The North American Free Trade Agreement: What Is at Stake Fo

Economic Review - Federal Reserve Bank of Kansas City, Third Quarter 1992 | Go to article overview

The North American Free Trade Agreement: What Is at Stake Fo


U.S. agriculture has a keen interest in the proposed agreement to create a North American free trade area. As proposed, the North American Free Trade Agreement, or NAFTA, would pull down trade barriers between the United States and Mexico and further open the door to a rapidly growing market for U.S. farm exports.

Efforts to create a free-trade area in North America began with the Canadian-U.S. trade agreement, or CUSTA, which went into effect in 1989. The NAFTA would extend the new free trade area to Mexico. While Canada is a patty to the new NAFTA accord, the major players are Mexico and the United States because the CUSTA has already addressed many major farm trade issues between the United States and Canada.

The NAFTA negotiations got under way in June 1991 and concluded with the announcement in August by President Bush that negotiators from the three nations had reached agreement. The draft text of the proposed accord was released early in September. Before the new trade accord can go into effect, Congress must give approval.

The steps to Congressional approval of the NAFTA treaty are spelled out under the timetable of the "fast-track authority." According to the fast-track timetable, the President must notify Congress of his intent to enter into the new trade accord at least 90 calendar days before he signs the agreement. Once the agreement is signed, Congress has 90 session days (about eight months) to approve the new agreement and any implementing legislation on a thumbs-up or thumbs-down vote without amendment. If approved, the NAFTA would most likely go into effect in January 1994.

The impact of an approved NAFTA on North American farm trade may still depend heavily on the outcome of the global trade talks. The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) are still in progress. But a long dispute between the European Community and the United States over farm trade issues has stalled--and may sink--the Uruguay Round, despite six years of negotiation. Still, many of the most important farm trade issues are global rather than regional in scope, a fact that both the CUSTA and the proposed NAFTA have acknowledged.

With the NAFTA on the horizon for U.S. agriculture, three important questions stand out: What are the major farm trade issues in the NAFTA? What benefits can U.S. agriculture expect from freer North American trade? And, how successful is the NAFTA likely to be in reforming farm trade on the continent?

This article explores these three questions. The first section provides an overview of farm trade in North America and describes the major farm trade flows and trade barriers. The second section assesses the potential gains in U.S. net farm exports with freer North American trade. The third section considers the NAFTA's prospects for pulling down farm trade restrictions in North America. The article concludes that the NAFTA could provide modest benefits to U.S. agriculture, but the industry's gains in the NAFTA still depend heavily on the outcome of the Uruguay Round.

AN OVERVIEW OF NORTH AMERICAN FARM TRADE

Tearing down trade barriers in North America is of keen interest to U.S. agriculture because Canada and Mexico are key markets for U.S. farm products. While farm trade between Canada and Mexico is relatively small, large volumes of farm products flow between the United States and each of its two closest neighbors.

Canada and Mexico are U.S. agriculture's third and fourth largest markets after Japan and the European Community (EC) (Chart 1). (Chart 1 omitted) In recent years, these two neighbors of the United States have purchased nearly a fifth of all U.S. farm exports. Dominating U.S. farm exports to Mexico are grains and oilseeds and livestock products. The major farm exports to Canada are horticultural products (fresh and processed fruits and vegetables), grains and oilseeds, and livestock products (Table 1). (Table 1 omitted)

The United States is also a critically important market for Mexican and Canadian farmers, absorbing more than three-fourths of Mexico's farm exports and about a third of Canada's. …

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