legal-to import sweetened instant ice tea into the U.S. from Canada, separate the sugar and tea, and re-sell the sugar in the U.S. In the case of Mexico, that it processes sugar is not sufficient to allow its sugar to enter the U.S. free of duty. However, confections made with sugar from non-member countries may be exported from Mexico to the U.S. free of duty. Stringent rules of origin also apply to dairy products imported from Mexico.

In the case of horticultural products, safeguards against "import surges" are provided. U.S. marketing orders that restrict the size and grade of products are allowed by the agreement.

A fund with contributions from both the U.S. and Mexico for cleaning up environmental damage in the border area is included. U.S. standards for chemical residue on fresh fruits and vegetables remain in effect. Violations by Mexican suppliers will result in earmarking the violators for future monitoring.

These are the main features of the agricultural section of the NAFTA agreement of August 13th, 1992. The precise effects vary by product, region, and country, but the net economic effects will be beneficial for all three countries. From the perspective of all the residents of the countries some comments on the August 13th agreement are appropriate before conducting a more detailed analysis:

a.The U.S.-Mexico agreement is comprehensive in the sense that it eliminates all border protection and all agricultural products. Canada and Mexico excluded certain products from trade liberalization and they signed a separate agreement for agriculture.

b.The long transition period for certain products is intended to soften the adjustment problem for certain workers and firms, but the delay also reduces the benefits from liberalization. The present value of $1 of benefits (at a 4 percent interest rate) deferred 10 years is $.676, and deferral for 15 years reduces benefits to $.555 per $1.

c.The agreement says little about the terms under which new members would be allowed to join NAFTA. The inclusion of a formal accession clause would make the agreement appear more outward-looking.

d.Domestic content provisions could become a more significant barrier to trade. The traditional practice of U.S. customs officials was to consider a product produced in a country if a substantial transformation of components occurred in that country, regardless of the precise domestic content of the product.

Formal Studies of NAFTA

A number of quantitative studies of NAFTA have been done using formal economic models. Some have focused on macroeconomic effects, while others have studied particular sectors of the economy. Exact results have varied depending on the nature of the model and its parameters and on the assumptions about the precise features of the trade agreement. A common result of nearly all the macro-economic models is that real income would rise in all three countries as a result of NAFTA, and the largest benefits would accrue to Mexico. A representative result is that real GDP would rise by 1.6 percent in Mexico, 0.7 percent in Canada, and 0.1 percent in the U.S. (Brown, Deardorff, and Stern).

Most of the studies show rather small increases in income, but Kehoe (1992) suggests that traditional models may seriously understate the gains from trade liberalization. A country's productivity growth can be stimulated by importing more specialized inputs and developing new final products as a result of learning-by-doing. He cites the literature on endogenous growth and the favourable economic growth experience, of Spain when it joined the European Community.

A detailed model of the agricultural sector appears in Grennes et. al. (1992), and it was used to analyze the economic effects of a NAFTA. The formal model consists of 29 agricultural products for the United States, Mexico, and a residual rest-of-the-world category. Canada was not treated separately because a free trade agreement between the U.S. and Canada already exists, and the volume of trade between Canada and Mexico is very small. Less than 2 percent of Mexico's imports come from Canada. The simulation was carried out (based on data for 1988) by removing all border trade barriers between the U.S. and Mexico but retaining trade barriers against the rest of the world. Domestic policies in the U.S. (for example, deficiency payments) and Mexico were also assumed to remain in place. The assumed changes in trade policy were approximately the same as those contained in the actual agreement of August 12, 1992, although no attempt was made to model the transition period. The weighted average rate of protection in 1988 was 5 percent for the U.S. and 24 percent for Mexico. These rates include border protection only, so deficiency payments were excluded from the measure of protection. The rates for broad commodity groups were:

Click here to view Table

The rates indicate that each country had the highest rate of protection for the product for which its partner had a comparative advantage. Mexico had a 32 percent rate for grains and oilseeds, and the U.S. had a 23 percent rate of protection against horticulture.

The simulation results should be interpreted as showing what would happen to trade after the U.S. and Mexico removed all trade barriers against each other (beyond the transition period) but retained barriers against non-members.

Table 1 shows a larger increase in U.S. agricultural exports to Mexico ($482 million) than agricultural imports from Mexico ($166 million). The increase in net exports of the U.S. is partly due to the higher initial level of protection in Mexico.

Click here to view Table 1: Changes from BASE in Agricultural Exports due to NAFTA

In terms of broad product categories, there would be an increase in U.S. exports of grain and oilseeds of $430 million (see Table 2). The biggest component of this category is corn (see Table 3). U.S. corn exports to Mexico are expected to increase by 65 percent, but exports to Mexico are a small percentage of U.S. corn production. Consequently, U.S. corn production will rise by only 0.3 percent and the U.S. corn price will rise by 1.1 percent. Because Mexico is a much smaller country, removal of the corn tariff will have a much bigger effect on production, consumption and the price of corn in Mexico.

Click here to view Table 2: Changes from BASE in Agricultural Exports by Commodity Group

Click here to view Table 3: Changes from BASE in Agricultural Production, Consumption and Prices for Select Grains and Oilseeds in Mexico and the United States

There would be an increase in U.S. imports of horticultural products of $104 million (Table 2), especially tomatoes. Most tomato imports occur in the winter months, and they compete with Florida production. U.S. production of tomatoes is expected to decrease by 0.7 percent and the price in the U.S. is expected to decrease by 1.9 percent. (Table 4). A paper by Buxton and Roberts (1992) contains roughly similar results for the effect of NAFTA on the U.S. fresh tomato industry: a slight decrease in price (-1.3 percent) and a decrease in production (-1.9 percent). Decreases in production of other fruits and vegetables in the U.S. are expected, but no product is expected to experience a production or price decrease in excess of 2 percent (Table 4). There would also be an increase in exports of beef, pork, and poultry by the U.S. and an increase in both exports and imports of live animals. Hence, the prediction is that NAFTA would bring about a kind of magnification of the current pattern of trade with Mexico.

Click here to view Table 4: Production, consumption, and price responses for Horticultural Commodities

Possibility of Trade Diversion

A potential problem with NAFTA and all free trade areas is that an inefficient pattern of trade could result from exempting Mexican products from U.S. tariffs, while retaining tariffs in the U.S. against the rest of the world. American importers could switch from a lower cost (under a uniform tariff) non-member source to a higher cost Mexican source due to the discriminatory tariff policy. Since the U.S. acquires only 6 percent of its imports from Mexico currently, it would be possible to divert many U.S. imports from the rest of the world to Mexico and lower real income. In the simulation, however, trade diversion does not occur for U.S. imports, since U.S. agricultural imports from the rest of the world do not decrease (Table 1).

In terms of individual products, the only significant case of trade diversion is frozen orange juice concentrate. Total U.S. imports of frozen orange juice concentrate would increase by 8000 tons as a result of an increase in consumption of 6000 tons and a decrease in production of 2000 tons. The net increase in U.S. imports is the sum of an increase in imports from Mexico of 12,000 tons and a decrease in imports from Brazil of 4000 tons. Thus, removing the U.S. tariff against Mexico results in trade creation of 8000 tons and trade diversion from Brazil to Mexico of 4000 tons (see Grennes et. al. p. 42). Frozen orange juice concentrate is the only agricultural product for which significant trade diversion was detected. The results indicate that trade diversion would not be as serious a problem as it was when Greece, Spain, and Portugal joined the European Community. (Plummer (1991a, 1991b), Winters).

It is also possible for Mexico to substitute tariff-exempt imports from the U.S. for tariff-eligible imports from the rest of the world (ROW). This kind of trade diversion did not show up either in terms of a large reduction in total imports from ROW or a reduction in imports of particular products. One reason why this kind of diversion is unlikely to occur is that the U.S. already accounts for 70 percent of Mexico's agricultural imports. Thus, U.S. exporters are already the lowest cost source even without a tariff advantage.

Erzan and Yeats have explicitly modeled the possible trade diversion from NAFTA. The value of trade created would be nearly four times the value of trade diversion. Of the limited trade diversion, most of it would occur outside Latin America. Brazil would be the biggest loser within the region and agricultural products would be the category with the most diversion within the region. However, the main conclusion from their work is that trade creation would dominate trade diversion.

Regional and Multilateral Approaches to Trade Liberalization

An important question is whether NAFTA and the expansion of regional trading blocs will contribute to faster worldwide trade liberalization or whether regionalism will be an impediment to broader liberalization. This issue has particular importance for agriculture because of the Common Agricultural Policy (CAP) of the European Community. The highly protectionist CAP has transformed the EC from a net importer of grain and many other agricultural products to a net exporter. The grain policy that combines a variable import levy and an export subsidy ("restitution") has been described as the new Corn Laws. The adverse effects of the CAP have increased as membership has grown (Plummer 1991a, 1991b, Winters and Hamilton). Intransigence by the EC on agricultural trade reform has prevented a general agreement on a much broader range of trade issues in the Uruguay Round negotiations. Thus, the EC as a regional approach to organizing agricultural trade has been a significant barrier to multilateral trade liberalization.

A necessary condition for a free trade agreement to contribute to multilateral free trade is that trade creation must dominate trade diversion. The arrangement must also satisfy the GATT condition of not raising tariffs against non-members. It should also be outward-looking in the sense of allowing fairly free entry of new members, provided they satisfy the rules of NAFTA. Easy accession of new members to a NAFTA would be roughly consistent with a kind of conditional most-favoured-nation principle, i.e., membership extended to one trading partner would also be extended to other trading partners. In that case, excluded trading partners whose exports might be diverted by NAFTA could avoid the trade diversion by joining the arrangement. The use of this kind of conditional most-favoured-nation principle was successful in promoting freer trade in the latter half of the nineteenth century, in absence of the GATT or a comparable international institution (Irwin). As the number and size of customs unions and free trade areas increase it might be prudent to clarify and tighten the GATT rules concerning what constitutes an acceptable preferential arrangement. Openness could be achieved by requiring customs unions and free trade areas to admit all prospective members who satisfy the stated economic conditions of membership. In the case of NAFTA, Caribbean countries who would be harmed by giving Mexico privileged access to the U.S. sugar market could avoid trade diversion by becoming members.

In terms of negotiating costs, it is easier to reach agreement among three countries than among 150 countries. The Uruguay Round stalled after six years of negotiation but the NAFTA agreement was reached in just over one year. With respect to new members it would be desirable to include an access clause ("docking") in NAFTA, stating the conditions under which new entrants could join. Establishing the rules in advance would reduce the cost of negotiating with new members. A weakness of the NAFTA agreement is that it is largely silent on the issue of future access by non-members, and an explicit statement about access would make NAFTA look less like an exclusive club to non-members. However, one can expect the Congress to be reluctant to give up its prerogative of judging new members on a country-by-country basis.

Some logical conditions of membership that could be included would be commitment to a market economy and absence of foreign exchange controls. Inducing some Latin American countries to meet these conditions could provide benefits to the prospective members that would be as large or larger than the benefits from removing trade barriers. Unilateral policy reform by Latin American governments has been and can be an effective policy. Chile and Mexico are two examples (see Goldin and van der Mensbrugghe).

NAFTA and Western Hemisphere Free Trade

NAFTA could be expanded into a Western Hemisphere Free Trade Agreement. The Enterprise for the Americas Initiative announced by President Bush in June 1990 is a formal invitation to move in that direction. Whether this larger regional bloc would lead to higher world income could be judged by whether it results in net trade creation and whether it remains accessible to prospective new members. There is a greater potential for trade diversion in the broader arrangement than in NAFTA, but it does not appear to be a serious problem for the countries of the Americas. Trade creation is expected to dominate (see Erzan and Yeats).

In general, the importance of trade diversion varies by country and product. A necessary condition for diversion is that the low cost supplier of a member must be excluded from the agreement. In addition, the member country must retain a tariff on the product against non-members. An example would be including Brazil but excluding Argentina, its main current supplier of wheat (see Grennes et. al.). For many important Latin American agricultural exports such as coffee and bananas, this problem does not exist because the products already enter the U.S. duty-free. Thus, as residents of a member state, Mexican growers of coffee and bananas gain no advantage over non-members.

Sugar is a greater potential problem, but only if the U.S. retains a global quota. If it does, greater imports from members will reduce imports from non-members. This could be a serious problem if certain Caribbean sugar producers are excluded from the agreement, and spokesmen for those governments have already expressed their concern about diversion of sugar trade. However, the source of the problem would be the global U.S. sugar quota, not the free trade agreement. The U.S. sugar program has been one of the most wasteful agricultural programs in terms of costs imposed on sugar buyers and perverse incentives given to U.S. sugar growers. In the recent past, the sugar program provided incentives for American farmers to incur $5 in costs to produce another unit of sugar when additional sugar could have been imported for $1. A disadvantage of a quota over a tariff is that a quota does not limit how high a domestic price can rise relative to a comparable world price. In the Uruguay Round discussions, U.S. negotiators have proposed phasing out global import quotas on all products. If this occurs, the possibility of diversion of sugar trade from a WHFTA would be smaller. The ultimate protection against trade diversion is to allow the lower cost non-member supplier to join the free trade agreement. For this reason it is important to make NAFTA or a broader Western Hemisphere trading arrangement accessible to new members.

Environmental Consequences of NAFTA

Environmental degradation is a frequently cited criticism of NAFTA. In this regard, it is important to distinguish between environmental problems that existed before NAFTA from those that are related to freer trade. Air pollution in Mexico City and water pollution along the U.S.-Mexico border are legitimate environmental issues, but they should not be attributed to NAFTA. Congressman Gephardt's proposal to "clean up the border" by imposing a special tariff (euphemistically named a "cross-border transactions tax") is a mistake, because it penalizes the wrong activity. Tomatoes grown in Sinaloa and exported to the U.S. and corn grown in Iowa and exported to Mexico do not contribute to border pollution, and the essence of NAFTA is to encourage this kind of mutually profitable and environmentally clean trade. The appropriate remedy for pollution is to correct the problem at its source rather than to penalize an unrelated activity like trade.

Food safety and protecting the health of plants and animals are legitimate concerns for consumers and agricultural producers on both sides of the border. However, the issues are not closely related to NAFTA. If NAFTA fails, the problems remain. If NAFTA is ratified, the volume of trade will increase, but the basic issues will remain. For example, U.S. standards for chemical residue on fruits and vegetables are applicable to both domestic products and imports, and U.S. standards will remain in effect under NAFTA. It is always difficult to determine the optimum standards for food safety, but NAFTA will not lower those standards in any way.

With regard to protecting the health of plants and animals, all trading countries have border measures (sanitary and phytosanitary standards) to exclude importation of diseased plants and animals. There are enforcement problems, including the possibility of using the standards as non-tariff barriers to trade. Long before NAFTA was discussed, the U.S. enforced rules against importation from Mexico of cattle with hoof-and-mouth disease and avocadoes subject to a certain plant disease. The NAFTA agreement would not make it more difficult to enforce such standards. The agreement does provide that standards should be scientifically based, which is the same position taken by the U.S. government in its trade discussions with the European Community.

Another environmental issue that has been linked with trade is the use of some chemicals by Mexican growers that are not legal in the U.S. Several aspects of the issue should be clarified. First, American consumers are protected against unsafe Mexican products by restrictions on the allowable chemical residue on fruits and vegetables. U.S. standards apply both to chemicals that are legal in the U.S. and those that are not. Second, if the chemicals are dangerous to the health of Mexican workers or if they pollute the Mexican environment, they constitute a legitimate domestic problem in Mexico with or without NAFTA.

Third, spokesmen for American farmers have claimed that differential standards across countries put American producers at a competitive disadvantage in competing against imports or in other markets. They call for trade barriers that would result in a "level playing field" or "fair trade." Relative costs are affected by different environmental standards, but differences do not justify interfering with trade. Many other standards also differ across countries; some are lower than in the U.S. and others are higher. Mexico also has a lower legal minimum wage law and different standards for the use of child labour. Other countries have more restrictive standards than the U.S. in terms of allowing the sale of meat from animals that were fed growth hormones, allowing factories to produce on Sunday, and worker safety laws.

International differences in standards influence relative costs in the same way that costs are affected by differences in wages, the price of capital goods, laws, and taxes. The politically popular expression "level playing field" and the analogy between trade and a game with a winner and a loser is fundamentally misleading. When trade occurs, both parties win. Furthermore, an important source of gains from trade is the existence of differences in costs. There is also a more pragmatic reason for American agricultural lobbyists to oppose restricting imports because of lower standards in some exporting country. The European Community has already restricted beef imports from the U.S. by claiming higher standards for food safety. Germany and Italy have higher standards than the U.S. for chemical residue on tobacco. American products of biotechnology are also vulnerable to similar import restrictions.

NAFTA and Employment

Some opposition to NAFTA has been based on concern about worker displacement due to imports or relocation of plants to Mexico. Some concern is justified in the sense that all economic change, no matter how great its net benefits to society, harms someone. Because NAFTA will produce more winners than losers, it is possible to enjoy the benefits of freer trade and also compensate the losers. Compensation would distribute the gains from freer trade more evenly. Candidates of both political parties for President and the Congress in the U.S. advocate some form of trade adjustment assistance in conjunction with NAFTA. The fact that some workers would have to change jobs should not justify opposing NAFTA and depriving the gainers the benefits of more favourable trading opportunities. Restricting imports to save particular jobs is analogous to allowing Luddite workers to destroy machines that threatened their jobs.

In the agricultural sector NAFTA would result in more jobs in the export sector, including grains and oilseeds, and fewer jobs in the import competing sector, including horticultural products. Since agriculture as a whole is expected to expand, one would expect more agricultural employment with NAFTA than there would otherwise be. However, the case for or against NAFTA should not be based on the number of jobs created or destroyed in a particular industry. To put the trade-employment relationship into perspective, it should be noted that any changes in agricultural employment attributable to changes in trade policy have been completely dominated by domestic changes in technology and demand. Millions of agricultural jobs have been destroyed in this century for reasons completely unrelated to international trade. In 1900, most Americans were employed in agriculture, but today less than 4 percent of American workers are employed in agriculture. The fact that new circumstances make particular jobs redundant is not a convincing reason to oppose freer trade or economic progress in general.

A larger agricultural labour market adjustment problem exists in Mexico. The biggest increase in imports will be in corn (See Table 3), which is currently produced by many small inefficient producers (Robinson et. al., Levy and Van Wijnbergen). To ease the adjustment problem the transition period is 15 years and a tariff quota will be in place during that period.

How many Mexican workers will be displaced by additional corn imports is an interesting question, but it is not easy to answer. Many corn producers participate in the communal operations of ejidos, and they would be adversely affected by cheaper corn imports. However, a recent constitutional reform has eliminated many of the restrictions that had contributed to inefficient production. Producers are now allowed to own land, lease land, hire additional labour, choose between crops and grazing, and enter into contracts with foreign investors. Relaxing restrictions on the use of ejido land lowers the cost of growing corn and makes it more difficult to determine the net effect of freer trade. Some of the workers displaced from corn production will be absorbed by the expanding fruit and vegetable sector and by food processing, but expansion of employment depends on complementary investment. For fruits and vegetables investment in water projects is essential. Expansion of facilities to produce tomato paste is an example of food processing financed by American investment.

Ratification Process

The NAFTA must be ratified by the legislatures in all three countries, but the political situations are quite different. In Mexico the President's party has a large majority in the legislature. In Canada the parliamentary system gives a majority to the Prime Minister in the Parliament, but the government and the U.S.-Canada free trade agreement are currently unpopular. Although the economic gains to people benefiting from NAFTA exceed the losses to other people in all three countries, it remains to be seen whether the agreement will be ratified. It is well-known that the U.S. Congress tends to be more protectionist than presidents of either party. The fact that members of Congress are elected by particular districts rather than the entire country leads them to subordinate national interests to parochial interests at times. For example, the military budget may not be cut even if a majority favours a reduction, because each member vigorously opposes closing bases or defense plants in his own district. Small but powerful special interest groups that would be harmed by NAFTA can exert disproportionate influence on the Congress.

Another factor favouring protectionism is the fact that benefits from trade liberalization tend to be spread evenly among the population, but the costs tend to be much more concentrated. The smaller number of losers makes it easier for them to form a coalition and lobby effectively before the Congress. The small number of sugar growers has made it easier to form an effective lobby. For example, there might be 1000 people in a Congressional district who would gain $1 each from trade liberalization. Because the gain per person is small, no individual has a strong incentive to commit his time and money to influencing his Congressman. At the same time, two people in the district may lose $100 each from freer trade, and each one has a strong incentive to commit time and money to oppose trade liberalization. In this case, the Congressman is vulnerable to the protectionist pleas of the special interest group that would lose $200 even though there would be a net gain of $800 to residents of the district as a whole. The fact that the percentage of income spent on food declines with affluence (Engel's Law) weakens resistance to special interest pleas for agricultural protection in high income countries. Special interest groups could block NAFTA just as Western European agricultural groups have successfully led the opposition to agricultural reform in the GATT negotiations for many years.

Conclusion

The NAFTA presents a rare opportunity to increase the prosperity of residents of the United States, Mexico, and Canada. It would allow producers in each country to specialize in making their best products. The trilateral agreement could be extended to other countries of the hemisphere, and the regional agreement could stimulate worldwide trade liberalization.

Increasing competition in world agricultural markets would be an impressive achievement after many decades of failed negotiations. In terms of specific products, the U.S. is expected to increase exports of grain, oilseeds, and meat to Mexico. At the same time Americans are expected to increase imports of horticultural products, especially fruits and vegetables.

Trade diversion is not expected to be an important problem for the members of NAFTA. Some workers are expected to be displaced from current jobs, but trade adjustment assistance has been proposed to ease the adjustment of particular workers. In addition a lengthy transition period (up to 15 years) has been included for products that are most vulnerable to import competition.

Some legitimate environmental problems exist, but they existed before NAFTA was proposed, and they will not be aggravated if NAFTA is ratified. The pre-NAFTA standards for protecting against excessive chemical residue on fruits and vegetables and for preventing imports of plant and animal diseases remain in effect. To the extent that NAFTA stimulates economic growth in Mexico, it will provide Mexicans with greater capacity and will to improve the environment.

Although the August agreement represents a step toward a more open world economy, it does contain certain protectionist features. Deferring the removal of trade barriers for 15 years for certain products reduces the present value of the benefits of trade reform. The absence of conditions and procedures for the accession of new members makes the NAFTA appear to be an inward-looking arrangement. For several products NAFTA introduces domestic content rules that are more restrictive than they have been in the past. Finally, Canada and Mexico excluded certain agricultural products from trade liberalization.

Although NAFTA presents an opportunity to expand agricultural trade based on comparative advantage, its impact is likely to be smaller than the effects of other changes in member countries. The U.S.-Canadian agreement is more important to Canada than freer trade with Mexico. Broader economic reform in Mexico will have a greater effect than preferential trade with its neighbours. In the U.S. long-term growth in agricultural productivity dominates the effect of additional trade with Mexico.

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