Saturday, July 10, 2010

Mexican Corn and NAFTA, Part 2

If you're from the U.S. there's one bit of good news about NAFTA's impact on Mexican corn farmers: it's not all our fault. Oh, sure, we screwed them over plenty. But it's not our fault that the Mexican government implemented NAFTA in an even more detrimental way to its own corn farmers than the treaty required.

In preparation for my upcoming trip to Jalisco, one of Mexico's top corn-producing states, I have been reading up on the impacts of NAFTA on Mexican agriculture. The first part I wrote up focused on how the treaty was written and how that impacted Mexican farmers. This next part is about how the treaty was actually implemented, which is a whole 'nother story.

According to the treaty, Mexico was supposed to phase in the treaty over a 15-year period. In the first year, they were to allow 2.5 million metric tons of corn into the country without any tariffs. Each year, the quota would increase by 3% over the previous year, eventually reaching 3.6 million tons in 2008. Meanwhile, the tariff imposed on all corn imports over the quota would decrease by a certain amount each year, finally reaching zero in 2008 (thus making the quota obsolete). Also, in theory, the Mexican price of corn would gradually, over time, become equal to the world price of corn. (They also neglected to take note of the fact that Mexicans typically grow white corn, which usually goes for about 25% more than American yellow corn in international markets. They just treated all corn as if it were the same.)

NONE of this happened. Year One came along and Mexico threw the door wide open to corn imports and dropped the tariff entirely. In 1993, pre-NAFTA, Mexico imported 210,644 metric tons of corn. In 1994, they imported 2,746,639 metric tons - more than a tenfold increase over the previous year. As of 2007, corn imports to Mexico were up to 7,954,729 metric tons. Mexico, thus, voluntarily gave up billions of dollars in tariffs that it could have rightfully collected.

So why did Mexico do that? At the time, it was having significant economic difficulties. Those in power assumed that allowing cheap, imported corn into the market would also lower the price of tortillas. They considered the decision to forgo the tariff revenues a wash because they feared that if they collected the tariffs and kept corn and tortilla prices high, they'd be under pressure to subsidize the price of tortillas.

But they were wrong. Between 1994 and 1999, real tortilla prices more than doubled while corn prices were reduced by nearly half. How can that be? Well, two companies control 97% of the entire tortilla market. They stuffed all of the extra money in their pockets and then didn't pass on any of their savings to consumers. In fact, they did the opposite. One of the companies was embarking on a large international expansion and since it needed cash, it jacked up the tortilla prices to get it.

Thus, in the end, Mexicans were doubly screwed by their own government. Those who grew corn could no longer sell it at a fair price, and those who purchased their food instead of growing it themselves faced higher tortilla prices. By the way, the Mexican government DID end up subsidizing the tortilla industry in an effort to get the prices back down. The tortilla companies shoved that money in their pockets too and went right on overcharging their customers for tortillas.

Remember that Mexico's assumption in NAFTA was that by importing cheap (supposedly more efficiently produced) corn, the "inefficient" Mexican corn farmers would find new jobs exploiting Mexico's comparative advantages (i.e. the workers would grow vegetables like tomatoes and peppers for export or they would go to work in factories producing goods for export). This didn't happen for a number of reasons, but it appears that the rise in tortilla prices played a role. In fact, Mexican corn production went UP. With tortilla prices going up, a subsistence farmer would need a lot more money to buy tortillas if he or she stopped growing corn. Thus, for a subsistence farmer, it became more important than ever to produce enough corn to cover all household needs in a year.

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