NFAPP's Newsletter October 1997
Home | Personnel | Commodities | Newsletters | Downloads | Links | Feedback | ASU Campuses |

NFAPP's Newsletter : October 1997

Featured Articles :

What Can We Learn from NAFTA

Market Watch.....U.S. Onion Market

Legislative Update....

 


What Can We Learn from NAFTA?
by Julie Stanton, Ph.D.


At the December 1994 Summit of the Americas, Chile was officially invited by the three NAFTA member countries to negotiate entry into the agreement. For many, this invitation has been seen as the first step in creating a western hemispheric free trade zone, a goal considered by observers to be crucial in maintaining U.S. competitiveness in world markets. However, the acceptance of Chile into negotiations has been met with considerable debate.

The first aspect of this debate concerns the results of NAFTA as is, with three member countries. According to Congressional testimony (U.S. GPO, 1995), the debate among U.S. representatives is fierce. Proponents point to high levels of new trade between the two countries, increases in employment in the U.S., and the important role of NAFTA in cushioning what would have otherwise been disastrous effects of the Mexican peso devaluation. They therefore encourage the extension of NAFTA to other countries in the hemisphere, particularly Chile.

Opponents decry results in particular sectors, and see the U.S. as having lost considerably in employment and trade. Thus they conclude that NAFTA, with Mexico, has been a failed experiment at free trade between countries of vastly different resources and economic levels and thus should not be compounded further with a new entry such as Chile.

Indeed, there are a number of problem areas in horticultural trade between the NAFTA partners. Packaging standards that undermine bulk shipments; the imposition of plant inspection fees; minimum prices on fresh fruit; complicated storage protocols; a problematic transportation network; "voluntary" trade restraints; retaliatory use of phytosanitary restrictions; and questions of application of existing U.S. law all arose as general areas of dispute after NAFTA implementation. It is likely that similar issues will arise if Chile is formally included in a free trade agreement.

Further, for commodities that had already been important to bilateral trade between the U.S. and Mexico, competition accelerated sharply despite longer phase-in periods for tariff liberalization. Tomatoes, bell peppers, cucumbers, squash and a number of other commodities have been the subject of heated disputes, including formal petitions in some cases, primarily because of decreasing U.S. market shares for domestic producers. Although declining market shares is not an unexpected result of free trade, the sentiment is that shares declined too rapidly for producers to gradually shift to other crops. While this demands that attention be paid to the scheduling of tariff liberalization in any free trade agreement with Chile, one must not forget the likely role of the peso devaluation in accelerating the decline of U.S. market shares.

Of course, the question as to whether NAFTA's results implies lessons for the impending negotiations with Chile must consider two additional factors: first, there are many who consider NAFTA a success in creating jobs and exports for the U.S. and attribute many of the negative patterns to the peso devaluation, and second, only a few years have passed since NAFTA's implementation and many of the lasting benefits to the U.S. will be apparent only in the long-run. For those reasons, it will be difficult to adjust the negotiating strategy for Chile using lessons other than those concerning procedural issues and the length of liberalization periods for sensitive crops.

Another aspect of the debate concerns the suitability of Chile as a partner. Indeed, many have agreed that Chile might have made a better candidate for NAFTA than Mexico, due to a longer, more stable history of democratization and privatization. Mexico's actions to remove substantial government presence in the markets has been only recent, while Chile has fostered the growth of private markets, including financial markets which are considered relatively strong.

Chile is also already an important market for the U.S. 1994 trade resulted in $2.3 billion of Chilean exports to the U.S., while the U.S. contributed 23% of total Chilean imports. While Chile's population is only about one-sixth that of Mexico, U.S. exports to Chile in 1994 were actually more than all exports to India, a country of nearly 1 billion people. Also, average tariff rates show that the relative advantage to the U.S. is greater with free trade with Chile than it was with Mexico. Chilean tariffs average 11% on U.S. exports, and the U.S. only 1% on Chilean exports. Prior to NAFTA, the ratio was 10 to 4 for Mexican tariffs to U.S.

Indeed, for particular fruits and vegetables, Chile has been quite a significant trade partner to the U.S. In recent years, Chile has supplied about two-thirds of all U.S. imports of avocados (Plunkett, 1997), and is the third-largest supplier of fresh asparagus (Calvin and Cook, 1997). The U.S. also imports about three-quarters of all strawberries that Chile exports (McNeil, 1993).

The question for policymakers is whether these characteristics of Chile and its existing trade patterns with the U.S. would result in a different outcome under free trade than has NAFTA with Mexico. Clearly the crop mix of most trade importance is somewhat different. Besides the avocados, asparagus and strawberries mentioned above, Chile is a significant producer of fresh table grapes and wine, products that are well-ensconced in Californian agriculture and therefore likely to draw long tariff liberalization periods. Interestingly, the case of wine illustrates a possible complication arising from inclusion of Chile in a free trade agreement that already includes Mexico. Chilean wines have been accorded preferential tariff treatment by Mexico, at rates below the tariff applied to U.S. wine exports. Even though NAFTA eliminates Mexican tariffs on U.S. wines completely over 10 years, those placed on Chilean wines are already lower and expected to be phased out sooner (Hayes, 1996). While the U.S. considers the impact of free bilateral trade with Chile, it should also recognize that Chile's entry into a revised NAFTA would not be bilateral, but instead imply reduced tariffs among all partners. That is, while the U.S. may have established better trading conditions with Mexico under NAFTA, the entry of Chile may in fact result in sufficient additional competition for the Mexican market as to reverse or diminish those gains.

Further, it will be interesting to see whether the higher transportation costs that Chilean exports face in reaching the North American market play a significant role in becoming a stronger competitor for the U.S. market. These costs must be compared to the generally higher labor costs incurred by U.S. growers to determine relative competitiveness.

A final aspect of the debate concerns hemispheric trade more generally. Proponents of Chile's entry into NAFTA argue that without this step, the U.S. will be left behind in the global trend toward free trade. Already, Chile's neighbors have joined in a customs union, and Chile is discussing its potential with them and with the European Union. Some point to the rapidly growing Latin American market as being much more important to the U.S. than is trade even with traditional partners in the European Unionš. Opponents point to the differences in economics among hemispheric countries as being unsuitable for full integration with the U.S. Lower labor costs, more lax environmental standards, and less advanced trading technology are often mentioned as factors complicating trade between countries of different developmental levels.

This article is an excerpt of NFAPP Policy Paper #97-7 "North American Free Trade in Fruits and Vegetables : Major Issues and Trends".

Please call the NFAPP office at (602) 727 1307 to request a copy.

References :

Calvin, Linda and Roberta Cook (1997) "Exporters Target U.S. Asparagus Market," Agricultural Outlook, USDA, Economic Research Service, April, pp. 20-23.

Hayes, Sue Eileen (1996) "The California Wine Industry and NAFTA," paper presented at the Tri-National Research Symposium entitled "NAFTA and Agriculture : Is the Experiment Working?", San Antonio, TX, November.

McNeil, Emanuel (1993) "Strawberry Trade Situation in Selected Countries," Horticultural Products Review, June, pp. 16-20.

Plunkett, Daniel (1997) "U.S. & Mexican Avocado Sectors : A Comparison," Agricultural Outlook, USDA, Economic Research Service, June, pp. 22-23.

U.S. Government Printing Office (1995) "Trade Issues Regarding Chile and Other Latin American Countries in Light of the NAFTA Experience," Hearing before the Subcommittees on International Economic Policy and Trade, and The Western Hemisphere of the Committee on International Relations, House of Representatives, 104th Congress, Washington, DC, October 25, 1995.

šTestimony of Hon. Alexander F. Watson, Assistant Secretary for Inter-American Affairs, Department of State, to Congress: Between 1990 and 1994, total US. exports to Latin America increased by $36 billion compared to only a $3 billion increase to the European Union.


Market Watch......U.S. Onion Market
by Pieter van Ispelen


Export key to market under pressure
Production of summer storage onions for the fresh market has been increasing strongly in the 1990s. Excluding the summer California crop (which goes mainly to the dehydrated market), production in 1996 was about 33 million cwt. compared to less than 26 million cwt. in 1989. The increase in production has been mainly contributed to increases:

1) in domestic consumption as southwestern-type foods become more popular; 2) better storage techniques which enables the summer storage onion producing states to ship far into the following calendar year; and 3) a favorable export market

Exports reached an all time high in 1994, which caused the prices of the storage crop (harvested in and recorded back to 1993) to sky rocket. The consequence was that in following years acreage was increased to make U.S. growers able to take advantage of the strong export market. However, as the 1994 high in exports was mostly due to high demand from Japan (when the onion crop failed) the market since that time has seen more moderate foreign demand. Therefore, the trend over the last few years has been that prices have been under pressure as the domestic market has had to absorb product that couldn't be shipped elsewhere. The U.S. annual export volume comprises about 11% of total annual U.S. onion production. This volume can significantly influence domestic prices when export demand shows.

Looking at this issue a little bit closer, projections of 1997 numbers can give a better insight in this effect. Domestic per capita consumption is expected to flatten out at 17.5 pounds, while annual onion production is projected to reach 5,110 million pounds (USDA), a 3% overall decrease from last year. However, this decrease is mainly due to declines in spring and summer non-storage onion production. In particular, Texas has had problems this year with bad weather circumstances. The summer storage production is expected to be around 3,550 million pounds, 7% higher than last year and 2% more than in 1995. Most of this increase is due to higher acreage in Washington and Western Oregon. Geographically, these states are in the best position to profit from the export market which mainly targets the Pacific Rim countries. These numbers show that Washington shippers have high hopes and plant onions anticipating good export demand. A light export demand year would force Washington shippers to look to the domestic market to take a larger percentage of their product.

Assuming export levels will stay close to last year's level (580 million pounds annually) prices for summer storage onions are likely to stay under last year's level of $9.8 per cwt. as production increases while demand stays level. The annual average U.S. grower price would end up around $9.85, at the same level as in 1994 and 1995 and thanks to high prices in the spring - 3% higher than last year's average annual price.


While they are hoping for good export demand, some shippers are openly pessimistic about the long term prices this season. Quantification of the exact effect of export demand on average grower prices could be of great interest to onion growers in planning their crops. Preliminary analysis shows that, for each million pounds that export demand will differ from the expected 560 million pounds annually the average annual U.S. grower price either will go up (favorable export demand) or will go down (slacking export demand) by 15 cents per cwt. Caution should be taken with these numbers, as preliminary analysis is done on annual data while more thorough analysis will need to be done on a monthly and seasonal basis. Figure 1 shows export and price levels during 1980-1996 and the projected numbers for 1997.


Legislative Update...
by Albert Kagan, Ph.D.



Fruit and vegetable growers watch with caution as "fast track" authorization is debated. As of this writing the Senate has passed the authorization and sent the legislation to the House.

Many representatives of the produce industry feel that any expansion of trade legislation may not be in their best interest at this time. Much of the industry concern regarding fast track stems from a feeling that NAFTA has not benefited various sectors of the produce sector. Also there is a perception that many commitments made by the administration regarding NAFTA passage have not come to fruition. Fast track supporters argue that all commitments were honored, however the timing may be disputed.

Underlying the fast track debate is the administration's objective to solidify trade agreements with Chile and other Latin American nations. The argument that hemispheric trade agreements are beneficial to all countries is in dispute. There is the continuing fear that markets will be lost to U S industries and a displacement of American workers will occur.

It appears that trade negotiations with Chile will continue throughout the fall as the president prepares for an upcoming visit to Latin America. Chile has recently negotiated bilateral trade arraignments with NAFTA members Canada and Mexico as well as joining MERCOSUR as an associate member.

From a fruit and vegetable perspective trade related claims effecting fresh tomatoes, peppers, potatoes, avocados, and most recently apples leaves industry members watching the debate with keen interest.