NAFTA's Impact on Mexican Firms' Profits from Apparel Exports to the US, Lecture notes of Economics

Download NAFTA's Impact on Mexican Firms' Profits from Apparel Exports to the US and more Lecture notes Economics in PDF only on Docsity! Chapter 3 NAFTA’s Remaining Trade Barriers 73 Box 1. Rules of Origin and the Export of Protection among NAFTA Partners: The Basic Analytical Framework This note aims to clarify how rules of origin (ROOs) can act as protectionist devices whereby the structure of production of one of the NAFTA partners determines the profitability of exporting firms. The framework was provided by Krueger (1993). Consider a Mexican firm deciding whether to export apparel products to the U.S. under the NAFTA preferences. Its expected profits can be formally written as follows: (1) , where pi represents the expected profits for this firm. If it sells the product in the U.S. market, it will receive revenues per unit of apparel equal to the U.S. price ( PUS A ) for that article. On the cost side, the firm will have to pay the U.S. price for the necessary textile inputs. This cost has three components: the unit price of textiles in the U.S. ( PUS T ) if the firm decides to use U.S. components (which is likely due to the low cost source within NAFTA for textiles); the resulting unit cost is the product of this price times the cost share of U.S. textile inputs (α) times the textile cost share relative to the value of apparel that is determined by the production technology (q); minus the cost of using textile inputs from other sources that might be cheaper than U.S. parts ( qPW T •− )1( α ). The relevant U.S. prices, world prices, and the technological parameter can be defined as follows: (2) where t US A is the ad-valorem U.S. import tariff (equivalent) on apparel and tUS T is the corresponding U.S. tax on textile imports. To simplify, let world prices of apparel and textile inputs be equal to unity: (3) Then, (3) The ROO determines α, which is the share of textile inputs that must come from regional sources in order for the export of apparel to be eligible for NAFTA preferential treatment. In the specific case of textile and apparel products, the NAFTA ROO implies α = 1 due to the yarn-forward rule, which says that apparel must be made from yarn originating in NAFTA countries. Thus, the profits for Mexican firms wishing to penetrate the U.S. market under the NAFTA preferences can be re-written as follows: (4) This formula shows that for exports under NAFTA preferences, Mexican firms’ profits will be determined exclusively by U.S. tariffs on apparel and textiles and the technological parameter, which we can safely assume is constant in this case because it is unlikely that technological change in the apparel industry can reduce the amount of cloth used per unit of apparel. The fact that Mexican apparel profits are determined by U.S. tariff structure is the key result from Krueger (1993). Alternatively, firms can choose not to use the NAFTA preferences. In this case, firms face the following profit condition: (5) In words, the firm that decides not to use the NAFTA preferences for apparel exports will receive the world price minus the costs of textile inputs, which in this case depend solely on Mexico’s textile import tariffs (and implicitly on the world price of textiles, which we have set equal to zero). Hence the decision to actually use the NAFTA preferences will depend on whether profits from using the preferences as defined in (4) are greater or at least equal to the profits from not relying on the preferences as defined in (5). Thus it is easy to show that the apparel preferential margin, which equals the U.S. tariff when all intra-NAFTA trade enters duty free, needs to be greater or equal to the product of the textile cost share in production times the difference between the U.S. and Mexican textile tariffs: (6) The analysis presented in the main text of this chapter discusses possible explanations of why the utilization of the NAFTA preferences in apparel exports from Mexico to the U.S. is relatively low given that the extent of the preferential treatment under NAFTA has been quite high. The framework presented here indicates that there are three key parameters, which are those in equation (6). 1 )1( )1( < += += q PtP PtP W T US T US T W A US A US A qq PPP W T US T US A Mex A •−−••−= )1( ααπ 11; == PP W A W T [ ])1()1()1( ααπ −++−+= tt US T US A Mex A q )1()1( tqt US T US A Mex A +•−+=π )1(1 tq Mex T Mex A +•−=π )( ttqt Mex T US T US A +•>= 74 3.2.2 NAFTA preferences, utilization rates, and rules of origin77 Box 1 showed that there are some specific conditions under which Mexican exporters will voluntarily decide to export to the U.S. without utilizing the NAFTA preferences. This occurs when the profits from exporting without preferences are greater than those from using them. More specifically, this is more common in industries where tariff preference is smaller than the cost differential from exporting to the U.S. by satisfying the rule of origin minus the costs from importing inputs of production from other sources. This is stated in equation (6) in Box 1 for the case of apparel exports. Figure 1. How NAFTA Utilization Rates Vary with Tariff Structure: The Case of the Yarn-Forward Rule for Apparel Exports Source: Authors’ calculations—see Box 1 and text for details. To illustrate how ROOs and the structure of protection in FTA members can affect the extent to which exporters use the FTA preferences, Figure 1 shows profit schedules for firms wishing to use FTA preferences. We continue to use the example of textile and apparel goods. The downward sloping lines corresponds to the expected profit schedules for three different hypothetical apparel products. The expected profits of exporting to the U.S. under FTA preferences decline with the textile tariff differential (or tariff equivalent rate of protection). The graph shows three different products: the top dotted line shows the expected profits for a firm that produces apparel with a rather low share of textile inputs (q=0.2) and facing an MFN (non-preferential tariff) of 40%. The corresponding expected profits from not using the preference is portrayed by the horizontal line, which simply shows that the profits for non- preferential exports do not depend on differences between U.S. and Mexican textile tariffs, and thus it is flat or horizontal. Exporters facing these conditions would probably choose to make full use of the FTA preferences, since for a reasonable range of textile tariff differentials, the FTA profit line is above the non- preferential profits. In contrast, the two other downward sloping profit lines cross their corresponding non-preferential profit line, which we set equal to zero, at different points of the horizontal axis (or at two 77 This section borrows heavily from Cadot et al. (2002). 0 0.2 0.4 0.6 0.8 1 1.2 1.4 -1 4% -1 1% -9 % -6 % -4 % -1 % 1% 4% 6% 9% 11 % 14 % 16 % 19 % 21 % 24 % 26 % 29 % 31 % 34 % 36 % 39 % 41 % 44 % 46 % 49 % 51 % 54 % 56 % 59 % 61 % U.S. minus MEX textile tariff (or tariff equivalent) E xp ec te d a ve ra g e p ro fi ts f ro m e ac h a p p ar el u n it s o ld in t h e U .S . (% o f w o rl d u n it p ri ce ) Profits without NAFTA preferences & min q=0.2 Zero profits without NAFTA preferences, max q =0.84 Profits with NAFTA preferences, q=0.84, & US min apparel tariff = 11.9% Profits with NAFTA preferences, q=0.84, & US apparel tariff = 40% Profits with NAFTA preferences, q=0.2, & US apparel tariff = 40% 75 different levels of textile tariffs in the U.S. relative to the Mexican tariff of 18.9% as of 2001).78 This implies that for products where the U.S. apparel tariff is close to 12% (the U.S. MFN average tariff without considering the impact of quotas) and a maximum textile cost share of 84% (q=0.84) using NAFTA preferences becomes unprofitable at low levels of U.S. textile tariffs. In fact, this would occur when the U.S. textile tariff is about 14 percentage points higher than Mexico’s 19% tariff. This break- even point occurs a higher levels of the U.S. textile tariff when the U.S. apparel tariff is 40%, which makes selling that apparel product in the U.S. market more profitable. Thus it is clear that the decision to take advantage of NAFTA preferences will vary across firms and products, depending on some key parameter, namely U.S. apparel and textile tariffs and the cost share of textile inputs in the production of apparel goods. This statement is generally applicable to any product and ROO. An important empirical question is what Mexican exports are utilizing NAFTA preferences and which ones are not. Figure 2, provided by Cadot et al. (2002), shows the relationship between NAFTA utilization rates in various sectors (measured along the vertical axis) and the tariff preferential margin offered by the agreement (measured along the horizontal axis). The textile and apparel sector is a clear outlier: it enjoys the highest preferential treatment, yet the utilization rate was quite low in 2000. The evidence indicates that only about 62% of Mexican exports of textile and apparel enters under the NAFTA preferences. Hence it seems that there is something peculiar about this sector in terms of how the rules of origin affect decisions by Mexican firms. We now turn to a more detailed empirical analysis of the impact of tariff preferences and ROOs on Mexican exports to the U.S. Figure 2. The Empirical Relationship between NAFTA Preferences Utilization Rates versus Tariff Preferences, 2000: Textile and Apparel – The Obvious Outlier Source: Cadot et al. (2002) based on data from the U.S. ITC. Given that there is substantial variation in NAFTA's tariff preference across industries, in the absence of offsetting administrative or ROO costs one would expect Mexico's trade flows to be affected 78 This zero-profit condition can be readily calculated from equation (5) in Box 1, by setting Mexico’s MFN textile tariff equal to their actual reported tariff of 18.84% and setting the cost share of textile inputs at the maximum possible ratio so that profits equal zero. This is the tariff reported by the FTAA Hemishperic Database maintained by the Tripartite Commission composed by the IDB, OAS, and ECLAC. 0 0.2 0.4 0.6 0.8 1 1.2 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2 Tariff Preference N A F T A u tilizatio n rate 11. Textile 19. Arms 14. Jewelry 8. Leather goods 17. Transport Eq. 20. Misc. 12. Footwear 7. PLastics 3. Fats and Oils 6. Chemicals 13. Stone & Glass 4. Food. Be. & Tobacco 9. Wood 18. Optics 16 15 Base metal 10 1 5 1. Live animals 2. Vegetables 5. Mineral Products 10. Pulp & paper 16. Machinery &El.eq 2 78 preferences and no rules of origin,80 which we interpret as “no NAFTA”; and (iii) with NAFTA tariff preferences but no ROOs (a hypothetical NAFTA without rules of origin). The difference between case (i) and case (ii) gives an estimate of the direct effect of NAFTA's package (tariff preference and ROOs) on Mexican trade flows. Results are presented as percentage deviations from the relevant baseline predicted value for Mexico’s exports to the U.S., namely $152.3 billion using the results for (1) and $133.4 billion with (2). The results are shown in Table 2. Table 2. Simulation Results for (1) and (2): Effects of ROO relaxation, simulated (% deviation from baseline) Constrained ROO values No NAFTA NAFTA without ROO Using Estevadeordal's index (equation 1) ROO=1 -3.1 76.6 ROO=2 -11.7 35.3 ROO=3 -22.6 17.8 Using dummies (equation 2) RVC=0 15.8 ITEM=0 1.5 SUBHEAD=0 9.0 HEAD=0 63.2 CHAP=0 35.3 RVC=0 AND EXC=0 4.5 RVC=0, ITEM=0 AND EXC=0 5.3 RVC=0,ITEM=0,SUBHEAD=0,EXC=0 11.3 RVC=0,ITEM=0,SUBHEAD=0,HEAD=0,EXC=0 85.0 All dummies at zero (no ROO) -9.0 108.3 Source: Cadot et al. (2002, Table 4). Consider the first part of Table 2, based on (1). If “No NAFTA” is interpreted as setting ROOs at their lowest level, then the combined effect of tariff preferences and ROOs (NAFTA’s package) raises Mexican exports, on average, by only 3.1%. As “No NAFTA” is interpreted as elimination of tariff preference but ROOs set at higher levels, NAFTA’s effect appears more favorable. With this caveat in mind, it is fair to say that the marginal effects of tariff preferences and ROOs as they are in NAFTA’s present form seem to produce limited positive net effects (+11.7% with ROO=2 taken as the “No NAFTA” value). The second column shows that if tariff preferences were maintained but ROOs eliminated the positive effects on Mexico’s exports would be considerable (+35.3% if ROOs were set across the board at a level corresponding to ROO=2). This finding has important policy implications, since they show that loosening NAFTA ROOs could bring substantial gains in terms of Mexico’s ability to take advantage of the preferences offered by NAFTA. The second part of the table provides some guidance about which ROOs in particular could have the biggest impacts if they were to be relaxed. Regarding required changes of tariff classification, the 80 The exercise we perform is as follows. In case (i), we use actual values of the PREF and ROO variables to predict the value of Mexico’s exports to the U.S.. In case (ii), we set PREF equal to 10E-13 across the board and ROO to a ‘low’ value across the board. The first part of Table 2 reports results for three values of ROO: 1, 2 or 3. The reason for not setting the ROO variable to zero is that, under NAFTA, there is no tariff line with ROO equal to zero, so that predicting the value of XUS (the dependent variable) so far out of the sample with non-linear forms gives unreasonable results. Results based on setting ROO equal to higher values are more conservative but arguably less prone to prediction errors. If anything, the bias that this introduces reinforces the point we are making, since setting ROOs at a lower level would generate larger negative effects. 79 most common type of ROOs, note that relaxing ITEM (changes of tariff item), which has the largest marginal effects in (1), produces only a minor effect on trade flows as this type of ROO affects only low- volume tariff lines. Conversely, relaxing CHAP which has a low and imprecisely-estimated marginal effect produces a large change on textile and food exports. Relaxing HEAD (change of tariff heading) also produces a dramatic effect on Mexican trade flows. Several caveats are in point. First, the exercise cannot measure non-trade effects of NAFTA (e.g. on the credibility of reforms) and should therefore be taken as a lower bound on NAFTA's real-world effect. Second, these results are based on effects measured on a cross-sectional data set and cannot give a full picture of NAFTA's effects since effects that cut across all sectors effects are subsumed in the constant. Thus, at least one important question remains unanswered: namely, whether the recent expansion of Mexico's exports to the U.S. is indeed attributable to NAFTA but to effects that are only indirectly related to tariff preferences, or whether it is attributable instead to exchange-rate or macroeconomic and credibility effects discussed elsewhere in this report. With these caveats in mind, the provisional conclusion here is that, at least at first sight, Mexico's export pattern seems to have been affected positively but in a quantitatively small way by the combined effect of NAFTA's tariff preferences and ROOs, because the negative effect of the latter partly offset the positive effect of the former. This has two policy implications. First, it supports the view that the gains from tariff liberalization under FTAs can be offset by non-tariff compliance costs related with ROOs. In this case FTAs involve a substitution of instruments rather than the simple elimination of one of them. Second, the extent of the substitutability between tariff and ROO protection varied across industries, depending on the type of ROO. Although the point estimates of the impact of the chapter-change ROO requirement, such as the rules that apply to textile and apparel trade under NAFTA, were imprecise, the magnitude of the negative effect are economically large. The imprecision is probably due to the fact that the same rule literally applies to textiles and apparel, although we suspect that in Mexico’s case the yarn- forward rule has hampered mainly the profitability of Mexican apparel exports, since this country is a net importer of textile from the U.S. The following section takes a closer look at these and other issues related to the apparel industry. 3.2.3 NAFTA and textile and apparel trade in North America As shown in Figure 2, textile and apparel trade under NAFTA is characterized by two features: very high preferential treatment for Mexican exporters relative to the MFN tariffs and a rather low level of utilization of these preferences by Mexican exporters. We have already explained and demonstrated that relaxing the relevant ROOs might have economically important consequences for Mexican exporters of apparel. However, here we aim to consider additional factors affecting this sector: NAFTA preferences for Mexico have been diluted by unilateral actions taken by the U.S. First, the Caribbean Basin Economic Recovery Act allowed in 2000 exports of apparel from Caribbean and Central American countries to enter duty-free into the U.S. market as long as the yarn used for these manufactures originates in the U.S. As of late 2002, this is also true for apparel exports from Colombia and other Andean countries, because the U.S Congress approved the Andean Trade Preferences Act in September 2002, which offered preferential treatment to apparel made with U.S. yarns and textiles. Hence to some extent the NAFTA preferential margin in apparel became less important.81 Furthermore, the initiation of negotiations between Central America and the U.S. towards a NAFTA-type FTA will probably level the playing field in terms of the ROOs affecting apparel exports from these countries relative to Mexico. 81 The Africa Growth and Opportunity Act (AGOA) also offered preferential treatment in the U.S. for textile and apparel imports from African countries. This is another reason why NAFTA textile and apparel preferences have been diluted. 80 We can use these facts to compare the CBI and NAFTA utilization rates to better understand how the textile-apparel ROOs affect different types of countries. In principle, the move from the CBI ROO to a NAFTA ROO (which allows apparel to enter the U.S. with preferential treatment even when the yarn is produced domestically, rather than exclusively in the U.S.) should be more beneficial for countries that have a domestic internationally competitive textile industry. To assess the extent to which various CBI and NAFTA countries have a comparative advantage in textiles, the main input for producing apparel, we look at the pattern of net exports per worker relative to the U.S. for CBI countries and relative to NAFTA for Mexico, and relative to the rest of the world for both sets of countries. In addition, we also examine the latest data concerning the CBI and NAFTA utilization rates in apparel. Figures 3a-f show the net exports of textiles for Mexico and the five Central American countries, both relative to the U.S. (U.S. plus Canada for Mexico). Only El Salvador seems to have a comparative advantage in textiles, since it is the only country that has systematically had postive net exports of textiles to the whole world since the early 1980s. Hence this country is likely to benefit substantially from shifting from the CBERA apparel ROOs to the NAFTA-type ROOs. Mexico on the other hand has become a large net importer of textiles, most of them coming from its NAFTA partners. This finding is consistent with our previous discussion that the NAFTA ROOs have resulted in the export of U.S. protectionism to Mexico in this sectors. That is, the large decline in the net exports of textiles in Mexico has been related to rising imports of textiles from the U.S., which are required for its apparel producers to export to the U.S. under NAFTA preferences. This fact also explains why the econometric estimates of the impact of the ROOs affecting textiles and apparel is imprecise; it is because the same rule affects textiles where Mexico is not the low-cost producer of North America (the U.S. is) and apparel, where Mexico is the NAFTA low-cost producer.82 [Figures 3a-f appear at the end of this chapter] Table 3 shows the latest available data concerning the CBI and NAFTA utilization rates in 2001 and 2002. El Salvador and Mexico have similar utilization rates. We interpret this as evidence that El Salvador has not benefited as much as other CBI beneficiaries in this sector partly because the U.S. is not its low-cost source of textile and yarn inputs used for apparel manufacturing. This is also the case for Mexico. The difference, however, is that El Salvador’s own textile industry might be the potential source of textile inputs (since it has a revealed comparative advantage for textiles relative to the whole world), and thus for this country NAFTA-type ROOs might be more beneficial than they were for Mexico or could be for Costa Rica, for example, under a NAFTA-type agreement. Although we have not shown the corresponding graphs for Colombia, a country that is also beginning to consider and FTA with the U.S., this is another country similar to El Salvador in that it does have a significant domestic textile industry, and thus could benefit more than Mexico from NAFTA-type ROOs.83 82 It should be noted that the U.S. is a net exporter of textiles within NAFTA but not for the rest of the world. 83 Historically, Colombia has been a net exporter of textiles to the world. This situation changed slightly in the mid- 1990s, but it was not a significant net importer of textiles by the late 1990s. In other words, Colombia is on the fringe between a net exporter and net importer of textiles. Shifting from ATPA to NAFTA-type ROOs in this sector might thus make this economy recover its relative position in textile and apparel exports. 83 the processors at the international price, and the government transfers to the farmers the difference between it and the concentrated price.88 Up to 1994, the Agricultural Council fixed the guaranteed price of maize and beans, which were administered by CONASUPO. In 1995 the peso devaluation allowed the government to transform CONASUPO to be just a "last instance buyer" of these two crops, eliminating domestic price supports for them. During that year CONASUPO did not import maize and, from purchasing in 1994 45 per cent of the domestic production of the grain, in 1995 just bought 20 per cent. However, and due to the decrease of the international price of maize, in 1996 Mexico followed an intermediate scheme of price fixation, by which the domestic price was settled regionally and between the guaranteed price and the international price. The price was called “base price” (ASERCA: May, 1997, pp. 10 and 13-14). During the winter season of 1996-1997, the scheme of price supports for maize changed again. Maize, together with beans, was bought by CONASUPO at “indifference prices” in the production zone. The prices were region- specific and determined by the average of the international price according to the Chicago Commodity Exchange plus the international bases of arrival to Mexican port(s) and the operation costs of storage, transport, financial costs, etc. (SAGAR: July, 97, p. 22). Under this scheme, and until it was abolished in late 1999, CONASUPO became a “last instance” buyer of white maize for human consumption in the sense that it allowed sales to those maize growers that could get a price from the private sector higher than the indifference price. The evidence on the weight of CONASUPO's purchases on domestic production of maize (mainly white) and beans show that, during the last years of its existence, the Company decreased its participation in the domestic markets of these two crops. During 1993 and 1994 CONASUPO bought around 45 per cent of the domestic supply of maize, whereas its purchases were reduced to 20.3 per cent during 1995, and to 8.8 per cent during 1996, to 19 per cent during 1997 and to 12.5 per cent during 1998. As for maize, CONASUPO's weight on domestic purchases of beans have been reduced: from 30.5 per cent during 1993 to 24.8 per cent in 1994, to 18.3 per cent in 1995, and to around 8 per cent in the following two years (SAGAR data base). During the last years of CONASUPO, the Company’s sales of maize were to tortilla producers or “nixtamaleros” (they ground the maize and elaborate tortillas). In order to support the subsidy to tortilla consumers, CONASUPO provided the maize to them and sold it at a price that allows “nixtamaleros” a "reasonable" profit for their tortilla sales at a subsidized price. The other processors that received a subsidy were the maize millers. They received a cash subsidy for the maize bought directly in the domestic market (“at prices linked with the international prices”, Zedillo 1997) that allowed them a "reasonable" profit so as to support the consumers' tortilla subsidy program. Direct income transfers: PROCAMPO Three years after the creation of ASERCA, a major transitional program called PROCAMPO was initiated in the winter season of 1993-94, a few months before the beginning of NAFTA. PROCAMPO is a decoupled program that substituted previous direct price supports. It consists of income transfers to farmers producing barley, beans, maize, cotton, rice, sorghum, soy, sunflower and wheat. The main purposes of PROCAMPO are to support domestic producers of basic staples to face competition from U.S.A. and Canadian farmers granted by NAFTA, and to help Mexican producers to switch to more competitive crops under a liberalized context. PROCAMPO is planned to last until 2008, when full trade liberalization under NAFTA will be attained, and its beneficiaries have been those producers that 88 To the scheme of indifference prices, a program of price coverage in the international markets for these crops, plus cotton and maize, was added. For example, during 1996, coverage for 91,920 mts. of wheat and 1.7 millions of maize were placed in the Commodity Exchanges of Chicago and New York (Zedillo 1996). 84 cultivated (or continue to cultivate) the above-mentioned crops during the three years before its implementation. The transferred amount is per hectare and the same to all farmers, independently of productivity and granted even if the beneficiaries switch to produce other crops. Box 2 reviews recent evidence concerning the income effects of PROCAMPO on its beneficiaries. Box 2. The Multiplier Effects of PROCAMPO – Evidence of Effectiveness Evaluations of income support programs, such as PROCAMPO, should consider, among other factors, how such transfers affect total incomes of the beneficiaries. Effective programs should in principle create additional income from other sources so that each dollar spent by the public sector results in more than one dollar of additional income. The study by Sadoulet, de Janvry, and Davis (2001) found that PROCAMPO created large indirect effects. The multiplier for all households is in the range of 1.5 to 2.6. Multipliers are higher for households with medium and large farms, low numbers of adults in the household, nonindigenous backgrounds, and located in the Center and Gulf regions. Large multipliers reflect uncaptured marginal income opportunities due to liquidity constraints that are relaxed by the transfers. Liquidity constraints can be caused by incomplete property rights in the ejido sector and by the disarray of financial institutions servicing agriculture following the scaling down of the agricultural development bank. Large multipliers thus reflect sizable gaps between opportunities and constraints. Households with migrants sending remittances and with higher levels of education may thus have lower multipliers because they were able to work around the liquidity constraints more effectively than other households. Households with little land and with ethnic backgrounds may have lower access to liquidity, but also have lower opportunities to invest additional cash received, again resulting in lower multipliers. Source: Sadoulet, de Janvry, and Davis (2001). Alliance for the Countryside In addition to the ASERCA and PROCAMPO the government created Alliance for the Countryside (Alianza para el Campo) in 1993. The program’s main objective is to increase agricultural productivity and to capitalize farmers by contributing funds for investment and sanitary projects leading to integrate farmers into the commercial food processing industry. A major purpose of Alliance is to promote farming efficiency through crop substitution (mainly from traditional crops to fruits and vegetables) for farmers who have a potential comparative advantage in producing such crops in the context of an open economy. Other important features of Alliance include its decentralized character with state-level control of its programs and contribution to the funding by participating farmers. (www.sagarpa.gob). Alliance for the Countryside includes PROCAMPO, as well as other programs. The most important amongst these is PRODUCE, which focuses on three main activities: the use of irrigation canals to deliver liquid fertilizer, mechanization, and the improvement of pasture quality for livestock producers. Alliance also includes a phytosanitary program. Other reforms Less government intervention in agriculture was accompanied by the abolition of State enterprises involved in the sector. As well as the disappearance of CONASUPO, government companies producing fertilizers, seeds and other inputs, and those involved in the marketing of coffee, sugar and tobacco were eliminated or privatized. Credit subsidies and official credit coverage for working capital given to farmers by public financial institutions for rural development (the most important being BANRURAL) declined sharply during the nineties. There are several reasons explaining the reduction of government participation in rural credits, ranging from public budget restrictions to a very high default rate among beneficiaries. The gap caused by the decline in governmental rural credit was expected to be filled by private commercial banking. The current government passed the Ley de Capitalización del Campo, which simplified and improved the system for granting credit subsidies through FIRA, in this case, for potentially profitable 85 agricultural activities for the beneficiaries of PROCAMPO. This instrument clearly aims to help the productive transformation of traditional agriculture (a PROCAMPO criteria) in favor of other activities. Another major reform was the amendment of the Constitution in 1991 that liberalized property rights in the ejidal sector. Up to that year, peasants that benefited from land distribution (a result of the Mexican Revolution, and called ejidatarios) were, by law, not allowed to associate, rent or sell their land. With the reform this mandate disappeared and land redistribution ended. The ejidal reform was expected to help develop the land market, and to capitalize agricultural activities by allowing farmers to participate in the private credit market and by promoting direct private investment. The Salinas administration created the Ministry of Social Development, and with it, a social program designed specifically to assist the rural poor (called Progresa during the Zedillo government). The concern with the development of poor rural areas has been maintained by the current government under its comprehensive Plan for Rural Development. 3.3.2 Liberalization under NAFTA Under NAFTA, the structure of border protection for Mexico’s agricultural sector was transformed and Mexico gained market access to the Canadian and the U.S. markets, which had not been achieved through its previous liberalization efforts. Two separate agreements between Mexico and Canada and between Mexico and the U.S. were actually negotiated.89 Market access granted by Mexico under NAFTA Some traditional crops were liberalized immediately after the implementation of NAFTA. From January 1994 onwards, sorghum, sesame seeds, and sunflower from Canada and the U.S. entered duty- free. Free trade also applies to seeds for barley, beans, maize, cotton, soy, and sunflower, and since January of 1998 all types of soy also enter duty free to Mexico from its other two North American partners. NAFTA became the first free trade agreement using tariff rate quotas (TRQs) as a transition mechanism to eliminate quantitative restrictions and to move towards free trade. TRQs were applied to those products that the governments of the three North American countries considered very sensitive. Under NAFTA, no tariffs for those agricultural products that are under in-quota imports are charged. A phase-out period of fifteen years of above-quota tariff reductions and quota increases was defined for the imports of maize and dry beans.90 TRQs were also established for grain and malt barley, for which free trade was reached in 2003. Quota levels were established using trade flows between Mexico and its two North American partners from 1989 to 1991. In 1994 the quota for maize was set to 2,500,000 metric tons (mts) for the U.S. and to 1,000 mts for Canada, and the above-quota base or consolidated tariff for both countries was fixed to 215 per cent (or 206.4 U.S.$/mts). In January of 1994, the quota for beans was 50,000 mts for the U.S. and 1,500 for Canada, and the above quota tariff was 139 per cent (480 U.S. $/mts). For both, grain and malt barley, the quota was set in 1994 to 120,000 mts for imports from the U.S. and 30,000 mts for imports from Canada, and the above-quota ad-valorem tariff for grain barley was 128%, and 175% for malt barley. 89 The following discussion emphasizes the agricultural agreement between Mexico and the U.S., because, in the short and medium runs, major impacts of NAFTA have been concentrated in Mexico-U.S. trade. 90 In the agreement between Mexico and the U.S., powdered milk was also included by Mexico under this scheme. 88 Regarding the sensitive products from traditional agricultural activities such as maize, beans and other sensitive commodities, Figure 5 shows total production, production by irrigated and non-irrigated lands. The distinction between irrigated and non-irrigated land is interesting because non-irrigated land encompasses the small ejidatario farmers that are thought to be poor subsistence farmers, since there is no other systematic data covering this particular sector. The evidence indicates that in spite of the rise in imports during the years after NAFTA (1994-2000), total production was significantly higher than before (1983-1993). This result is driven by a notable increase in the production of maize and is especially true for non-irrigated farming, whereas production of the other traditional crops declined during this period. In fact, the irrigated traditional agriculture had a comparatively lackluster performance when compared to non-irrigated farms. However, this data is due to the fact that irrigation farming was more dynamic in non-traditional agriculture as many farmers managed to substitute non-traditional crops, such as fruits, for the traditional ones. These conclusions seems to be robust to comparisons across various sub-periods, as shown in Figure 5. Figure 5. Imports and Production of Traditional Crops before and after NAFTA: Irrigated versus Non-Irrigated Production Source: Yúnez-Naude (2002), based on data from SAGARPA. Figure 6 shows the evolution of land productivity for the whole of irrigated and non-irrigated agriculture. The main conclusion is that irrigated agriculture experienced a substantial productivity improvement after NAFTA, whereas productivity of non-irrigated agriculture stagnated. Figure 7 shows trends in exports and production of fruits, as an example of non-traditional agricultural performance. In the post-NAFTA years, both exports and production surged relative to the earlier years. This surge was in part due to the transformation of irrigated traditional agriculture into non- traditional production as well as the aforementioned improvements in land yields. Given the high profile of the state of agriculture in Mexico at this time, it is worth discussing potential explanations of why NAFTA did not result in the expected devastation of traditional and non-traditional agriculture. 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 1983-90 1991-93 1993-94 1995-96 1997-2000 1994-2000 T o n el ad as Importaciones (tns) Producción Total Prod con Irrigación Prod sin irrigación 89 Figure 6. Land Productivity: Irrigated and Rainfed Yields, 1983-2000 Source: Yúnez-Naude (2002), based on data from SAGARPA. Figure 7. Mexico: Exports and Production of Fruits before and after NAFTA Source: Yúnez-Naude, based on data from SAGARPA. Yields (Tons/Acres) 0.00 1.00 2.00 3.00 4.00 5.00 6.00 1983-90 1991-93 1993-94 1995-96 1997-2000 1994-2000 a. Total b. Irrigated c. Rainfed NAFTA 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 1983-90 1991-93 1993-94 1995-96 1997-2000 1994-2000 Exports (000 tons) Production (000 tons) NAFTA 90 A word of caution is required for making conclusions about the income effects of NAFTA based on the aforementioned evidence based on the volumes of production. This is so because the relative prices for producers of import-sensitive commodities fell in Mexico during the 1990s. These declines in relative prices imply that agricultural incomes fell for some farmers during this period. However, the relative prices of agricultural commodities in Mexico were falling well before NAFTA, dating back to the early 1980s. For example, between 1987 and 1994, the relative price of maize for Mexican producers fell by almost 50%, according to data provided by Yúnez-Naude and Barceinas (2003). In turn, in the equivalent seven-year period after NAFTA implementation, between 1994 and 2001, this relative price fell by about 43%. Thus, incomes derived from maize production fell during NAFTA, primarily because of the relative price decline. But this decline began well before 1994, and Yúnez-Naude and Barceinas (2003) report econometric results indicating that the behavior of Mexican agricultural prices did not change significantly after 1994. Moreover, Yúnez-Naude (2002, table 5) also reports that the portion of the variation in the relative price of maize due to policy interventions was actually positive, whereas the decline after 1993 was due to the movement in international prices. Thus it is difficult to blame NAFTA for any income losses due to the behavior of the relative price of maize.93 Chapter four discusses the evolution of agricultural employment, which also experienced a secular decline dating back at least to 1980. Finally, it is worth noting that the Mexican government implemented a series of agricultural support policies during this time period, some of which insulated producers from the price fluctuations. The following section examines this and other potential explanations of the surprising resiliency of Mexican agriculture. 3.3.4 Three plausible explanations for the resilience of Mexican agriculture The growth of demand in the late 1990s in both Mexico and the U.S. are well known facts (see Lederman et al. 2002, 2003). It is quite possible that Mexican agriculture performed remarkably well during the late 1990s precisely because these economies were growing and thus Mexican production could rise in spite of the increase in imports of traditional agricultural products. Productivity gains concentrated in the irrigated farm sector also contributed to this resilience, as demonstrated above. Last but not least, the income support and subsidy programs maintained by the Mexico after 1994 might have also helped sustain agricultural dynamism during this period. The domestic support policies merit further attention. As described earlier, agriculture in Mexico had historically enjoyed ample public support, although the programs were quite inefficient in economic terms. With the advent of the agricultural reforms, the quantity and quality of the support programs changed. Figure 8 shows the evolution of the total support for traditional agriculture and its corresponding components relative to gross farm receipts, as reported by the OECD (2000). On the one hand, it is clear that total support was not higher after NAFTA than on the average year prior to the implementation of the agreement. Hence the resilience of the traditional sector was not due to an increase in total support. On the other hand, the composition of this support was changed with the advent of PROCAMPO. Beginning in 1994, about 50% of total support was administered through PROCAMPO, which as explained earlier, the income subsidies provided by this program are de-linked from current and future production decisions. This contrasts notably with the situation prior to 1994, when most domestic support was concentrated in so-called “Market-Price Supports” (MPS) which compensate farmers for low commodity prices, and thus tend to distort production decisions. Upon comparing the annual averages of total producer support estimates as a whole during 1999- 2001 in the U.S. (23%), Canada (18%) and Mexico (18%), we find that Mexico has converged to the 93 Besides NAFTA, the relative prices of Mexican agricultural commodities fluctuated dramatically during this period due to the wild fluctuations of the real exchange rate and due to international market conditions, such as the severe Asian financial crises of 1997-1998. 93 imports of poultry. This is also a recommendable action in face of the political economy considerations that need to be addressed in the short run. The government also responded by providing further subsidies for agricultural inputs, such as electricity and diesel fuel. Again, these actions are undoubtedly short-term solutions to a mainly political situation. Yet in the medium and long run these are not solutions for the competitiveness of Mexican agriculture. The long run profitability of Mexican producers depends crucially on the their capacity to plant new crops and/or produce processed foods. To support these efforts, the government can take a closer look at its agricultural research and extension support services, which are related to the its national innovation system discussed in chapter 5 of this report. In addition, the public sector needs to evaluate the current infrastructure needs of the agricultural sector, including its roads, ports and irrigation infrastructure. All of these are and should be an integral part of the country’s rural development strategy in the context of an open North American economy that supplies one of the most competitive and dynamic agricultural production and consumption centers in the world—the U.S. economy. This does mean that regional (encompassing the U.S., Canada and Mexico) cooperative efforts to support agricultural research and extension services supported by the public sector, as well as infrastructure investments, could be an integral part of Mexico’s rural development agenda in the next five years, prior to the disappearance of PROCAMPO. The hope is that by that time, PROCAMPO could be substituted by an even more efficient regional system of agricultural transformation policies, where temporary protection plays only a very limited role. 3.4 NAFTA’s antidumping and countervailing duties94 With the success of GATT/WTO rounds in reducing traditional forms of trade protection, such as tariffs and quotas, recent focus by economists and policymakers has been on the use of antidumping (AD) and countervailing duty (CVD) laws by WTO-member countries. There is concern that the growing adoption and use of these laws by countries may threaten to roll back the free trade gains negotiated in GATT/WTO rounds since the end of World War II.95,96 In recent WTO meetings it has become apparent that traditional users of AD/CVD laws, particularly the United States, have been extremely reluctant to even allow these practices to be subject to future WTO negotiations. (See below, under the section concerning Mexico’s AD/CVD system before and after NAFTA for a review of technical criteria used for deciding whether to impose AD/CVD duties. These are quite similar across countries.) Likewise, treatment of AD/CVD practices has been a contentious issue for recent preferential trading arrangements (PTAs) negotiated by the United States. In negotiations for the Canada-U.S. Free Trade Agreement (CUSFTA) implemented in 1989, Canada originally proposed exemptions for both countries from each other’s AD/CVD actions. Given strong U.S. objections to this, a compromise was eventually reached to establish binational panels to review AD/CVD actions between the two countries when requested by an involved party (Gantz 1998).97 This compromise was codified in Chapter 19 of the CUSFTA. The role of these binational panels is limited to determining whether a country appropriately follows its own national AD/CVD laws in making a particular determination. Thus, national AD/CVD laws were not changed and cannot be questioned by the review panels, which was a crucial issue for the 94 This section draws heavily from Blonigen (2002). 95 See Prusa (2001) for analysis of the recent spread of AD/CD laws and their use across WTO member countries. Blonigen and Prusa (forthcoming) provides an extensive survey of the academic literature on the economics of AD activity. 96 While AD/CVD activity often involves narrowly-specified import products, the high duties often imposed and other features of the administration of these programs can lead to quite significant welfare impacts. Gallaway, Blonigen and Flynn (1999) estimate that U.S. AD/CVD programs cost the U.S. $4 billion annually using 1993 data. This placed AD/CVD programs as second only to the Multi-Fiber Arrangement in terms of welfare costs to the U.S. 97 This Chapter 19 review process of AD/CVD actions by binational panels was separate from a more general dispute settlement mechanism for all NAFTA-related issues stipulated in Chapter 20 of CUSFTA and NAFTA. 94 U.S. On the other hand, the process provides an alternative to having national courts handle appeals of AD/CVD decisions, thus providing the possibility for greater impartiality of the review.98 An almost identical Chapter 19 was ultimately adopted in the subsequent NAFTA agreement as well, but not before the U.S. rejected calls by Canada for the NAFTA countries to exempt each other from their AD/CVD actions. In addition, there was substantial concern from both the U.S. and Canada over Mexico’s AD/CVD laws and their application, which led to agreements by Mexico to make major procedural changes in their AD/CVD laws before implementation of NAFTA.99 Likewise, treatment of AD/CVD laws is a major concern in negotiations for a Free Trade Area of the Americas, with the U.S. unlikely to accept any concessions that would restrict their ability to apply U.S. AD/CVD laws.100 The role of AD/CVD laws is already an important issue for future trade negotiations over PTAs and in the multilateral arena under the aegis of the WTO. Studying the impact of the change in the appeals process afforded through Chapter 19 of CUSFTA and NAFTA holds to answering a key policy question: Did this change alter incentives sufficiently to impact AD/CVD activity. To date, there has been very little literature examining these issues.101 The main exception is Jones (2000), which points out that the creation of Chapter 19 binational review panels has the potential to create many more successful appeals by parties becoming subject to AD/CVD duties. This, in turn, would limit the success of domestic groups that file such actions and could lead to diminished AD/CVD activity toward other NAFTA countries. Importantly, the level of activity in the NAFTA dispute settlement process for AD/CVD cases has been substantial, with approximately 75 reviews since CUSFTA began in 1989. On the other hand, PTAs obviously reduce trade barriers in general and lead to increased trade flows. AD/CVD decisions are supposedly based on whether imports are injuring domestic industries, so that increased import activity from a region may make this injury determination more likely, leading to a greater probability of affirmative decisions. This in turn gives domestic industries greater incentives to file AD/CVD cases, raising the level of AD/CVD filing activity. In summary, the effect of CUSFTA and NAFTA on U.S. AD/CVD activity against NAFTA countries is an open question because of these opposing effects of increased trade and a new binational dispute settlement process. The following sections empirically examine U.S. AD/CVD actions from 1980 through 2000 to determine the effects, if any, of the CUSFTA and NAFTA on U.S. AD/CVD activity with respect to Canada and Mexico, and Mexican cases against the other two countries.102 Jones (2000), the only paper to empirically examine this issue, finds that both U.S. AD filings against Canada and Canada’s AD filings against the U.S. significantly drop after the CUSFTA agreement. This is attributed by Jones to the new binational dispute settlement process put into place by CUSFTA and NAFTA. However, this is true for all regions of the world as shown in Table 4. Hence understanding the impact of NAFTA’s Chapter 19 on Mexico’s and Canada’s vulnerability to U.S. AD/CVD activity requires more careful analysis presented in 98 The national courts of appeals for unfair trade cases are the U.S. Court of International Trade, the Federal Court of Canada, and the Federal Fiscal Tribunal for the U.S., Canada and Mexico, respectively. 99 See Geisze (1994) for more details on the historical evolution of Mexican AD/CVD laws. 100 For example, a January 31, 2001, front-page article by Gazeta Mercantil reported that AD issues led to a negotiation impasse between Brazil and the U.S. in FTAA negotiations. 101 A small set of law journal articles and U.S. Government Accounting Office (GAO) reports have observed a number of developments with respect to the operation of the binational review panels stipulated under Chapter 19. Gantz (1998), Pippin (1999), U.S. General Accounting Office (1997), and Vega-Canovas (1997) provide descriptive assessments of how well the binational panel system of Chapter 19 reviews have worked in fulfilling their stipulated goals. These issues will be discussed more below. 102 The primary focus on U.S. AD/CVD activity is due to data accessibility issues, as well as the fact that the U.S. is the largest market in NAFTA and user of AD/CVD laws. 95 the following section. We examine the geographic and other trends of Mexican AC/CVD activity later in this chapter. Table 4. Average Annual U.S. Antidumping and Countervailing Duty Filings by Named Country/Region and by Select Time Periods. Pre-CUSFTA Pre-NAFTA 1980-1988 Post-CUSFTA Pre-NAFTA 1989-1993 Post-CUSFTA Post-NAFTA 1994-2000 NAFTA-partners Canada 3.9 4.3 1.6 Mexico 1.1 3.8 1.7 Other countries/regions Japan 7.6 6.3 3.3 European Union 32.7 20.3 8.3 Latin America 10.8 11.3 4.0 Asia 13.8 22.3 14.6 Rest of the World 14.1 11.5 9.1 Sources: U.S. Antidumping Database available from the National Bureau of Economic Research webpage: http://www.nber.org/antidump/, and official sources of the U.S. Department of Com- merce and U.S. International Trade Commission. 3.4.1 U.S. AD/CVD activity towards NAFTA partners: Did Chapter 19 help? As mentioned, U.S. and Mexico’s AD/CVD activity is likely to be affected not only by NAFTA but also by macro (Feinberg 1989; Knetter and Prusa 2000), industrial, and microeconomic conditions (Finger et al. 1982; Feinberg and Hirsch 1989; Blonigen and Prusa 2002) that are known to explain AD/CVD activity in various countries. To examine the impact of NAFTA’s Chapter 19 Blonigen (2002) estimated various econometric models of such activity in the U.S. where NAFTA case fillings are only part of the explanation. The results are presented in Table 5. The most notable finding is that neither Canadian nor Mexican Chapter 19 filings against U.S. decisions are significant determinants of U.S. AD/CVD activity. Blonigen (2002) conducts further exercises to test for the robustness of these results. In one set of econometric experiments, Blonigen tests the importance of other aspects of the NAFTA review mechanism. He finds that, in the case of Mexico, the number of remands per year (i.e., the number of cases determined to be wrongfully assessed against Mexico by the NAFTA experts panel), the number of accumulated remands, and the accumulated number of filings by Mexico are all not significant determinants of U.S. AC/CVD activity. In contrast, Canadian cumulative filings and cumulative remands do seem to reduce this country’s vulnerability to U.S. AD/CVD investigations. The aforementioned results were unchanged when Blonigen examined only steel-related cases filed by the U.S. (Table 6 contains a statistical summary of CUSFTA and NAFTA filings against U.S. AD/CVD cases.) 98 changed as a result of the Uruguay Round and it embodied the WTO criteria.106 The key organizational innovation of this law was the creation of the International Trade Practices Unit (“Unidad de Practicas Comerciales Internacionales, or UPCI in Spanish). The UPCI is the government agency accountable for the filing and investigation of AD/CVD practices in Mexico. The UPCI is responsible for the following activities: • Advise the Minister of Economy about the application and size of AD/CVD duties; • Serve as the general advisor of the federal government on AD/CVD and escape clause issues; • Provide assistance on the formulation of LCE reforms, regarding AD/CVD and escape clause issues; • Explain and defend the Ministry’s AD/CVD resolutions in international agencies (local authorities), and • Offer technical and legal assistance to Mexican firms involved in AD/CVD investigations from other countries. In order to understand further the types of technical responsibilities held by the UPCI, we must first review the legal definitions of “dumping” and other relevant terms, for they explain to a significant extent why AD/CVD duties in Mexico, the U.S. and around the world can easily become sources for the reversal of trade reforms through these so-called administrative procedures. Indeed, given the lax criteria used for identifying dumping and foreign subsidies of private firms, some analysts have concluded that, at least in the case of the U.S., the real puzzle is not why AD/CVD actions are so popular among private firms and governments, but why they are not used more often (Prusa 1992). Dumping The case for dumping or price discrimination is called whenever a firm that exports a particular good does it at a price that is less than the prevailing one at the exporter’s market. An important remark is the fact that dumping per se is not forbidden by law; unfair competition holds when the imports cause material damage (or potential damage) to the importing country’s industry. There are two key elements on the analysis of an AD investigation. The first is the export price of the good. The second is the price of a similar good on the exporting country’s market. The comparison between both prices leads to the dumping margin. Some of the potential motivations for firms to engage in dumping activities are: • It wishes to improve its competitive position through an increased market share (generally on countries where it has a low participation ratio); • Seeks to sell excess production; • As a part of its benefit maximization process (price discrimination on the basis of demand elasticities), and • Market predation, through the elimination of rival firms. 106 It should be noted that each country establishes their own AD/CVD policies according to general GATT/WTO principles. Such guidelines, however, are generally vague, thus leaving each country’s legislation to interpret them. However, a key criteria is that AD/CVD laws should allow some legal appeals or review mechanism. 99 CVD duties The exporting firm may not always be directly responsible for the low prices. In some cases, the government of the exporting firm’s country provides subsidies to its companies, therefore reducing the effective export price. In a CVD analysis, there are three basic elements. First, the amount of the subsidy; second, the export price –considering the subsidy; and, third, the export price that would have prevailed had been no subsidy. The comparison between both prices results in the CVD margin. Similar to the AD case, the granting of subsidies is a necessary but not sufficient condition for an affirmative duty resolution. CVD duties can only be applied when the subsidies are responsible for damage (or potential damage) to the domestic industry.107 Damage assessment criteria Mexico’s legislation does not allow duty imposition under the sole excuse of dumping or government subsidies; these conditions are a necessary but not sufficient condition. In addition to these conditions, it is required to prove that these actions have caused material damage (or are a potential threat) to the domestic industry, as well as a cause–effect relationship between the AD/CVD activities and the industry’s injury. The same is true in the U.S. and Canada. The methodology designed to test for injury to a domestic industry is composed of five steps: First, the authorities have to ensure that the domestic product under investigation is identical (or similar) to the imported one. The latter obeys the fact that AD/CVD duties can only be applied when both products have similar characteristics, serve the same purposes and functions, and can be commercially interchanged. The second step requires an assessment of the size of the filing firm, relative to the industry. Since the firm can be either a major participant or a small fraction of the entire market, the fact that a firm is being affected by imports does not necessarily mean that the industry as a whole is also being damaged. This analysis allows authorities to determine if the investigation must be done (considering the injuries done to the industry), and to identify which firms must be excluded from the process, either because they are importers of the good, or because they are linked to importers or exporters. The third step requires the study and evaluation of the importing country’s market, both on national consumers as well as the distribution channels (on the filing country) of the merchandise, given the fact that the structure and channels of the product’s distribution are an important part of the injury analysis. The fourth requirement, the causality test, is probably the most important step on the determination of injury against a certain industry. First, it is necessary to determine if the surge on imports has caused the national (as well as foreign competitor’s) good to be displaced from the market. Also, it must be verified that the imports were sold on the same distribution channels and market niches, as well as the same clients. Second, the authorities need to analyze if the imported goods affected domestic prices, and if the market share of these imports is related to their price level. Third, a cause–effect relationship must be discovered, relating imports and the main variables of the affected industry. And finally, the effect of exogenous variables over the performance of the industry must be isolated, thus giving a clear picture of the causality between imports and industry behavior. While these criteria (and the previous ones concerning the margin of dumping and subsidies) seem reasonable, they can easily satisfied when trading partners experience macroeconomic fluctuations such as exchange-rate changes. 107 International legislation classifies such subsidies into three groups. Non-actionable (subsidies that have no effect on international trade, such as health or education transfers—no duty is applied); actionable (subsidies that are specific and either [a] injur the domestic industry of another member [defined the same way as with antidumping duties]; [b] nullify or impair benefits under GATT, or [c] cause serious prejudice to the interests of another member—a duty may be applied), and prohibited (direct transfers granted to increase exports—duties applied). 100 Generally, the size of the AD/CVD duty is equivalent to the dumping or CVD margin, but this is not always the case. The UPCI can impose a lesser duty,108 so as to minimize the impact of this action over related productive chains that can be affected because of the price increase. That is, the UPCI can consider the potential impact of such duties on consuming industries. Mexican, as well as U.S. and Canadian laws, do not consider the impact of these duties on non-corporate consumers, which might result in rather large welfare losses (Gallaway, Blonigen and Flyn 1999). As in the U.S., AD/CVD duties imposed by a final resolution in Mexico are not necessarily permanent; they can be reviewed, in order to determine if the conditions that originally led to their imposition have changed, therefore allowing the duty to be reduced, revoked or confirmed. The LCE states that the revisions can be requested on the monthly anniversary of the resolution; however, the UPCI can start an official revision at any time if it considers that the general circumstances that originated the duties have changed. The new duties will be considered final, and therefore will be subject to new revisions on further years. In Mexico, if the duties have not been reviewed in the past 5 years, they will automatically expire, which is different from the laws in the U.S. where AD/CVD duties do not automatically expire. • In order to clarify particular situations that may arise from the interpretation of both the LCE and UPCI’s rulings, special procedures have been designed:109 • Product reach: duties are imposed over tariff lines. However, the same tariff line can include products that are not related to the AD/CVD investigation; in these cases, a special procedure is called upon, in order to exempt (or confirm) duties for the specific good (generally at 4 or 5- digit Standard Industry Classification [SIC]). • Benefit extension: Mexican legislation states that UPCI’s rulings are always extensive to other firms, given that the interested part demands the special procedure and proves that it has the same legal situation as the original firm. • Isolated market determination: in the cases where AD/CVD injury is determined, it may not be the case that the damage is nationwide. For some special industries, the injured firms can be located in a defined area (for example, in a particular state or region). Using this special procedure, duties are only paid for the imported products that are destined to that specific area. The mechanisms designed to appeal AD/CVD decisions made by the UPCI and the equivalent authorities worldwide are diverse. Broadly speaking, disputes about the final resolutions dictated by the unit can be solved using a variety of channels (considering that the specific procedure will depend upon the conditions of the FTA between Mexico and the affected country; if no FTA exists, higher authorities must be consulted, like the WTO). Of particular importance to the analysis is the Mexican review system, as well as the aforementioned NAFTA Chapter 19 bilateral panels, both designed to provide an alternative review procedure to the national appeals processes.110 According to the LCE, interested parties can request a review of the UPCI’s decision, through administrative and judicial procedures. The administrative review process requires that the interested party presents the case to the UPCI within 45 day of the (original) final resolution. The LCE states that the UPCI is required to present a new resolution within 4 months. This new resolution can revoke, modify or confirm the original decision. Once the UPCI states its new resolution, if the interested party is not satisfied with the result, a judicial review process can be requested. In this case, the decision corresponds 108 This practice is known as lesser duty rule. 109 The following is not an exhaustive listing. For more details, see Unidad de Prácticas Comerciales Internacionales (1997). 110 For a more detailed description, see Leycegui (1997). 103 explanatory variables as determinants of AD filings by Mexico that might lead private firms to petition the UPCI for AD protection or that might affect the decisions of this organization due to the political consequences of industry-specific economic conditions. The chosen variables were the relevant bilateral real exchange rates and imports over GDP or import penetration (lagged one year), which might lead domestic firms to file AD petitions with UPCI and might lead the UPCI to find AD margins. Second, the authors considered variables that might have had additional direct effects on the UPCI decisions due to their political effects. Among these, the authors included the unemployment rate, value added or GDP performance at the industry level, and other unobserved country effects. Among the latter the analysis included dummies for the U.S. and Canada, as well as effects affecting these two countries on or after 1994. Table 8. Negative Binomial Maximum Likelihood Estimates of the Determinants of the Number of Mexican AD Cases and AD Duties, 1990-2001 1 2 3 4 5 6 Dependent Variable: Number of AD Filings Number of AD Duties Imposed RER 0.0061015 (0.020) 0.0047688 (0.048) 0.0053335 (0.038) 0.0116214 (0.000) 0.0101621 (0.000) 0.018514 (0.000) Unempl. 0.2242873 (0.144) 0.272863 (0.062) 0.2862045 (0.074) -0.1273622 (0.555) -0.0717797 (0.735) -0.0470322 (0.833) GDP -0.0590344 (0.274) -0.0602689 (0.234) -0.0580375 (0.288) -0.1445165 (0.041) -0.1352548 (0.051) -0.1321254 (0.067) Import Penetration 68.1348 (0.011) -74.99109 (0.249) 79.57851 (0.103) 72.37415 (0.026) -50.77837 (0.545) 97.42099 (0.107) Canada -1.895202 (0.001) -2.51075 (0.023) U.S. 2.041655 (0.041) 1.70415 (0.180) Canada94 -1.518103 (0.025) -2.015274 (0.087) US94 -0.40218 (0.641) -0.734402 (0.509) Log likelihood -152.54127 -144.81949 -149.80907 -111.20824 -106.23789 -108.99635 Pseudo R 2 0.0578 0.1055 0.0746 0.0826 0.1236 0.1009 Note: The table reports the coefficients from the regression. P-values in parenthesis. Source: Esquivel and Solis (2002). The results in Table 5 imply that the real exchange rate and import penetration are important determinants of both the number of filings and of the number of positive findings by the UPCI, as shown across the six columns of Table 8. In contrast, GDP performance and the unemployment rate alternate in significance, depending on the variable under analysis. In the case of AD filings, the relevant variable is the unemployment rate, and GDP is never significant. For the case of AD duties, GDP performance is the key variable. In any case, the inclusion of dummy variables in the model shows a differentiated effect for the United States and Canada, depending on the period under analysis. Canada’s effect is negative, while the United States’ is positive for the entire period (1990–2000) but zero considering the NAFTA years (1994–2000). We interpret these results as suggesting that NAFTA had a notable effect in reducing the U.S. vulnerability to Mexican AD actions, although the U.S. tends to be more vulnerable than other 113 Esquivel and Solis (2002) focus on Mexico’s AD activity because AD cases completely predominate over CVD and even safeguards cases in Mexico. AD cases accounted for over 90% of total cases during the period under study. 104 countries to such actions. As mentioned earlier, this is true only for the number of AD filings, but for the number of positive findings, where countries such as China are significantly more vulnerable. These results are interestingly different from those concerning Mexico’s vulnerability with respect to U.S. action, which showed (see above) that NAFTA had not had a significant impact on Mexico’s vulnerability, although Mexico has always been less vulnerable than other countries. Thus these are exactly the opposite of the results concerning the U.S. vulnerability to Mexican AD actions. 3.4.4 Policy implications regarding AD/CVD activity under NAFTA The findings discussed in the previous sections have important implications not only for Mexico but also for other countries from Latin America and the Caribbean who are in line to implement (Chile) or negotiate FTAs with the U.S. (Central America). The results have implications for future FTA and WTO round negotiations, as the Chapter 19 dispute settlement process was likely intended to reign in abuse of these laws by the U.S. In both the CUSFTA and NAFTA, the U.S. clearly tried to thwart any attempt by the partner countries to affect their application of AD/CVD laws. These intentions are now explicitly stated in the 2002 Trade Promotion Authority granted by the U.S. Congress to the Executive branch. The compromise solution of Chapter 19 binational dispute settlement procedures for AD/CVD cases had the potential to affect AD/CVD activity because it allowed for timely dispute settlements by panels representing both countries involved in the case to supercede appeals to national courts. A critical holdover, however, was limiting the Chapter 19 panels (as with the national appeals courts) to only rule on whether a country has appropriately applied its own AD/CVD laws and practices. Given sufficiently ambiguous laws about the practice of determining dumping, subsidization and injury, a whole range of practices can be ruled consistent. In addition, the panels have no ability to enforce judgments. While government agencies from all three countries have mainly complied with remands from the panel, this process did not resolve the largest trade dispute it has faced, the softwood lumber case with Canada, which led to direct governmental negotiations. Some remands connected with U.S. cases against Canada have led to significant changes in judgments in a handful of cases, which may by why there is some evidence of the effect of cumulative remands with respect to Canada. There are no such “successful” remands concerning initial U.S. AD/CVD cases against Mexico to date. In fact, a worry with the Mexican experience is the long delays in the dispute settlement process, which makes it very unlikely it will affect U.S. behavior in the near future. Thus, while it may make government agencies more vigilant in maintaining consistency in how they apply their laws, Chapter 19 has little power to affect real change in AD/CVD laws and practices. This realization led Chilean negotiators not to accept language similar to NAFTA’s Chapter 19 in its recent FTA negotiations with the U.S. This begs the question of possible avenues that current and future partner countries may have to persuade the U.S. to reform or eliminate its AD/CVD laws. One option is more aggressive retaliatory AD/CVD activity against the U.S. Both Canada and Mexico have substantial enough trade volumes to be able to create effective retaliation. There are a number of reasons why this is not a good strategy. First, estimates reported by Blonigen (2002) showed that U.S. AD/CVD actions do not seem to be affected by AD/CVD activity in the Canada and Mexico against the U.S. Second, such strategies could just as easily lead to a trade war, rather than an agreement to “disarm.” A second option is to make efforts to harmonize competition policies and push for folding antidumping policies into a common competition policy. Were AD/CVD practices subject to the same strong criterion for action as current competition policy (at least in the U.S.), we would likely see almost the complete elimination of successful AD/CVD cases. However, this is exactly the problem. AD/CVD laws are explicitly devised to benefit only domestic producers, even at the expense of competitive markets 105 and the welfare of consumers, which is in direct contradiction with competition policy. Thus, limiting AD/CVD use through harmonization with competition policy is likely a very long and difficult road. A final alternative may be negotiate a new safeguards agreement with the U.S. and Canada and to agree to use safeguard actions rather than AD/CVD laws. Safeguard protection allows for governments to impose temporary protection for a domestic industry, provided that imports are a significant cause of injury to the domestic industry. The explicit condition that safeguard actions are temporary is a definite improvement over AD/CVD cases, as the U.S. currently still assesses AD/CVD duties from cases as far back as the 1970s. In Mexico, the only applicable “sunset” clause is the one that states the AD/CVD duties can be removed after five years if there have not been any reviews of the cases during that time span. In addition, the injury test for safeguard actions requires a more stringent test that imports are a significant cause of injury, not just a nontrivial one. There is no required finding of dumping or subsidization for safeguard actions, but this criterion is virtually always passed anyway in AD/CVD cases. No calculation of dumping/subsidization also makes it more transparent that the action is political, rather than falling under the guise of promoting “fair trade practices,” despite having no economic basis. Finally, since safeguard actions must necessarily involve presidential action, it ensures that only nontrivial trade actions take place. This feature also forces leaders to consider the overall political implications of imposing taxes that hurt voters and other interested parties. Table 9. Characteristics of Agricultural Support Programs in Mexico and the United States Characteristic Mexico: PROCAMPO 1994 U.S.: FAIR implemented 1996 Objective To compensate producers for the elimination of guarantee prices on support crops To compensate producers for the elimination of deficiency payments Payment basis Average acreage in support crops during 1991-93 Acreage for which deficiency payments were received in any of the past 5 years. Base years were updated in 2002 extension. Supported products Wheat, maize, sorghum, barley, rice, cotton, beans, soybean, safflower Wheat, maize, sorghum, barley, rice, cotton, oats Time profile Total of 15 years: first 10 years fixed in real terms; declining in final 5 years Program lapsed after 7 years but was extended in 2002. Payment limits $6,700 per farm $40,000 per farm Restrictions on the use of support-crop land Land should be allocated to support crops but since 1996 land can be allocated to other agricultural uses Land should be kept in agricultural uses(excluding fruits and vegetables);use must be in compliance with existing conservation plans Other features “Negotiated” prices in effect for the first 2 transition years of the program; floor prices are retained for maize and beans Nonrecourse government guaranteed commodity loans are retained in modified form Note: The upper limit for PROCAMPO payments is 100 hectares and the per hectare payment is currently 484 Mexican pesos, or approximately US$6,700 (at 7.2 pesos/US$). Following the 1994 devaluation, PROCAMPO payments were not fully adjusted to inflation. Source: USDA(1996); SARH (no date). 108 Casco, A. And F\A. Rosensweig: 2000, La política sectorial agropecuaria en México: Balance de una década, Instituto Interamericano de Cooperación para la Agricultura (IICA), México, Cord L. and Q. Wodon, “Do agricultural programs in Mexico alleviate poverty? Evidence from the ejido sector”, Cuadernos de Economía, v.38 n.114 Aug. 2001. D.F. CONASUPO: 1986, 1988 and 1989, Informe de Actividades del Sistema CONASUPO, Dirección de Planeación, Mexico. Davis, B. et.al. (June, 2002), “Conditionality and the impact of program design on household welfare. Comparing the effects of two diverse cash transfer programs on the rural poor in Mexico”, FAO, Mimeo. De Melo, Jaime, and A. Panagariya (1992), New Dimensions in Regional Integration; CEPR. DeVault, James M. (October 1993). “Economics and the International Trade Commission,” Southern Economic Journal, Vol. 60(2): 463-478. Direction of Trade Statistics. Yearbook. (Various years). Washington, DC: International Monetary Fund. Economic Report of the President to the Congress. (2002). Washington, DC: U.S. Government Printing Office ERS (Economic Research Service of the U.S. Department of Agriculture): August: 1999, ERS NAFTA REPORT.pdf, WRS-99-1, at www.econ.ag.gov ——— March 2000, ERS Commodity Report (NAFTA).pdf at www.econ.ag.gov Esquivel, Gerardo, D. Lederman, M. Messmacher and R. Villoro (2002), “Why NAFTA Did Not Reach the South”; mimeo. Estevadeordal, Antoni (2000), “Negotiating Preferential Market Access: The Case of the North American Free Trade Agreement”, Journal of World Trade 34, 141-2000. Etcheveri-Caroll, Elsie (1999), “Industrial Restructuring of the Electronics Industry in Guadalajara, Mexico: from Protectionism to Free Trade”; University of Austin Bureau of Economic Research. FAO and SAGARPA, 2000, Evaluación de la Alianza Para el Campo: Informe Global, http://www.rlc.fao.org/prior/desrural/document/alianza.htm Feinberg, Robert M. (November 1989). “Exchange Rates and Unfair Trade,” Review of Economics and Statistics, 71(4): 704-707. Feinberg, Robert M. and Barry T. Hirsch. (1989). “Industry Rent Seeking and the Filing of ‘Unfair Trade’ Complaints,” International Journal of Industrial Organization, Vol. 7(3): 325-340. Finger, J. M., H. Keith Hall, and Douglas R. Nelson. (June 1982) “The Political Economy of Administered Protection,” American Economic Review, Vol. 72(3): 452-466. Frankel, Jeffrey (1997), Regional Trading Blocs in the World Trading System. Institute for International Economics. Gallaway, Michael P., Bruce A. Blonigen, and Joseph E. Flynn. (December 1999) “Welfare Costs of the U.S. Antidumping and Countervailing Duty Laws,” Journal of International Economics, Vol. 49(3/4): 211-244. Gantz, David. (Spring 1998). “Resolution of Trade Disputes Under Nafta's Chapter 19: The Lessons of Extending the Binational Panel Process to Mexico,” Law and Policy in International Business, Vol. 29: 297- Giesze, Craig R. (1994). “Mexico’s New Antidumping and Countervailing Duty System: Policy and Legal Implications, As Well As Practical Business Risks and Realities, for United States Exporters to Mexico in the Era of the North American Free Trade Agreement,” St. Mary’s Law Journal, Vol. 25: 885- Hansen, Wendy L. and Thomas J. Prusa. (May 1997) “The Economics and Politics of Trade Policy: An Empirical Analysis of ITC Decision Making,” Review of International Economics, Vol. 5(2): 230-245. Helfand, Steven M. and Castro de Rezende, Gervásio, Sept. 2001, "The impact of sector-specific and economy-wide policy reforms on agriculture: the case of Brazil, 1980-98, Working Paper 01-34, Department of Economics, University of California, Riverside, Sept. 2001. 109 Herin, Jan (1986), “Rules of Origin and Differences Between Tariff Levels in EFTA and in the EC”, EFTA Occasional Paper 13. Hernandez Estrada: 2000, "Tipología de productores agropecuarios", in Yuñez-Naude, A. (Editor) Los Pequeños Productores Rurales: Las Reformas y las Opciones, El Colegio de México. Information workshop, Puerto Vallarta the paper is available at www.farmfoundation/... Holmes, Peter and G. Shephard (1983), “Protectionism in the Economic Community”, International Economics Study Group, 8th Annual Conference. Hombeck, Jan F. (1998), “Maquiladoras and NAFTA: The Economics of U.S.-Mexico Production Sharing and Trade”; CRS Report for Congress 98-66E, www.cnie.org/nel/crsreports. Jones, Kent. (April 2000). “Does NAFTA Chapter 19 Make a Difference? Dispute Settlement and the Incentive Structure of U.S./Canada Unfair Trade Petitions,” Contemporary Economic Policy, Vol. 18(2): 145-158. Ju, Jiandong, and Kala Krishna. 1998. “Firm Behavior and Market Access in a Free Trade Area with Rules of Origin.” NBER Working Paper Series 6857, Cambridge, Massachusetts. Knetter, Michael M. and Thomas J. Prusa. (November 2000). “Macroeconomic Factors and Antidumping Filings: Evidence from Four Countries,” National Bureau of Economic Research Working Paper No. 8010. Koskinen, Matti (1983), “Excess Documentation Costs as a Non-tariff Measure: an Empirical Analysis of the Import Effects of Documentation Costs”, Working Paper, Swedish School of Economics and Business Administration. Krishna, Kala and A. Krueger (1995), “Implementing Free Trade Areas: Rules of Origin and Hidden Protection”; NBER working paper #4983. Krueger, Anne O. (1999), “Trade Creation and Trade Diversion Under NAFTA”, NBER working paper 7429. Krueger, Anne O. 1993. “Free Trade Agreements as Protectionist Devices: Rules of Origin.” NBER Working Paper Series 4352, Cambridge, Massachusetts. Krueger, Anne O. 1997. “Free Trade Agreements versus Customs Unions.” Journal of Development Economics 54: 169-187. Krueger, Anne O., M. Schiff, and A. Valdés (editors), 1991, The Political Economy of Agricultural Pricing Policy, Volume 1: Latin America, Baltimore: The Johns Hopkins University Press, 1991. Levy, S. and S. van Wijnbergen: 1991. “Mexican agriculture in the free trade agreement: Transition Problems in Economic Reform”, OECD Development Centre, Technical Papers No. 63, 1992. Levy, Santiago, and Sven van Wijnbergen. 1994. “Labor Markets, Migration, and Welfare: Agriculture in the North American Free Trade Agreement.” Journal of Development Economics 43: 263-278. Lopez-Cordova, J. Ernesto (2001), “NAFTA and the Mexican Economy: Analytical Issues and Lessons for the FTAA”, IDB, ITD-STA Occasional Paper 9. Moore, Michael O. (July 1992) “Rules or Politics? An Empirical Analysis of ITC Anti-dumping Decisions,” Economic Inquiry, Vol. 30(3): 449-466. OECD: 1997, Examen de las políticas agrícolas de México: políticas nacionales y comercio agrícola, Paris. OECD: 2000, Agriculture and Food: Producer and Consumer Support Estimates. OECD data base: 1986-1999, Edition in Compact Disk). Orden, David: March 2002, “Partial Easing of U.S. Avocado Restrictions through a Systems Approach to Pest”, paper presented at the Eighth Agricultural and Food Policy Pippin, Kenneth J. (Fall 1999). “An Examination of the Developments in Chapter 19 Antidumping Decisions Under the North American Free Trade Agreement (NAFTA): The Implications and Suggestions for Reform for the Next Century Based on the Experience of NAFTA After the First Five Years,” Michigan Journal of International Law, Vol. 21(1): 101-130. Prusa, Thomas J. (August 1992). “Why Are So many Antidumping Petitions Withdrawn? Journal of International Economics. Vol. 33(1/2): 1-20. 110 Prusa, Thomas J. (August 2001). “On the Spread and Impact of Anti-dumping,” Canadian Journal of Economics, Vol. 34(3): 591-611. Prusa, Thomas J. and Susan Skeath (August 2001). “The Economic and Strategic Motives for Antidumping Filings,” National Bureau of Economic Research Working Paper No. 8424. Quiroz, Jorge and Alberto Valdes, 1993, “Agricultural Incentives and International Competitiveness in Four African Countries: Government Interventions and Exogenous Shocks,” in Agricultural Policy Reforms and Regional Market Integration in Malawi, Zambia, and Zimbabwe, edited by Valdés, Alberto and Kay Muir-Leresche, Washington, D.C.: IFPRI. Quiroz, Jorge, and Luis Opazo, 2000 “The Krueger-Schiff-Valdés Study Ten Years Later: A Latin American Perspective,” Economic Developmnet and Cultural Change, 181-196. Robinson, S., M.E. Burfisher, R. Hinojosa-Ojeda and K.E. Thierfelder; 1991, "Agricultural Policies and Migration in a U.S.-Mexico Free Trade Area: A Computable General Equilibrium Analysis." UC Berkeley, Department of Agricultural and Resource Economics Working Paper No. 617, December. Rodríguez, Peter L. 2001. “Rule of Origin with Multistage Production.” World Economy 2: 201-220. Rodríguez, Peter L. 2001. “Rules of Origin with Multistage Production.”??? Rosenzweig, A.: 2000, "Mexican Agricultural Trade under NAFTA: Am Assessment after five years of implementation", paper presented at the, 7th Policy Disputes Information Consortium Workshop, San Diego, Feb. 16-19. Rosenzweig, A.: Dec. 2000, "On NAFTA: Mexican Experience after Six Years of implementation", draft of a paper to be presented at the 7th Policy Disputes Information Consortium Workshop, Tucson, February, 14-17, 2001. Sadoulet, Elisabeth, Alain de Janvry, and Benjamin Davis. 2001. “Cash Transfer Programs with Income Multipliers: PROCAMPO in Mexico.” FCND Discussion Paper No. 99, International Food Policy Research Institute, Washington, DC. SECOFI: 1994, Fracciones arancelarias y plazos de desgravación, Ed. Miguel Angel Porrúa, México. Shagam, S. and D. Plunkett: Dec., 1997 “Tariff Rate Quotas Administration in Mexico: 1994-97”, Paper presented at the IATRC, San Diego. Shwedel, Ken: March 2002, “Trade disputes in an unsettled industry: Mexican sugar”, paper presented at the Eighth Agricultural and Food Policy SAGAR, Programas y Proyectos en Apoyo al Campo 1996, July, 97, p. 22 Soloaga, Isidro and A. Winters (1999), “Regionalism in the Nineties: What Effect on Trade?”, mimeo, the World Bank. U.S. General Accounting Office. (1997) North American Free Trade Agreement: Impacts and Implementation. (Testimony before the Subcommittee on Trade, Committee on Ways and Means, House of Representatives.) Washington: DC: U.S. Government Printing Office. UNCTAD (2001), Improving Market Access for Least Developed Countries, United Nations, UNCTAD/DITC/TNCD/4. U.S. Customs (1998), NAFTA for Textiles and Textile Articles, 1998. USDA Economic Research Service (ERS): 1999, “ERS NAFTA Report”, August. USTR (2000), 1999 Annual Report of the President of the United States on the Trade Agreements Program, www.ustr.gov/html/2000tpa. Vargas, Lucinda (2001), “NAFTA, the U.S. economy and Maquiladoras”, El Paso Business Frontier, Federal Reserve Bank of Dallas. Vega-Canovas, Gustavo. (Spring 1997). “Disciplining Anti-dumping in North America: Is NAFTA Chapter Nineteen Serving Its Purpose?” Arizona Journal of International and Comparative Law, Vol. 14: 479- Wonnacott, Paul (1996), “Beyond NAFTA: The Design of a Free Trade Agreement of the Americas”, in Jagdish Bhagwati and Arvind Panagariya, eds., The Economics of Preferential Trade Agreements; The AEI Press.