r united states GAO General Accounting Office Washington, D.C. 20548 National Security and International Affairs Division B-238263 January 12,199O The Honorable E (Kika) de la Garza Chairman, Committee on Agriculture Houseof Representatives Dear Mr. Chairman: In responseto your request of July 11,1989, we have undertaken a review of agricultural trade between the United States and Mexico. Spe- cifically, you expressedinterest in U.S.-Mexicanagricultural trade flows in recent years, the impediments - to further expanding this trade, and the potential for increasing it. This briefing report, as requested, con- tains information on the value of U.S.-Mexicanagricultural trade from 1982 to 1988, economictrends affecting this trade, and principal obsta- cles to agricultural trade between the two countries. For this briefing report we relied on information provided by US. gov- ernment officials, representatives of the Mexican Embassy and interna- tional organizations in Washington, D.C., academicians,and spokespersonsfor US. and Mexican agricultural industry groups. We plan to issue a comprehensivereport at a later date which will more fully explore these issues,taking into account information to be obtained from Mexican agricultural and commercial authorities, repre- sentatives of U.S. and Mexican agricultural producers and other experts in U.S.-Mexicanagricultural trade. The discovery of vast petroleum reservesin Mexico in 1977 allowed the Background Mexican government to pursue a debt-led strategy for economicdevel- opment. Counting on revenues from its oil exports, Mexico borrowed heavily from foreign sourcesto finance industrial development. In 1982, however, oil prices declined leading to a shortfall in expected revenues, and financial institutions cut loans to Mexico. Mexico was saddled with a huge external debt without the expected means to service it. From 1983 through 1988 Mexico experienced an average annual decline of 2.5 percent in real per capita income and the economicproblems continue. In spite of serious economicproblems in Mexico, agricultural trade’ with the United States has expanded in recent years, in the context of ‘Combinedvalue of U.S.exports to Mexicoand Mexican exports to the United States. Page1 GAO/NS~BR U.S.Jblesk~Agricultud Trade B22s262 improved overall trade relations between the two countries. Mexico’s accessionto the General Agreement on Tariffs and Trade (GATT) was an important development in this area. Sincejoining GATT, Mexico has sig- nificantly reduced import licensing requirements, its principal protec- tionist mechanism. In addition, Mexico has consolidated tariff categories,reduced the dispersion of tariff levels, and reduced overall tariff rates. U.S.-Mexicanagricultural trade increased from $2.3 billion during the Results in Brief recessionyear of 1982 to $4 billion ln 1988. While agricultural trade has recovered since the 1982 crisis, a number of problems continue to impede expansion. Both governments still maintain somepolicies which impede trade, including strict health regulations, import licensing requirements and tariffs. U.S. and Mexican border processingproce- dures and inadequate infrastructure in Mexico also constrain trade. In addition, Mexico’s large external debt limits demand for all U.S. exports, including U.S. agricultural exports, and Mexico’s ability to promote agri- cultural development. In August 1989 the U.S. Department of Agriculture and its Mexican counterpart established b&rational technical groups to promote a closer working relationship and facilitate commercebetween the U.S. and Mex- ico. The technical groups are addressing areas such as administrative procedures, marketing and inspections. In October 1989, the presidents of Mexico and the United States formally declared their support for the efforts of these groups. Mexican agricultural trade with the United States nearly doubled from Agricultural Trade 1982 to 1988. While the value of US. agricultural trade worldwide grew Trends at an average rate of only 2.3 percent between 1982 and 1988, U.S.-Mex- ican agricultural trade increased at an average annual rate of 11.6 per- cent. However, US. and Mexican agricultural exports had different patterns. Mexican agricultural exports to the United States had a steady growth trend, except for a surge in 1986 which was mainly due to higher coffee prices. Mexico’s efforts to increase revenues from non- petroleum exports since 1982 and the devaluation of the Mexican peso have been important factors in the expansion of agricultural exports. U.S. agricultural exports to Mexico had wide fluctuations, mainly reflecting Mexican harvest conditions, adverse Mexican economic condi- tions, and the availability of US. export credit guarantees. Pyfe2 GAO/N8IADgOSIIBBUS.-MexicoAgriculturalTrade 5233263 Figure I: Value of U.S.-Mexican Agricultural Trade (1982-l 988) 2.4 BlbndDdlvr 22 2.0 lb 1.6 1.4 12 1.0 0.6 0.6 0.4 02 0 8,8#R,BQ,d I Value of U.S. Agia~ltud Expotta to Mexim Value of Modcan Agrtcuttural Export9 to the UnibadStates Source: U.S. Department of Agriculture data. Agriculture’s share of total Mexican exports has increased from an aver- age of 7 percent from 1982 through 1985 to more than 12 percent from 1986 through 1988. In 1988, Mexico ranked third among major suppliers of agricultural products to the U.S. market. However, the United States enjoyed an agricultural trade surplus of about $414 million with Mexico in 1988, and Mexico was the fourth largest single country market for U.S. agricultural exports. The nature of U.S.-Mexicanagricultural trade has been complementary. The United States exports bulk commodities to Mexico, such as corn and soybeans,and Mexico supplies the United States tropical products and specialty crops, such as coffee and tomatoes. A number of problems hinder expansion of U.S.-Mexicanagricultural Trade Policies and trade. Apart from the economic and harvest conditions, the principal Practices Impede U.S.- impediments are related to government policies. Mexican growers com- Mexican Agricultural plain that their agricultural exports are subject to excessiveU.S. plant and animal health regulations and that U.S. tariffs on certain export Trade crops are too high. Conversely, U.S. sourcessay that Mexico’s continued Page 3 GAO/NSLUbSO-35BBU.S.-MexicoAgricultural Trade E236263 reliance on import licensing requirements is inconsistent with certain provisions of GKrr. Other conditions also constrain agricultural trade, such as limited partic- ipation by Mexican horticultural producers in marketing and distribut- ing their crops and lack of knowledge by U.S. producers of the Mexican marketing and distribution system. As the volume of bilateral trade has increased,transportation and other infrastructure constraints at the border and in Mexico have surfaced as obstaclesto trade expansion. In addition, the crushing weight of external debt on the Mexican economy limits demand for U.S. agricultural exports and funding for development of Mexican agriculture. Less serious problems concern administrative processingprocedures at the border. Allegedly, U.S. inspections and processingrequirements were not applied consistently at all ports of entry. There were also alleged irregularities and inconsistenciesregarding processingproce- dures and requirements on the Mexican side of the border. However, recently there has been progress in speedingup the inspection process. In 1987 the United States and Mexico signed the Bilateral Framework Joint Initiatives Agreement on Trade and Investment to improve, and make more rou- Support Agricultural tine, consultations on trade and investment issues.Building upon the Trade Improvements successof the Bilateral Framework Agreement, in October 1989 the two countries concluded an understanding to expand bilateral trade and investment relations. Among other things, this understanding lends sup- port to the efforts of five binational technical groups established in August 1989 by the U.S. Department of Agriculture and Mexico’s Secre- tariat of Agriculture and Water Resourcesto cooperate in . technical and administrative assistanceprograms; l marketing; . inspection and research systems; . data collection procedures to facilitate economic analysis; and . harmonization of research programs and needs. The US. Department of Agriculture and the Mexican Secretariat have worked together on numerous programs to eradicate agricultural pests, promote research into the development and exploitation of new crops, encourageconservation and more efficient use of natural resources,and improve productivity of conventional crops and livestock. Currently, the Pege 4 GAO/NSIAlM&MBR U.S.-MexicoAgricultural Trade 5233263 two governments are cooperating on research into crops such as guayule and jojoba which could be made into useful new products. Details on the results of our study of major impediments to U.S.-Mexico agricultural trade are in appendix I and the economic and market trends affecting bilateral agricultural trade are discussedmore fully in appen- dix II. Our objectives, scope,and methodology are in appendix III. As requested by your office, we did not obtain agency commentson this briefing report. However, the information presented was discussedwith appropriate officials of Agriculture and Customs and their views were considered in completing the report. Unless you publicly announceits contents earlier, no further distribu- tion of this report will be made until 30 days from its issue date. At that time, we will provide copies to other interested parties. The principal GAO staff members contributing to this study are identified in appendix IV. If you have any questions please call me on (202) 275- 4812. Sincerely yours, Allan I. Mendelowitz Director, Trade, Energy, and Finance Issues Page 6 GAO/NSIADBO&BB U.S.-MexicoAgricultural Trade Contents Letter 1 Appendix I 8 Major Impediments to Tariffs Non-Tariff Barriers 8 10 Agricultural Trade Sanitary Requirements 13 Mexican Transportation and Infrastructure 17 Administrative Procedures 19 Mexican Debt Crisis 21 Poor Accessto Marketing and Distribution 22 Appendix II 23 Economic and Market Agricultural Trade Flows: 1982-1988 U.S. Agricultural Imports From Mexico 24 29 Trends Affecting U.S. Agricultural Exports to Mexico 32 Bilateral Agricultural U.S. Credit progam~ 34 Trade Appendix III 35 Objectives, Scope,and Methodology Appendix IV Major Contributors to This Report Tables Table 1.1:Ad Valorem Equivalent Tariff Rates for Top U.S. Horticultural Imports From Mexico-Fiscal Year 1988 Table 1.2:Section 608e-1Commodities and Proposed 12 Additions Table II. 1: Major U.S. Markets and Suppliers of 23 Agricultural Products (1988) Table 11.2:Mexico’s Ranking Among Major Markets for 23 U.S. Agricultural Exports Table 11.3:Mexico’s Ranking Among Mqjor Suppliers of 24 U.S. Agricultural Imports P8gc 6 GAO/NSIAlMO-MBR U.S.-MexicoAgricultural Trade Contents Figures Figure I: Value of U.S.-MexicanAgricultural Trade (1982- 3 1988) Figure II. 1: Value of U.S.-MexicanAgricultural Trade 25 (1982-1988) Figure 11.2:GSMGuaranteed Commodities and Total U.S. 27 Agricultural Exports to Mexico (1982-1988) Figure 11.3:Mexican Agricultural Exports to the United 30 States (1982 and 1988) Figure 11.4:U.S. Agricultural Exports to Mexico (1988) 33 Abbreviations APHIS Animal and Plant Health Inspection Service CNPH National Confederation of Horticultural Producers ERS Economic ResearchService FAS Foreign Agricultural Service FDA Food and Drug Administration GATT General Agreement on Tariffs and Trade GSM General SalesManager GSP Generalized System of Preferences ICO International Coffee Organization USDA US. Department of Agriculture P4P7 GAO/NSIAD9045BR U.S.-MexicoAgricultural Trade Appendix I Major Impedimentsto Agricukura,l Trade Roth Mexico and the United States have tariffs and other barriers to trade between the two countries. Inadequate infrastructure and out- dated transport conditions in Mexico and along the border also delay and complicate the flow of trade. The administrative import procedures of each country are reportedly cumbersome.Recently, however, there has been progress in this area with bilateral consultations and pro- grams, such as “Line Release,‘*to speedup the importation processinto the United States. Mexico’s large external debt is a major constraint to its ability to import all products, including U.S. agricultural products. Lack of knowledge of and accessto marketing and distribution systems further inhibit trade flows between Mexico and the United States. Although Mexico has reduced many of its tariffs in recent years, rela- Tariffs tively high tariffs on someimported agricultural commodities make those products virtually uncompetitive in the Mexican market. Simi- larly, although someMexican agricultural products enter the United States duty free under the GeneralizedSystem of Preferences(GSP), many of Mexico’s important agricultural exports are subject to import tariffs, especially during the harvest seasonsin the United States. Mexican Tariffs on U.S. In recent years, Mexico has reduced its overall tariff rates and rational- Agricultural Products ized its tariff regime by consolidating the number of tariff levels imposed on imports. Differences between tariff levels were also reduced. These efforts were initiated in conjunction with Mexico’s accessionto the General Agreement on Tariffs and Trade (GATT) in 1986. The aver- age tariff rate dropped from about 30 percent in 1985 to less than 10 percent in 1988. In December1988, Mexico went beyond its obliga- tions under GATT, which set overall tariff ceilings at 50 percent, and uni- laterally reduced the maximum applied tariff to 29 percent. Participation in GATT has also entailed a reduction in the number of products subject to import licensing; however, the importance of tariffs as a trade policy tool has increased.Mexican duty levels are set after consideration of such factors as the degreeof processing and internal demand. Tariffs on bulk commodities are low, while the highest duties apply to processedfoods and specialty crops such as temperate climate fruits, nuts, and alcoholic beverages.While the 20 percent tariff may appear relatively low, it eliminates the competitiveness of certain U.S. products, such as beer. Since the beginning of 1989, Mexico has also raised the tariff rate on someproducts from zero or 5 percent to 10 percent. Page fl GAOjNSWBB U.S.-MexicoAgricultural Trade Appendix I Major Impediments to Agricultural Trade U.S. Tariffs on Mexican SomeMexican agricultural exports, such as bananas,enjoy U.S. duty Agricultural Products free status. However, under the Tariff Schedulesof the United States, most fruits and vegetablesare subject to duties basedon a cents-per- kilogram charge; in 1988, the ad valorem equivalent tariffs on the prin- cipal Mexican horticultural exports ranged from 0.5 to 37.6 percent of product value. (Seetable 1.1.) U.S. tariffs on someMexican fruits and vegetablesare applied on a sea- sonal basis to coincide with the marketing period for domestic U.S. pro- duction. For example, tomatoes, which accountedfor more than 20 percent of the total value of Mexican fresh produce exports in 1988, were subject to a reduced 6.9 percent ad valorem equivalent tariff rate from November 15 through February, the off seasonfor U.S. domestic production. During periods of increased domestic production, tariff rates for tomatoes ranged from 8.5 to 11.5 percent. In the past, Mexico has argued that US. duties on tomatoes and melons are unreasonably high. Generalized System of The GeneralizedSystem of Preferences(GSP) program, established under Preferences Title V of the Trade Act of 1974, grants temporary, nonreciprocal duty elimination on designated products of certain developing countries. In 1988, Mexico ranked third among major beneficiaries ofthe GSPpro- gram. In the past three years, imports from Mexico under this program have increased at an average annual rate of 12.9 percent. Mexico has been the leading source for fruits, vegetables,and beveragesimported into the United States under the GSP. In 1988, the leading Mexican exports eligible under the GSPprogram included beveragesand spirits ($50.3 million), sugar and sugar confectionery products ($50.8 million), vegetables($18.8 million), and fruits ($9.4 million). Page 9 GAO/NSIAD-MBR U.S.-MexicoAgricultural Trade h@jor Impediment-9to Agricultural Trade Table 1.1:Ad Valonm Equivalent Tartff Rator for Top U.S. Horllcultunl Imports From Mexico-Fiscal Year 1988 Import Value (Dollars In Volume (yo;$ “~~~~:~ Product and tariff code lime of tariff Tariff (cents/kg) thousands) equlvalent Tomatoes 1376000 3/l-7/14; 9/l-11/4 4.6 $74,114 184,553 11.45 1376200 7/15-a/31 3.3 14,841 38,221 8.50 1376300 11/152/last 3.3 69,296 145,504 6.93 Onions 1369300 all year 3.9 69,625 162,888 9.12 Peppers, Chili 1371010 all year 5.5 20,548 35,590 53 Peppers, Bell 1371020 all year 5.5 32,169 82,377 14.08 Cucumbers 1359000 12/l-2/last 4.9 29,508 136,694 22.70 1359500 3/l-4/30 6.6 7,053 40,175 37.59 1359700 5/l-6/30; 9/l-11/30 6.6 7,748 25,825 22.00 1359!300 7/l -8131 3.3 464 1,325 9.42 Squash 137500 all year 2.4 31,103 59,299 4.58 Strawberries 146!%00 6/15-9115 .4 538 1,189 0.88 1466000 other times 1.7 13,629 14,600 1.82 Lettuce 1366000 6/l-10/31 .88 39 78 1.76 1366100 other times 4.4 10,628 15,659 6.48 Sean,, Qreen 1351600 all year 7.7 9,132 11,169 9.42 Eggplant 1362000 4/l-11/30 3.3 2,844 4,842 5.62 1362100 other times 2.4 6,293 13,179 5.03 Grrllc 1363000 all year 1.7 6,931 12,337 3.03 Source: U.S. Department of Agriculture, Foreign Agricultural Service, Horticultural and Tropical Products Division. In many instances, non-tariff barriers rather than tariffs limit the trade Non-Tariff Barriers of agricultural goodsbetween Mexico and the United States. Mexico’s import licensing requirements restrict many U.S. agricultural exports, Page 10 GAOYBR US.-Merlco Agxkultnral Trade -_ Appendix1 mar Impedimenta to Agricdturai Trade while U.S. controls such as marketing orders and quotas limit Mexican agricultural exports. Mexico’s Import Licensing The Mexican government sets quotas for almost all major imported agri- Requirements cultural commodities. These quotas are set by estimating the size of the domestic harvest and the amount of imports necessaryto bridge the gap between domestic production and demand. Import licensesare the mech- anism used to enforce these quotas. Import licensing requirements are the most significant non-tariff barrier to U.S. agricultural exports to Mexico. To meet its commitments under GATT, Mexico has undertaken measuresto liberalize its trade practices, including reducing the number of items subject to import licensing. In 1983, all Mexican tariff categories were subject to import licensing requirements; by 1988, only about 4 percent of these categories still required import permits. Nevertheless,60 agricultural product catego- ries, including grains, oilseeds,dairy goods,and certain horticultural products with good market potential for U.S. exporters, still require import permits. The Mexican government’s objective in requiring import licensesis to encouragedomestic industry to buy local products. During the harvest seasonfor domestic crops the government effectively closesthe border to foreign suppliers. In somecasesthe availability of permits for specific importers is basedon the amount of domestic crop purchased. Mexico’s import licensing requirements affect various U.S. agricultural exports in different ways. According to the Foreign Agricultural Service, import licensesrepresent a greater impediment to the expansion of LT.S. apple and pear exports to the Mexican market than tariffs, which are set at the maximum rate of 20 percent. For U.S. grain, the major prob- lems associatedwith licensing requirements are that imports must occur within narrow time frames between Mexican production seasons.For example, sorghum, a major U.S. export, can generally be imported from March through mid-May and during August and September.Given increasingly congestedrailway accessfor bulk commodities going to Mexico, these requirements place an added logistical burden on I’ .S. grain exporters. The U.S. Department of Agriculture (USDA) recommrbnds that U.S. exporters pay close attention to the expiration date on t hci t Mexican import permits, since there is generally little or no flexibility on extensions. Page 11 Appendix I mar Itnpedtment9 to Ag&ulturaI Trade U.S. Marketing Orders According to a spokesmanfor Mexican horticultural producers, U.S. marketing orders have posed a significant impediment to Mexican exports of fruits and vegetablesto the United States. Marketing orders are agreementsamong domestic producers of a given commodity to pro- vide collective solutions for marketing and distribution problems, such as quality control, promotion, and sharp fluctuations in supply. The Agricultural Marketing Agreement Act of 1937, Section 608e-l(7 U.S.C. 608e-l), provides that whenever a marketing order specifies grade, size, quality, or maturity for specified domestic commodities, imports must meet the sameor comparable requirements. Currently, Section 608e-1 specifies 18 fruits and vegetablesand marketing orders are in effect for all but 4 of these commodities (seetable 1.2).Mexico is the major sup- plier of several commodities listed under Section 608e1, including toma- toes, onions, and mangoes. Table 1.2:Section 6080-l Commodities and Proposed AddJtions Commodfth8~toa comlmahnotsubjeotto mafkoting wdef a mwketing ardor Proposed additions Avocadoes Cucumbersa Kiwifruit Dates Eaaolants Nectarines Filberts Green Peppers Papayas Grapefruit Mangoes Peaches Irish Potatoes Pears Limes Plums Olives Onions Oranaes Prunes Raisins Table Grapes Tomatoes Walnuts %urrently there is a proposal to establish a marketing order for greenhouse cucumbers. Mexican producers have usually been able to meet the standards imposed by U.S. marketing orders for Section 608e-1 commodities. Nev- ertheless, a spokesmanfor Mexican horticultural producers explained that Mexican exports have been hurt when the commodities involved have come under new marketing orders or when domestic producers have changed the requirements for existing marketing orders. On such occasions,Mexican exports have suffered heavy lossesas production adjustments were made to meet changing requirements. Future Mexican horticultural products exports could face additional problems as U.S. Page 12 GAO/NsIAD-WMBE US.-Mexico Agricultural Trade Appendix I Major Impediments to Agricultural lhde legislation is pending to expand the number of items under Section 608e-1. U.S. Quotas U.S. imports of Mexican beef are subject to the Meat Import Act of 1979, which establishes an annual global level of imports for these products, and calls for quotas if imports exceedthis level. However, Mexican beef exports to the United States generally fall short of the level where a quota would be imposed. This is primarily due to Mexican internal pol- icy considerations. The Mexican government has imposed quotas or duties on beef and cattle exports to restrict exports and maintain an adequate supply of meat at low prices for domestic consumption. Although current Mexican sugar and sugar product exports to the United States are relatively modest, they could potentially be much higher. However, Mexican sugar exports are subject to a strict U.S. quota system. The present sugar quota program, established by Presi- dential Proclamation 4941 on May 5, 1982, is a country-by-country quota system set unilaterally by U.S. authorities. The existing country quotas are based on the amount of sugar exported to the United States by exporting countries between 1975 and 1981, a period characterized by “relatively free” trade in sugar, according to USDA officials. Each year the aggregatesugar quota is reviewed and revised to meet U.S. needs, even though the percentage allocated to individual countries remains the same. Under this system Mexico is entitled to the minimum quota allocation, or 0.3 percent of the total. In 1988, the U.S. sugar quota for Mexico was set at 8,000 metric tons, valued at approximately $1.4 million. Mexico and the United States maintain and enforce various sanitary Sanitary Requirements standards for agricultural imports. Generally, producers in each country are able to meet the other country’s sanitary standards. However, in somecasesthe prevalence of specific plant diseasesand pests in Mexi- can production areas has led to a U.S. prohibition against Mexican agri- cultural commodities. Mexican orchard crops have been particularly affected by these restrictions. Mexican Sanitary Mexico has strict sanitary requirements for agricultural imports. For example, animals imported from the United States must be accompanied Requirements by a health certificate issued by a veterinarian authorized by USDA and endorsed by a veterinarian from the Veterinary Servicescertifying that Page 13 GAO/NSIADBO-S5BBU.S.-MexicoAgricultural Trade Major Impedimenta to AgriculW Thde the animals are free from certain diseases,such as tuberculosis, brucel- losis, or cholera. These health certificates also must be validated by Mexican consular officials. A statement that the animals have been cleaned and disinfected must accompany the shipment. Changesin Mexican sanitary requirements have seriously disrupted U.S. exports in the past. For example, in March 1989, Mexico required that U.S. swine be vaccinated for hog cholera 30 days before export. U.S. exporters refused to undertake this measure becausethe United States has been officially free from hog cholera since 1978 and vaccination could lead to renewed outbreaks of cholera among U.S. hogs. A problem arose according to Mexican officials becausesomeMexican importers had diverted U.S. slaughter hogs for breeding purposes. U.S. hogs lack immunity to cholera and the officials alleged they were caus- ing cholera outbreaks in Mexico’s hog population. Mexico wanted to solve the problem by restricting imports to castrated male hogs. The U.S. position was that Mexican authorities should be responsible for ensuring that the imported slaughter hogs are not used for other pur- poses.Mexico will soon replace the prior vaccination requirement and U.S. hogs will be vaccinated in Mexico, after which they will be quaran- tined 2 weeks. The cost of such a quarantine will increase the price of the hogs, thus affecting their marketability in Mexico. Processingprocedures within Mexico’s health bureaucracy have also hindered U.S. exports’ accessto the Mexican market. In the past, U.S. exporters of wine have had to wait up to a year for required health certificates before they could export their products to Mexico. U.S. government officials have argued that Mexico often useshealth and sanitary requirements, without scientifically justifiable bases,to restrict imports. For example, during the Mexican domestic soybean harvest, Mexican authorities temporarily closed the border to soybean meal imports, allegedly becausethere was a need to inspect for aflatoxin, mycotoxins, and pesticide residues in the shipments. U.S. Sanitary The United States maintains strict sanitary requirements on agricultural imports. Mexican producers are generally able to comply with these Requirements requirements, but somecommodities are restricted or denied entry becausethey pose a threat to domestic crops or animal health. Concern Page 14 GAO/NSIADmBR U.S.-MexicoAgricultural Trade Appendix I M8jor Impedimenta to Agrlcultur8l Trade over the safety of certain Mexican agricultural products for human con- sumption has also presented serious obstaclesfor Mexican exports to the United States. Plant Health Issues According to USDAAnimal and Plant Health Inspection Service (APHIS) officials, Mexican vegetable exports are not affected by significant plant health problems, but there are serious phytosanitary concernsregarding a number of Mexican orchard crops, particularly the prevalence of the Mediterranean and Mexican fruit flies throughout many production areas of Mexico. Consequently, most Mexican fruits exported to the United States must be treated to ensure they are free of fruit flies; for example, oranges,grapefruit, and tangerines must be treated with metholbromide gas. This treatment often blemishes the exterior of the fruit, significantly reducing their value. Only fruits exported from the Mexican state of Sonora are exempt from this treatment, becauseSonora has been declared free of fruit flies by APHIS authorities. This fact is also a great benefit to growers in Califor- nia and Arizona, because,in effect Sonora serves as a buffer between the fruit producing areas of the United States and the fruit fly infested areas of Mexico. Recently, other Mexican states have sought APHIS coop- eration to eradicate fruit flies. Avocadoes are a major Mexican agricultural export, but they are com- pletely banned from the United States due to seedweevil infestation. However, Mexican avocadoesare allowed to transit the United States enroute to third countries-Canada, Europe and Japan. These ship- ments must be sealedwhile transported through the United States, and the routes used must avoid U.S. avocado-producingareas, such as Cali- fornia. Mexican avocadoesexported to Japan through the United States must be shipped from Portland, Oregon,or Seattle, Washington, while those shipped to Europe go through the port of Houston, Texas. Another important phytosanitary problem limiting Mexican orchard crops exports is the citrus canker. The Mexican small sour lemon is com- pletely banned from the U.S. market. The larger Persian lime can be exported to the United States but must undergo a chlorine-based treat- ment, There is ongoing controversy regarding the restrictions on these Mexican citrus products. Mexican growers claim they have eradicated the citrus canker and the ban should be lifted. P8ge 16 GAO/NSIABgO-85BBU.S.-MexicoAgricultural Trade M8jor Impedimenta t.0Agrhltud Trade Animal Health Issues Mexican livestock and animal products also face strict U.S. sanitary con- trols, primarily against bovine tuberculosis, brucellosis, and fever tick. Feeder cattle must be accompaniedby a health certificate from a sala- ried veterinarian of the Mexican government showing that the animals have been inspected and have no communicable diseases. The US. demand for Mexican cattle is high, but due to the prevalence of tuberculosis in Mexico’s cattle herd, the major concern of U.S. cattle industries is the risk of infection transferring to US. herds. The U.S. and Mexico have reached an agreement requiring steers from Mexico to be branded on the right jaw with the letter “M” to clearly identify their origin and improve surveillance for bovine tuberculosis. In addition, U.S. authorities require that Mexican cattle be l tuberculin tested with negative results between 3 to 12 months prior to the animals’ date of entry; . detained at the port of entry for health inspection and dipped for ticks in a pesticide solution; l certified as coming from a herd which tested negative for brucellosis infection between 30 to 90 days prior to the date of certification; and . tested again for brucellosis at the port of entry, except for calves under 6 months, and if any cattle in the herd test positive for brucellosis, the herd will not be allowed into the United States. Most other live animal imports from Mexico are banned becausethey allegedly carry diseaseswhich do not exist in the United States. Live Mexican swine have been prohibited since 1976 due to the hog cholera infection. Mexican poultry has been prohibited since the early 1970sdue to Ejrotic New-Castle disease,and Mexican sheep and goats are prohib- ited becauseof scrap& Issues Related to Safety The United States has also restricted imports of Mexican agricultural goodswhen there have been concernsregarding the safety of specific for Human Consumption products for human consumption. For example, in 1984 Mexico lost its eligibility to export meat products to the United States, becausethe WDA Food Safety and Inspection Service determined that someof Mexico’s inspection methods were faulty and failed to capture unacceptable levels of chemical residues in meat. In January, 1989, the service ruled that Mexico could resume shipping meat products from five approved facilities, which were judged to meet U.S. standards. Page 16 GAO/NSIAD!W66BR U.S.-MexicoAgriculturd Trade Appendix I M&r Impedimenti to Agricul~ Trade At times Mexican horticultural imports have also been denied accessto the United States, when they have been tested and found to contain traces of banned pesticides or higher than tolerable levels of pesticide residues as defined by the Environmental Protection Agency. However, USDAand other experts agree that Mexican produce exported to the United States is generally safe and free from dangerouspesticide residues. US. concern for the safety of produce destined for human consumption also limits Mexico’s ability to introduce tropical fruits to the U.S. mar- ket. The experience of the Mexican mango, which is now an established export, is worth considering. Like other fruits from Mexico, mangoes host a variety of fruit flies. Mexican producers relied on an ethylene dibromide treatment to ensure that exported mangoeswould not carry the pests to the United States. However in 1985, the Environmental Pro- tection Agency banned the use of ethylene dibromide, as a potential health hazard, effectively eliminating Mexican mangoesfrom the US. market. Subsequently, U.S. authorities approved an alternative treat- ment, now in effect, requiring the green fruit to be dipped in hot water for several minutes to kill the pests. It is a very delicate treatment, and if not done carefully, has an adverse effect on ripening. Mexico has one of the most comprehensive land transportation systems Mexican of any country in Latin America. The railroads and highways form a Transportation and network linking all economically important areas to the major seaports Infrastructure and connect with the United States at 12 border cities. Nonetheless, Mexico’s transportation infrastructure has been inadequate to handle the large increase of trade in recent years and if not improved, will con- tinue to limit trade volume between the two countries. According to a USDAreport, Mexico’s rail system is outdated and lacks the capacity to carry the increasing cargo bound from the United States to Mexico. Storage facilities are also lacking and U.S. rail cars are often used as storage facilities. Roadsin Mexico are reported to be in general disrepair making transportation of goods by truck to the border a slow process.U.S. truckers also complain becausethey are prohibited from operating in Mexico while Mexican truckers have the privilege of enter- ing the United States with their cargo. Port facilities also need to be improved. Page 17 GAO/NSLAD#86BR US.-Mexico Agricultural Trade Rail Congestionon Mexico’s rail lines extends to the U.S. border, where car- loads of imported supplies and materials awaiting export face delays as long as 2 weeks or more. These problems are due, in part, to the fact that Mexico’s railroad links with the United States were built for easy control of border traffic and not to facilitate foreign trade. The single lines laid at all border crossingsare now unable to handle the increasing commercial traffic. In addition, outdated unloading facilities delay the turnaround time of U.S. rail cars going to Mexico. Due to the lack of warehouses for unload- ing grain near the border, U.S. rail cars are used for storage. These rail cars are held at the border until a decision is made regarding cargo des- tination within Mexico. Subsequently, the cars are repeatedly held up at different distribution points in the interior of Mexico where there is also a lack of storage facilities. A 1989 study by Union Pacific Railroad determined that the average turnaround time for rail cars for all Mexi- can destinations is approximately 20 days. However, the average tum- around time for rail cars from the U.S. to Mexico City is 40 days. At times thousands of U.S. rail cars have been held in Mexico. Due to delays in returning rail cars and congestion at the border, U.S. rail companies have refused on several occasionsduring 1989 to accept any Mexican-bound shipments and imposed a de facto embargo. Rail delays and embargoeson agricultural shipments resulted in lost reve- nues for the shippers, and increased prices for food in Mexico. Over the last decadeit was estimated that 60 percent of bulk commodi- ties moving from the United States to Mexico was moved by sea and 40 percent by rail. However, officials report that in 1989, due to the increased volume of trade, 80 percent of U.S. bulk commodities were moved by sea and 20 percent by rail. When they are forced to shift to oceantransport U.S. bulk grain exporters forfeit a degreeof the compet- itive advantage they generally enjoy over exports from Australia, Can- ada, or Argentina. Clearanceprocedures at the U.S.-Mexicocrossing points complicate and delay the movement of railcars acrossthe border. Current problems which have been identified by U.S. officials include excessive paperwork and lack of pre-manifesting or pm-clearing shipments going into Mexico. This creates delays. In addition, Mexican customs are rarely open during weekends and are occasionally closed during somenormal working hours. Page 18 GAO/NSMDM&BR U.S.-MexicoAgricultural Tr8de Appendix I M&w Impedimenta to Agricultural Trade Storage Substantial improvement and augmentation of storage facilities would aid the economic development of Mexico and help the United States to meet Mexico’s import needs.Present storage procedures include making use of railroad cars and open, uncovered piles. Inefficiency and loss could be greatly minimized by improving storage capabilities. OceanTransport Although 36 of Mexico’s ports have deep-water, none provide a good harbor. Five ports handle 80 percent of all the shipped tonnage. Increased petroleum shipments, lack of cargo-handling facilities, and administrative bureaucracy also contribute to port congestion.Some Mexican shippers find it expedient to send their agriculture exports to Japan and Europe from ports in Texas and on the U.S. Pacific Coast. Trucking While Mexican truckers are permitted to bring their cargo into the United States, Mexico prohibits equivalent accessto American truckers. Mexican truckers are allowed to operate within the parameters of U.S. commercial zones,areas which are defined basedon a mileage/popula- tion density formula. U.S. trucking companies are requesting more lib- eral accessto the Mexican border zone and, in the short run, more efficient ways to transfer long-haul cargoesat the border. In the long run, U.S. trucking interests believe it would be beneficial for both coun- tries to allow carriers free accessto the interior. Mexican exporters are also pressing for improvements in the transporta- tion infrastructure to facilitate their exports. Highway construction and maintenance have been neglected,and many Mexican roadways and bridges are in disrepair. Improvements in this area could improve the environment for imports and the internal distribution of goods in Mexico. Congestion,bottlenecks, and excessivedelays characterize conditions at Administrative border crossing points between the United States and Mexico. We visited Procedures Nogales,Arizona, the principal point of entry for Mexican horticultural products, handling more than 50 percent of the volume. Mexican roads leading to the border crossing point with the United States at Nogales narrow from four lanes into one as they approach the border line where cargo must be inspected before release into the United States. Trucks arriving in Nogalesmust form single lines to go through customs and other inspections. Officials estimate that during the height Page 19 GAO/NSIADW-S6BR U.S.-MexicoAgricultural Trade of the produce import season,from November through May, long lines of trucks await processing,often extending for as long as three miles. Approximately 700 trucks of produce are processedeach day. According to Customs officials, customs processingcan be completed in less than 90 minutes for items eligible for an expedited releaseprogram called Line Release.However, U.S. officials estimate that it can take a truck as much as 7-l/2 hours to go through the border procedures at Nogales if the cargo is required to undergo loo-percent inspection. More- over, becauseCustoms and other inspection offices are closed at night, trucks not processedduring normal working hours must park along the road and wait for the offices to open. U.S. Customs officials stated they would stay open at night during the peak seasonif Mexican Customs also remained open. A narrow two-lane entry roadway limits the flow of traffic into the cus- toms processing facilities on the U.S. side of the border, contributing to the congestion.According to US. customs officials, work on widening the road is scheduled to start in April 1990, and be completed in approx- imately 18 months. Inconsistencies and Horder officials report that U.S. agenciesdo not have consistent admin- Irregularities istrative procedures for processingMexican imports along the border; for example, Agricultural Marketing Service personnel make quality inspections only at someborder points. In addition, according to an APHIS official, APHIS office directors at border crossing points may choose whether or not to allow products to be acceptedfor import under Cus- toms’ Line Releasesystem (discussedbelow). Consequently, products may require certain inspections at one border crossing point, but not at another. U.S. officials and exporters also complain that administrative irregulari- ties at Mexican customs often delay and complicate processingof U.S. exports to Mexico. Irregular working hours by Mexican customs officials and inconsistent health certificate requirements are two examples of the difficulties encountered at the border by U.S. exporters. U.S. and Mexican customs officials have held periodic consultations since 1987 and have agreed on some specific ways to facilitate cross- border trade. Page 20 GAO/NSIAD@OMBR U.S.-MexicoAgrlcdtnral Trade Mq/or Impedimenta to Agrkultural Tr8de Line Release In 1987 U.S. Customsexpanded its Automated Commercial System to processimports along the southern border. Termed Line Release,it is designed to facilitate the entrance and clearanceof certain Mexican commodities through the use of personal computers and bar code tech- nology. To qualify for Line Release,commodities must have a history of invoice accuracy, be free of enforcement concerns(marking violations, penalties, seizures,fraud, and suspect narcotics), require no special doc- umentation, and be selectedby local customs districts on the basis of high volume and low risk. The Line Releasesystem’s automated process allows for quick, computerized identification of the commodity, pro- ducer, importer, and broker. Customs, in consultation with USDA and the Food and Drug Administra- tion (FDA), approved two major agricultural imports, cucumbers and tomatoes, for Line Releasefrom Mexico. Tomatoes and cucumbers were selected becauseof pest- and chemical residue-free records. These imports receive expedited handling from all three agencies.Other agri- cultural products approved by Customs for Line Releaseare cantaloupe, kabosha squash, and watermelon, but they still require inspection by USDAand FDAbefore release.Live cattle imports are also approved for Line Release.The cattle are inspected by USDA’S Veterinary Service in Mexico. Customs officials believe that expanding the number of com- modities approved for Line Releasewould further enhancethe flow of commercefrom Mexico to the United States. Mexico’s outstanding external debt, which totaled more than $100 bil- Mexican Debt Crisis lion in 1988, is a major economic constraint to U.S.-Mexicantrade. More than 50 percent of Mexico’s annual export earnings were neededto ser- vice this debt. Despite recent successfuldebt negotiations, scarce foreign exchange in Mexico limits imports of US. agricultural products. Fiscal austerity measuresenacted by Mexico to deal with the debt problem affect agricultural policies that in turn affect production and consump- tion incentives. On the other hand, the need to increase foreign exchange earnings has led to liberalized export policies and an increase in the export of fresh fruits and vegetables,for which there is considerable foreign demand. Confronted with the secondlargest foreign debt of any Latin American country, the Mexican government has lowered subsidies on somest :tple food products, cut back on government programs to aid agricultural. ;md implemented policies designedto liberalize trade and attract foreign Page 21 GAO/NSIAD9046BR U.S.-MexicoAgriicult uml Trade investment. A 1988 Congressionalreport prepared for the Joint Eco- nomic Committee notes that Mexico represents a large potential market where U.S. firms enjoy a natural advantage due to the geographic prox- imity of the two countries. Mexico ranks fourth as a destination for U.S. agricultural exports, even after 6 years of drastic import restraint. A reduction in Mexico’s foreign debt service burden would be a signifi- cant step in enhancing agricultural trade between the United States and Mexico. With more funds available, Mexico could purchase more U.S. export commodities as well as other goodsnecessaryfor economic growth. Limited accessto and knowledge of the U.S. market and distribution Poor Access to system have been identified as major constraints for Mexican producers Marketing and in expanding fruit and vegetable exports. A recent report by the Mexi- Distribution can National Confederation of Horticultural Producers (CXPH) notes that generally Mexican producers do not participate in the distribution of their products in the U.S. market and somedistributors and brokers take advantage of producers. According to a CNPH spokesman,about 18 cents of every dollar made on sales actually’gets back to the producers. CNPH has tried to overcome someof these problems by establishing a presence in Los Angeles, California, to monitor developments in that sector of the U.S. market. Timely accessto better market data, such as that prepared by the USDAAgricultural Marketing Service, may also help overcomethis problem. U.S. grain exporters have also experienced problems becauseprospec- tive Mexican buyers and traders lack knowledge of the U.S. marketing system. In an effort to overcome someof these problems, some U.S. com- modity trade associationshave sponsoredseminars in Mexico to famil- iarize public and private sector Mexican officials with grain quality and standards, transportation, and usll~ credit programs. According to USDA officials, lack of knowledge about the Mexican market and distribution system is also a significant deterrent for U.S. producers of horticultural products. Page 22 GAO/NSIAIMM5BlZ U.S.-Mesh Agricultural Trade Economicand Market Trends Affixting Bilateral Agrical Trade The combined value of U.S. agricultural exports to Mexico and Mexican agricultural exports to the United States increased from about $2.3 bil- lion in 1982 to over $4 billion in 1988. The value of this trade grew by an average of 11.6 percent annually, the highest growth rate among major US. agricultural trading partners. U.S. agricultural trade with Mexico increased from 4.4 percent of total U.S. agricultural trade world- wide in 1982, to 7.8 percent in 1988. Since 1982, Mexico has ranked among the top 8 markets for U.S. agricul- tural exports and has been one of the top three suppliers of U.S. agricul- tural imports. (SeeTables II.1 through 11.3.)During the sameperiod, the United States has been Mexico’s major supplier of agricultural products and the largest market for Mexican agricultural exports. Table 11.1:Major U.S. Market8 and SU~@OI’SOf AgriCUhral PrOdUCt (1986) Dollars in millions Major Value of U.S. Value of U.S. U.S.marketr exports Major U.S.suppliers imports Japan $7,640 Canada $2,443 South Korea 2,273 Brazil 1,067 U.S.S.R. 2,246 Mexico 1,820 Mexico 2,234 Australia 1,207 Netherlands 2,051 Indonesia 884 Canada 2,019 Colombia 818 Source: Economic Research Service, Foreign Agricultural Trade of the United States. Table 11.2:Mexico’s Ranking Among Major Markets for U.S. Agricultural Dollars in millions Exports Total U.S. Exports to Mexico agricultural Percent of Year exports Value Ranking total 1982 $36,627 $1,156 8 3.2 1963 36,099 1,942 3 5.4 1984 37,804 1,993 4 5.3 1985 29,041 1,439 4 5.0 1986 26,222 1,080 6 4.1 1987 28,709 1,202 7 4.2 1988 37,093 2,234 4 6.0 Source: Economic Research Service, Foreign Agricultural Trade of the United States Page 23 GAO/NSIADM43SBB U.S.-MexicoAgricultural Trade Tab& 11.3:Moxko’8 Ranking Among Major suppliera of U.S. Agrkultuml Dollars in millions Import, Total U.S. Import8 from Mexico agrkultuml Percent of Year ImQortr Vale Ranking total 1962 $15,389 $1,158 3 7.5 1983 16,627 1,280 3 7.7 1984 19,334 1,279 3 6.6 1985 19,968 1,446 3 7.2 1986 21,463 2,080 1 9.7 1987 20,402 1,867 2 9.2 1988 20,951 1,820 3 8.7 Source: Economic Research Service, Foreign Agricultural Trade of the United States. While there has been impressive growth in bilateral agricultural trade Agricultural Trade between 1982 and 1988, this period has also been characterized by dra- Flows: 1982-1988 matic fluctuations in agricultural trade between the two countries. Mexi- can exports to the United States increased modestly between 1982 and 1986, surged impressively in 1986, and have registered minor losses since that peak year. Conversely, U.S. exports to Mexico have been sub- ject to major decreasesand increasesover this 7 years. (Seefigure 11.1.) Page 24 c;lro/NSUDWMBR U.S.-MexicoAgricultural Trade Economic and Market Trends AfYecting Bilatmd Agdcukurel Trade Figure 11.1:Value of U.S.-Mexican Agricultunl trade (1982-l 988) 2.4 Bnaensotodbm 23 2.0 14 1.6 1.4 1.2 1.0 0.0 0.8 0.4 0.2 0 '1 V&m of U.S.Agricultural Exportsto Mexico ValueofMsxian Agtfahrd Exportsm theUnimdSmm Source: U.S. Department of Agriculture data. 1982 Despite attempts to achieve self-sufficiency in basic foodstuffs under the administration of President Jose Lopez Portillo (1977-1982), Mex- ico’s imports of U.S. agricultural products more than doubled between 1978 and 1981, from $902 million to $2.4 billion. This dramatic expan- sion in demand for U.S. agricultural goodswas fueled by population growth, an overvalued exchangerate, and increased per capita income associatedwith Mexico’s oil boom. During this period, Mexico borrowed heavily from abroad to finance industrial development, with the expectation that oil revenues would be available to service external debt. However, in the wake of the severe international recessionbeginning in 1981, international commodity prices declined precipitously. Oil revenueswere lower than expected and foreign capital dried up. In 1982, Mexico experienced its most serious economiccrisis in recent history-250 percent devaluation in the controlled exchangerate and 460 percent devaluation in the free exchangerate, prices of imports soared, and the government imposed measuresto reduce the quantity of Page 25 GAO/NSIAMO-8UBR U.S.-MexScoAgricultural Ttade - imports. Consequently, in 1982 U.S. agricultural exports to Mexico were cut in half, to $1.1 billion. Austerity measurescurtailed credit available to Mexican farmers. However, Mexican agribusinessand export crops were not as hard hit by the credit crunch, and they benefitted from devaluation and a drop in real wages. In 1982, Mexican agricultural exports to the United States enjoyed modest growth over 1981 levels. 1983 The new administration of President Miguel de la Madrid, which cameto power in 1983, encouragednon-oil exports and continued austerity measures.This strategy succeededin cutting most imports and Mexico enjoyed an impressive overall trade surplus of $13.3 billion in 1983. Mexican agricultural exports to the United States grew by more than 10 percent, to more than $1.2 billion. Nevertheless,U.S. agricultural exports to Mexico also rebounded in 1983. Continued cuts in public investment and lending to the agricultural sector and severe drought beginning in 1982 adversely affected Mexican agricultural production, which led to an increased demand for agricultural imports from the United States. Another important factor leading to increaseddemand for U.S. agricultural products was the availability of financing through usM’s agricultural export credit guarantee programs known as GsM-102 and -103. In 1983 more than half of US. agricultural exports to Mexico were financed by GSM credits. (Seefigure 11.2.) Pyle e0 GAO/NSMD-B046Blt U.S.-MexicoAgricultural Trade Appendix II Economic and Market Trends meeting Bilateral Agricultuml Trade Figure 11.2:GSM Guaranteed Commoditier and Total U.S. Agricultural 2.4 U.S.Swia8s Exports to Mexico (1982-l 988) 22 2.0 1.8 1.6 1.4 1.2 1.0 0.6 0.6 0.4 02 0 1982 1863 1984 l@m ls)( 147 low l-J Agrlcubral Exporta not Guaranteed under GSM Agrfcuit~~mlExporta Guaranteed under GSM Source: U.S. Department of Agriculture data. 1984 With adequate rainfall in 1984, Mexican agricultural production began recovering from the drought of the prior 2 years. However, inflationary pressures created difficulties for Mexico’s agricultural sector by raising the cost of such items as seedsand fertilizers. Even though the volume of Mexican agricultural imports decreasedfrom 1983 levels, higher prices raised the value of U.S. agricultural exports to Mexico in 1984. However, prices for somemajor Mexican vegetable exports were low, and the value of agricultural exports to the United States for 1984 remained at about the 1983 level. Timely rains and near-capacity water levels in storage reservoirs allowed Mexico’s production of major crops to increase in 1985: Mexican agricultural exports to the United States increased by 13 percent. In 1985, the Mexican government established a controversial policy for public purchasing which called for final grading and pricing of certain commodities to be determined at destination rather than origin. This pol- icy led to an impasse between U.S. bulk commodity exporters and Mexi- can government purchasing agents. The effect of Mexican recessionand Page 27 GAO/NSLAB904SBRU.S.-MexicoAgricultural Trade --. Appendix II EiconolnicandMuketTrends Affecting BileteralAgriculturalMe increased agricultural production, combined with problems associated with the new policy, contributed to a decline of 28 percent in U.S. agri- cultural exports to Mexico. 1986 While Mexican agricultural production in 1986 was actually lower than in 1986, agricultural exports to the United States achieved their highest historical levels, totaling more than $2 billion. High coffee prices accounted for a large portion of this increase.However, other Mexican export crops also experienced significant growth. Conversely, deterio- rating economic conditions within Mexico, especially declining consumer purchasing power, and further weakening of the exchangerate, reduced demand for foreign agricultural products. U.S. agricultural exports to Mexico plummeted to $1.08 billion, the lowest level during the 1980s. 1987 In 1987 Mexico’s agricultural trade surplus with the United States was considerably smaller than it had been in 1986. While overall production of such export crops as fruits and vegetablesincreased, production of crops for domestic consumption, such as grains, declined. Low rainfall, tight credit, and high production costs were major factors affecting this decline. Reduceddomestic grain supplies and lower international com- modity prices resulted in increaseddemand for foreign agricultural products. In 1987, U.S. agricultural exports to Mexico grew by 10 per- cent over the previous year to $1.2 billion. A decline in the value of major Mexican export crops-coffee prices fell by 27 percent and tomato prices by 62 percent-reduced the value of agricultural exports to the United States to $1.9 billion. Due to drought, hurricanes, high input costs and low guarantee prices, Mexico’s agricultural production declined 4 percent in 1988. Among the hardest hit sectors were dairy, poultry and other livestock. A substan- tial number of small and medium-sized farm operations were forced to liquidate their herds and flocks becausethey could not afford feed costs and meet the fixed consumer prices set by the government. In an effort to maintain low consumer prices, the Mexican government allowed major increasesin live animal and dairy imports from the United States. U.S. grain exports also expanded considerably. Overall, the value of Mexican imports of U.S. agricultural products rose to $2.2 billion, the highest level since 1981. Mexican agricultural exports to the United States remained closeto 1987 levels. SomeMexican exports, Page 28 GAO/NS~BR U.S.-Mexicoz@‘hdtti ‘hada? Appendix I[ JZconomicand Market Trends Affecting Bilateral Agricuhual Trade such as orangejuice and feeder cattle, showed significant increases, but declines in the volume of coffee and beer exports and low prices for tomatoes limited expansion in the value of exports to the United States. Since 1982, Mexico has ranked among the top three suppliers of agricul- U.S. Agricultural tural commodities to the United States, principally coffee, fruits and Imports From Mexico vegetables,and live cattle. In recent years, Mexico has also becomean important supplier of processedfoods (see figure 11.3)including tomato sauceand paste and beveragessuch as fruit juices and beer. Coffee Products Coffee is Mexico’s secondlargest export after petroleum products, and the single largest agricultural product Mexico exports to the United States. In 1988 Mexico was the fourth largest producer of coffee in the world. Coffee and related products accounted for approximately 16 per- cent of the total value of Mexican agricultural exports to the United States in 1988. Mexico is a member of the International Coffee Organization (IN). The ICOis a cartel that establishes a series of threshold prices for coffee. If the international price of coffee falls below these thresholds, export quotas for member countries are cut to reduce world supply in an effort to increase market prices above the threshold price. In the summer of 1988 the international price of coffee fell below the $1.15 per pound threshold, triggering a reduction in export quotas. Consequently, Mexico had to reduce the amount of coffee exported. The value of Mexico’s cof- fee exports to the United States declined from $399 million in 1987 to $296 million in 1988. In 1989 the international price of coffee continued to decline, putting pressure on the ICCImember countries to reduce export quotas even fur- ther. In June 1989, ICOmember countries were unable to cometo an agreement on export quotas and the economicprovisions of the Interna- tional Coffee Agreement were suspended.Currently, there are no quotas for Mexican coffee exports. Page 29 GAO/NSIAD-90-85BRU.S.-MexicoAgricultural Trade AppendtxII Econon~Icand Market Trends Affecting Bil8tmdAgrkul~Tr8de Figure 11.3:Mexican Agricultural Exports tothe UnitedState (1982and 1988) Cofbeandrehtedproducts Fresh and frozen fruits and vegetabbs I Live animals Totd Value19B2:$1.2Billh Proa3ssed foods Other coffee and related products Fresh and frozen fruits and vegetabk I Live animals T~VaiuelS6:$l.6 Source: U.S. Department of Agriculture data. P8ge 30 GAO/N!3LiD-WWBR US.Mesico Agricultural Trade Appendix II Economic and Market Trends Affecting BhteralAgricultura~e Fresh and Frozen Fruits Fresh and frozen fruits and vegetablesare the largest category of Mexi- and Vegetables can agricultural exports. i In 1988, U.S. imports of such products from Mexico were valued at $679 million, or about 37 percent of the total value of US. agricultural imports from Mexico. Tomatoes comprised the largest item and in 1988 accountedfor more than 20 percent of the value of US. imports of fresh and frozen fruits and vegetables from Mexico. Other established major products in this category include cucumbers,peppers, squash,eggplant, onions, bananas,cantaloupes, watermelons, mangoes,and grapes. Mexico’s fruit and vegetable production industry is concentrated in the northwestern states of Sonora and Sinaloa, although production is mov- ing into new areas, particularly in the states of Northern and Southern Baja California. Development of the horticultural export industry was encouragedby climatic conditions which made possible a counter-cycli- cal growing season, allowing Mexican farmers to take advantage of the U.S. demand for winter vegetables.The importance of US. demand is reflected in the fact that about 90 percent of most Mexican fresh fruit and vegetable exports are destined for the U.S. market. More than 60 percent enter the United States between Decemberand May, when U.S. production is relatively low. Ample labor, government investment in irrigation facilities, and well- organized growers’ associationshave contributed to the development of Mexico’s fruit and vegetable export industry. Since 1982, the devalua- tion of the Mexican peso has also encouragedthe growth of this indus- try. In addition, US. private capital and technology have been available for the expansion of farm operations and the development of freezing plants. Major expansion of Mexican horticultural exports to the United States took place during the 1970s according to usw officials. However, between 1982 and 1988, these exports grew at an average rate of just over 6 percent annually, slower than the average rate of growth for Mexican agricultural exports as a whole. The slowdown of more estab- lished Mexican fruit and vegetable exports has encourageddiversifica- tion. The combined value of shipments to the United States of new ‘For our analysis of Mexican agricultural exports to the United States, we relied on data pmvldcd by USDA’s Economic Research Service (ERS). While frozen fruits and vegetables are commonly C~SSI- fied under procewxl foods, ERs statistics combine fresh and frozen fruits and vegetables Page 31 GAO/NSIADSO-SSBB U.S.-MexicoAgricultural Trade Bconondc and Market TremdaAfhting BJhteral AgriculturalTrade Mexican vegetable crops, such as asparagus,lettuce, broccoli, cauli- flower, brussels sprouts and celery, more than doubled between 1982 and 1988. Cattle The value of Mexican live animal exports to the United States increased from approximately $116 million in 1982 to more than $262 million in 1988. Most of these live animal exports are cattle imported for fattening rather than immediate slaughter. Cattle exported to the United States originate in northern areas of Mexico, which have been declared free of serious contagious diseases.The development of the export cattle indus- try in northern Mexico has been encouragedby the growth of commer- cial feed lots in the United States. During the economiccrisis of the 19809,the Mexican cattle industry also turned increasingly to exports to offset declines in domestic demand. However, to assure an adequate supply of meat products for domestic consumption and reduce inflationary pressure on meat prices the Mexi- can government has sought to limit cattle and beef exports by placing high export duties on these products or temporarily suspendingexports altogether. ProcessedFoods Between 1982 and 1988, Mexican processedfood exports to the United States increased at an average annual rate of nearly 21 percent.” In 1988 the combined value of someof the more significant processedfood exports to the United States was $366 million. This represented 20 per- cent of Mexican agricultural exports in 1988, compared to 11 percent in 1982. Someof the most successfulMexican processedfood exports include tomato paste and sauce,frozen orangejuice, and beer. Proximity to the Mexican market and the availability of medium-term U.S. Agricultural financing through the GSMprogram have allowed the United States to Exports to Mexico maintain its position as Mexico’s principal supplier of agricultural goods during the difficult economicperiod since 1982. The major U.S. agricul- tural exports to Mexico are oilseeds and coarsegrains. Live animals, %ur selected proceaeed foods category includesalcoholic beverages, fruit juices, prepared and pre- served vegetable products, prepared andprt?served fruit products,biscuits and wafers, pasta and nm&q confectioneryproducts and meatpmducts.Our data do not include frozen fruits and vegeta- bles.Es&n&es of averagemual gmwth rates for Mexican pm food exports, including frozen fruits and vegetables, range between16 and 17percent. Page 32 GAO/NSLADM-ggBRUW-Mexico Agricultural Trade Appendix II Economic and Market Trends Af’fecting BihteralAgrkulturalTrade meats, and dairy products are also prominent among U.S. exports to Mexico. (Seefigure 11.4.) Oilseeds Between 1982 and 1988 oilseedswere among the top three categoriesof U.S. agricultural exports worldwide. In 1988 oilseedsaccounted for $5.1 billion, or 13.8 percent, of total U.S. agricultural exports; about 8 percent of these oilseed exports, valued at $403 million, went to Mex- ico. That year oilseedsand related products exports represented 25.7 percent of U.S. exports to Mexico. Soybeanis the major oilseed crop, accounting for more than 80 percent of the total value. U.S. soybean exports to Mexico are used for animal feed and for vegetable oil. Mexico also relies on domestic soybeansfor its needs. Figure 11.4:U.S. Agricultural Exports to Mexico (1988) 11 Other Oilseedsand related products Coarsegrains Total Value of Agricultwal Expoes: $2.2 biUii Source: U.S. Department of Agriculture data. Coarse Grains In 1988, coarsegrains and related products valued at $627 million rep- resented 23.6 percent of U.S. agricultural exports to Mexico. The two major crops within this category are corn and sorghum. Page 33 GAO/NSIAD9&33BR U.S.-MexicoAgricultural Trade . Appendtrn Economic and Market Trenda AlWring Bilateral Agrhltwal Trade U.S. corn exports to Mexico are used for human consumption as well as livestock feed. Corn is the basic staple of the Mexican diet. More than 50 percent of the cropland in Mexico is devoted to corn production. However, most corn is grown on rain-fed land. During the 198Os,recur- rent droughts disrupted production and reduced yields. The Mexican government tried to maintain affordable supplies of corn, importing large amounts from the United States. Sorghum is used only as animal feed in Mexico. Its importance has declined as Mexican meat consump- tion has been reduced during the economiccrisis Mexico has endured since 1982. Live Animals and Meat Even though Mexico exports cattle to the United States for fattening, Mexico also imports breeder cattle and other animal products from the Products United States. In 1988 there was a dramatic increase in Mexican imports of U.S. cattle, swine, poultry, and meats. That year the value of US. live animal and meat exports to Mexico was nearly 4 times what it had been in 1987. This increase was due to the Mexican government’s efforts to maintain low consumer prices for these commodities through imports. In 1988 the value of U.S. live animal and meat exports to Mexico reached $447 million. Dairy Products Dairy products have been a traditional U.S. export to Mexico. Mexico has dependedon subsidized US. nonfat dry milk exports to provide for a significant portion of its milk consumption. However, in 1987 the United States Department of Agriculture terminated subsidized nonfat dry milk exports to Mexico as U.S. surplus stocks were depleted. In 1988, U.S. dairy exports to Mexico reached $136.8 million, accounting for 6 percent of the value of US. total agricultural exports to Mexico. Mexico is one of the major beneficiaries of the GSM programs. (SeeFigure U.S.CreditPrograms 11.2.)In 1988 and 1989 Mexico ranked first among the users of GSM credit guarantees.Approved GSMcredit guaranteesto Mexico have risen from $38 million in 1982 to $1,217 million in 1988. In 1989, $1,138 mil- lion in GSM-102 and $122 million in GSM-103 credit guarantees had been approved for Mexico. While the terms for repayment for loans guaran- teed under the ~~~-102program are 6 to 36 months, those for ~~~-103 loans are in excessof 3 years, but no more than 10 years. P8ge 34 GAO/NSIAIh3O&BR U.S.-MexhAgrhlturalTkade Appendix III Objectives,Scope,and Metlmdology The principal objectives of this briefing report are to (1) identify current impediments to trade between the United States and Mexico and (2) pro- vide data on trade flows between the two countries from 1982 to 1988. The information presented is basedprimarily on official documents and interviews with officials from the Department of Agriculture, the Office of the U.S. Trade Representative, and other government agencies.We also relied on studies and position papers provided by academic institu- tions, international organizations, and industry groups. In Washington, D.C., we interviewed officials responsible for trade and/ or Mexican affairs at the Office of the U.S. Trade Representative; the Department of Agriculture’s Foreign Agricultural Service, Economic ResearchService, Agricultural Marketing Service, and Animal and Plant Health Inspection Service; the Department of Commerce’sInternational Trade Administration; the International Trade Commission;the Depart- ment of the Treasury’s Customs Service; the Department of Transporta- tion’s Federal Railroad Administration, and the Office for Policy and International Affairs; and the Food and Drug Administration. We also met with the Agricultural Counselor and an assistant to the Economic Counselor for the Mexican Embassy. We also consulted officials familiar with Mexican economic and agricultural trends at the World Bank. We collected and reviewed official documents, statistics and reports from all of these government and international agencies. We also interviewed agricultural trade experts at the University of Cali- fornia at Davis and Berkeley and reviewed various works and studies prepared by experts from these and other academicinstitutions con- cerning U.S.-Mexicanagricultural trade. We met with spokespersonsfor various California-based industry groups, including the Western Grow- ers Association, California Farm Bureau Federation, and California Fed- eration of Food Processors.In addition, we interviewed a spokesmanfor the National Confederation of Horticultural Producers, Mexico’s largest association of fruit and vegetable producers. We visited Sacramento, where we met officials from the California State International Trade Commission, California Department of Food and Agriculture, and Select Committee on California-Mexican Affairs. We visited Nogales,Arizona, the major port of entry for Mexican horti- cultural exports to the United States, and its sister city Nogales,Sonora, in Mexico. During this trip we observed the processrequired for Mexi- can agricultural exports to enter the United States. We met with officials from U.S. government agenciesresponsible for administering agricul- tural import processingand inspection programs, including officials Page 35 GAO/NSuD30-85BR U.!L-MexicoAgricultural Trade APP* UI Objectives, Scope,and Methodology from the Customs Service, the Animal and Plant Health Inspection Ser- vice, the Arizona Federal/State Inspection Service, and the Food and Drug Administration. We interviewed representatives of West Mexican Distributors, an association of U.S.-baseddistributors of Mexican agri- cultural produce, and of the Southern Pacific Railroad, a major handler of U.S. agricultural exports to Mexico via rail. In Nogales,Sonora, we met spokesmenfor CNPH and the Association of Horticultural Producers of Sinaloa. This review was conducted in accordancewith generally acceptedgov- ernment auditing standards. As requested by your office, we did not obtain agency comments on this briefing report. However, the informa- tion presented was discussedwith appropriate officials of Agriculture and Customs and their views were considered in completing the report. Page 30 GAO/NSIAD-NgSBR U.S.-MexicoAgricultural Trade JP kfzi Contributors to This &port National Security and Jane- Yu Li , Economist International Affairs Division, Washington, D.C. Los Angeles Regional Juan R. Gobel, Site Supervisor Office Venecia R. Kenah, Evaluator Rodina U. Sanchez,Evaluator (483S30) Page 37 GAO/NgIAD3O-36BRUS-Mexico Agricultural Trade .
U.S.-Mexico Trade: Trends and Impediments in Agricultural Trade
Published by the Government Accountability Office on 1990-01-12.
Below is a raw (and likely hideous) rendition of the original report. (PDF)