oversight

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)

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
.