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NAFTA

Beginning in 1990, Mexico and the United States began discussions of forming a free trade agreement. Mexico had experienced a difficult decade in the 1980’s, with significant increases in nationwide poverty levels.

When Mexico entered into formal negotiations with the United States, Canada also requested to join these negotiation, as a means of renegotiating the U.S.-Canada Free Trade Agreement.

The North American Free Trade Agreement (NAFTA) entered into force between the United States, Canada, and Mexico on January 1, 1994. NAFTA created the world's largest free trade area, linking 450 million people and producing a cumulutative $17 trillion worth of goods and services by 2012 (latest data).

Mexican-United States Agricultural Agreement

NAFTA partner countries recognized the importance of maintaining strong, domestic agriculture. In an effort to ensure that domestic agricultural industries were preserved in the immediate aftermath of NAFTA, as duty-free goods entered national markets at different prices, separate bilateral agreements between member countries were put in place, concerning trade liberalization in the agricultural sector. These agreements were passed and ratified as conditions for individual country’s entry into the North American Free Trade Agreement. Lengthy negotiations between the United States and Mexico were the result of opposing national interests in controlling agricultural exports between the countries.

American negotiators sought to quickly eliminate tariffs on corn exports into Mexico, because the United States enjoyed a strong comparative advantage in grain production. This advantage was due mainly to large centralized grain production processes controlled by large corporations, and hefty government agricultural subsidies that made United States produced corn cheaper than Mexican corn.

For Mexican negotiators, the possibility that eliminating tariffs on corn would crush the domestic Mexican corn industry was a genuine threat. To minimize the effects of opening the Mexican corn market to corn produced in the United States, Mexican negotiators sought a transition period that would slow trade liberalization in the corn market, giving Mexico’s small corn farmers time to adjust.

Negotiations on deciding corn policy between Mexico and the United States were informed by assumptions about the behavior of the agricultural industry that eventually proved to be a poor estimate of actual performance. First of these assumptions was the belief that the horticulture sector of the agricultural industry would be able to grow in Mexico and absorb the losses in the corn industry. Another assumption was that Mexico’s subsistence corn farmers, who primarily live off of their own production, would be insulated from fluctuations in the price of corn because they do not sell their produce. Lastly, it was assumed that corn-based products would fall in price.

In order to facilitate the adjustment for poor farmers, who were assumed to lose their livelihood growing corn, and be able transition to working in large fruit or vegetable farms, the Mexican government was expected to financially assist and subsidize small-holder farmers during in the immediate years following NAFTA.

Provisions

NAFTA provisions required that partner countries eliminate all non-tariff barriers to agricultural trade, either through their conversion to tariff-rate quotas (TRQ’s) or ordinary tariffs. Mexico removed or replaced its import license requirements with TRQ’s and gradually phased these out over a 10-year period. All TRQ’s were phased out by the end of a 15-year transition period. Approximately one-half of U.S.-Mexico agricultural trade became duty-free when the agreement went into effect. Sensitive products receiving longer phase-out schedules of 14 to 15 years included sugar, corn, dry beans, frozen concentrated orange juice, winter vegetables, and peanuts. Trade in sugar, one of the most sensitive issues in the trade negotiations, received the longest TRQ phase-out period of 15 years. NAFTA included special safeguard provisions in which a partner country could apply the tariff rate in effect at the time the agreement entered into force if imports of a products reached a “trigger” level set out.

The provisions in the final agricultural agreement on corn between the United States and Mexico allowed the United States to export 2.5 million tons of corn to Mexico in 1994, duty free. This duty-free amount would increase in volume by three percent every year until 2008. For Mexico, the final agreement allowed the Mexican government to charge extreme tariffs (215 percent in 1994) on corn imported from the United States in excess of the annual duty-free quotas. Import duties were required to decrease annually until reaching zero percent in 2008, when corn produced in the United States could be sold completely duty-free in Mexican corn markets.

Controversies

Mexico’s entry into free trade agreement negotiations were spearheaded by President Carlos Salinas. During negotiations with the United States, Mexico’s president and representatives from the Consejo Mexicano de Hombres de Negocios (Mexican Council of Businessmen), leaders of the largest industrial interests in Mexico, strived to ensure that NAFTA passed, while Mexico’s political system, controlled by Salinas’ Institutional Revolutionary Party, effectively suppressed the voice of small farmers and unions in its decision. This became a controversial topic, with allegations of corruption in the years following NAFTA’s passage.

Manufacturing and investment increased in Mexico in the years following NAFTA, but the income gap severely increased. In particular, policies designed to apply to smallholder corn farmers, came out of negotiations in which this group was not directly represented or consulted.

The ramifications of the poor assumptions underlying agricultural trade policies by the Mexican government in their NAFTA concessions were compounded by harsh discrepancies between what policymakers and economists predicted would happen and the actual results of NAFTA on Mexico’s agricultural industry. The effect of liberalizing trade in the agricultural sector was particularly felt by the smallholder corn farmers that populated Mexico’s poor rural areas, whose production was unable to compete with cheaper United States grain. With their source of income devalued, millions of rural Mexican farmers left their poverty-stricken homes to find employment in the cities and in the United States.

Impact of NAFTA on Mexico's Agricultural Industry

Corn Farmers

Large Scale Farmers

Most large corn farming operations are located in the northwestern Mexican states. Thanks to economies of scale and government subsidies that provide benefits based upon the cultivated land owned by the producer, the effects of market price reductions due to the influx of United States-produced corn have not been severe.

The use of modern farming techniques and machinery on vast Mexican farms, combined with cheap human capital, create profit margins large enough to compete with United States imports, even after NAFTA made the corn market less attractive.

Additionally, companies involved in large corn production operations were influential in NAFTA negotiations and allowed input.

Small Scale Commercial Farmers, Subsistence Farmers, and Ejidos

For small-scale corn farmers, NAFTA introduced less favorable conditions than for large corn producers. These farmers are geographically present all over Mexico, mostly selling their excess corn at market and consuming the rest for nutrition. Without the economies of scale provided from large farming operations, market price reductions because of NAFTA-related corn imports drove down the profits for smallholder farmers to almost nothing.

Small-scale farmers cultivate thousands of varieties of corn throughout Mexico, in varying environments. For rural Mexicans, corn production is an intricate process that has been passed down for generations, and is tied to their livelihood. The regional processes unique to cultivating corn in different environments have prevented standardized cultivation, but allow farmers to optimize their use of the marginalized land in which they grow corn. The regional knowledge of small-scale farmers has resulted in sixty percent of land under cultivation in Mexico devoted to the production of corn by 2000.

Small-scale farmers are spread out and isolated in communities throughout rural Mexico and as a group they are powerless to organize agricultural interests powerful enough to influence treaty negotiations.

With the main source of income for small-scale corn farmers decreasing, rural Mexican communities became extremely poor. A study by the World Bank found that in 1998, the percentage of rural Mexicans living in extreme poverty rose from around 37 percent in 1994 to about 54 percent before falling back to 1994 levels in 2002. This and further decreases in the percent of rural Mexicans in extreme poverty in recent years can be accounted for by mass exodus from rural villages to Mexican cities and across the border into the United States in search of jobs.

Subsistence corn farmers constituted 40 percent of all Mexican corn farmers by 2000, 6 years after NAFTA’s implementation. These are Mexico’s poorest rural residents. Economists in the nineties supported NAFTA on the prediction that trade liberalization would help subsistence farmers by allowing them to take advantage of lowered prices for corn products. The idea that subsistence farmers are completely separate from the market, and thus unaffected by a changing landscape in the corn industry is still a prevalent belief among Mexican policy makers. In 2008, Marco Sifuentes, a spokesman for the agricultural department of Mexico reiterated, “our small producers are not affected by the free trade agreement… They do not participate in the market.”

Subsistence farmers use marginalized land to produce the corn that they eat, employing outdated farming techniques. (Nadal) A large portion of subsistence farmers are ejidatarios, people who practice small-scale subsistence farming on communal plots called ejidos, a right won in the Mexican Revolution.

In 2000 (latest study), ejidos accounted for 62 percent of Mexico’s corn production, even though the majority of these plots are smaller than 5 hectares in size.

Even though Mexican subsistence farmers do not raise corn for market, price fluctuations in corn still affect their spending power, simply because of the need to consume items beyond food. For unusual circumstances such as illness, a typical practice would be to sell a portion of the crop raised to pay for medicine, an action that is more costly at lower corn prices.

Zapatista Uprising

See also Zapatista Army of National Liberation

As an incentive to increase investment, the passage of NAFTA included privatizing ejidos and other communal landholdings. This was a revocation of Article 27 of Mexico’s constitution, that had protected communal Indian landholdings from sale or privatization. The right of communities to these landholdings had been a cornerstone of the Mexican Revolution (1910-1919). The Zapatista Army of National Liberation (EZLN) decried NAFTA and on January 1, 1994, declared war on the Mexican state when NAFTA came into effect.

Government Agricultural Assistance Programs

Poor credit access for small farmers made switching crops from corn production to competitive crops under NAFTA difficult. Before 1990, the Mexican government granted credit subsidies to farmers and provided 55% of the total credit given to the industry during the 1980’s. Policy changes in 1990 decreased the amount of government credit available for agriculture, an issue compounded by rural banks, whose limited support is channeled primarily to big farmers. Private investment in agriculture increased during the first four years of the 1990s, but sharply decreased after the financial crisis of 1995, coinciding badly with the introduction of NAFTA, and the need for funds to switch to competitive crop production.

PROCAMPO

In anticipation of NAFTA’s final ratification, the Mexican government established its Program of Direct Support for the Countryside (Programa de Apoyos Directos para el Campo, or PROCAMPO) in 1993. PROCAMPO was put in place to ensure income support for Mexican farmers over a fifteen-year transitional period, through 2008 and the end of United States corn import limits. Benefit payments for farmers were determined on a per-hectare basis. In the first four years of PROCAMPO, government expenditure on this program decline from $1.4 billion in 1994 to roughly $1 billion in 1998. In addition, these four years also saw a fourteen percent decrease in the number of agricultural producers who benefited from PROCAMPO.

Alliance for the Countryside

In 1995, the Mexican government under President Calderon, created the Alianza para el Campo (Alliance for the Countryside) as the policy basis to promote agricultural and rural development. This program is designed to address the problems facing agricultural growers and bring about technological and methodological change through matching investments and training programs to allow farmers to adopt yield-increasing supplies and services. The objectives of the Alliance are the following:

1. "To increase grower income.
2. To achieve an agricultural production growth rate higher than the population growth rate.
3. To improve the balance of trade.
4. To support the overall development of rural communities.”

The Alliance is funded through State Agricultural Committee’s and a trust fund overseen by various government officials, primarily used to fund subsidy programs. The main beneficiary of Alliance funds are large agricultural producers, as they possess the funds necessary to be a matching investment.

Immigration from Rural Mexico

See also Illegal immigration to the United States

Some experts argue that the high population growth since the mid 20th century, in combination with increased female labor force participation, led to the high emigration rates from Mexico that started in the 1970s.

Others blame more recent events, especially after NAFTA came into effect. In connection with a 2.3 million drop in total employment between 1990 and 2008 (largely due to agricultural employment loss), Mexicans have been fleeing the rural countryside. In connection with the 2.3 million agricultural jobs that were lost between 1990 and 2008, rural migration to the United States grew 452 percent from 1980 to 2002, a large change considering that rural migration to the United States only grew 92 percent from 1980 to 1994, before NAFTA came into force.