The Impact of Liberalization of Agriculture in Mexico: from the GATT to NAFTA

By Ana de Ita

The radical character of the liberalization of the Mexican economy and agriculture has been praised by neo-liberal governments, multinational companies and international financial institutions. However, for the Mexican peasants, the impact of this process has been catastrophic and threatens their survival.

The aim of this paper is to analyze the main transformations in agricultural policy in Mexico in the framework of the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO). We will evaluate their impact on foreign trade, and on peasant-based agriculture, as an indication of the effects resulting from the unilateral liberalization of agriculture in an underdeveloped country, which is, moreover, a net importer of foodstuffs, dependent on structural adjustment policies, and with a weak and antidemocratic state, as is currently the situation in Mexico. The case of corn will be discussed as one of the worst examples.

Antecedents

Until 1982, the Mexican economic model was guided by a policy of important substitution for the domestic market. In agriculture, protectionism, regulation, and subsidies were the key elements that allowed the country to achieve self-sufficiency in food from the 1940s until the mid-1970s.

After Mexico joined the GATT in 1986, the country's economy began an accelerated process of opening up to international markets through deregulation and privatization. In 1994, Mexico, Canada, and the United States signed NAFTA; Mexico was accepted in 1994 as a member of the OCED and participated in commitments derived from the Uruguay Round Agreement of the GATT in 1995.

The GATT and NAFTA are thus by far Mexico's most important international trade agreements. In the agricultural sector, both have the goal of achieving trade liberalization and are based on the same suppositions involving the internationalization of agriculture and making use of comparative advantages. For Mexico, the commitments acquired with the GATT are much blander than those negotiated as part of NAFTA.

NAFTA is the first treaty in which two developed countries and an underdeveloped nation are associated as equals. NAFTA does not grant Mexico additional advantages derived from a "special and differentiated treatment" that the GATT provides to underdeveloped countries. In addition, the chapter on agriculture negotiated between Mexico and the United States is the most radical on an international scale, since it includes all agricultural and agro-food commerce.

With the NAFTA negotiations, Mexico embarked on an ambitious and suicidal course. Although it is a country without any competitive level whatsoever, it totally opened its agricultural sector and threw itself, unprotected—without arms and against the stream—into a commercial battle in a world structured around protectionism and subsidies.

I. Modifications to Mexico's agricultural policies: differences between the GATT and NAFTA

Mexico's protocol agreement on joining the GATT (1986) stipulated its right to manage its agricultural policy in accordance with the national interest of improving production, maintaining the ejido (semi-communal farms, a product of the 1910-17 Mexican revolution) as a system of land ownership, defending the income levels and jobs of the population working in agriculture. The GATT granted Mexico treatment as an underdeveloped country. But by 1987, the Mexican government went beyond its commitments with the GATT and unilaterally reduced tariffs to only 20 percent.

As of 1989, the Mexican government decided to modernize the countryside "with some prodding kicks and blows from the market." It promoted a neoliberal program of modifying agricultural policy to diminish state intervention, strengthening the role of the market, and opening up agriculture to commerce and investment. The agricultural reforms (1989 to 1994) radically transformed relations in the countryside, defined a new framework of action for the peasants and their organizations, and culminated with the signing of NAFTA, which is the impediment that prevents moving back from the reforms.

NAFTA concurs with the measures and procedures adopted by the GATT in terms of market access and safeguards. Its differences are in the degree and pace of liberalization. NAFTA, which was negotiated before the Uruguay Round was concluded, required the three countries to accept the commitments resulting from a reduction in domestic support measures and export subsidies. For Mexico, the GATT-UR defined what were to be the upper limits of support measures and commercial protection.

NAFTA is of key importance for Mexico, since even before it was signed 75 percent of the country's exports were earmarked for the United States and 69 percent of imports came from that country. Therefore, NAFTA commitments to a large degree determine Mexico's policies.

The agricultural/animal husbandry sector provides 7 percent of the country's total GDP and involves about 23 percent of the economically active population. The main agricultural crops are basic grains and oil seeds (corn, beans, wheat, sorghum, soy, barley, and safflower), which take up 62 percent of cultivated land. Among these crops, corn is the most important in terms of volume, value, and cultivated land, involving three million peasants in its production, and it is the staple of the entire population's diet. According to the theory of comparative advantages, Mexico is not competitive vis a vis the United States and Canada in the production of basic grains, nor in cattle or timber, but does boast competitive levels in fruits and vegetables, which only account for 8.6 percent of cultivated land, and in tropical products (coffee and sugar cane), which use 7.4 percent of available land. In NAFTA, the Mexican government sacrificed the bulk of the agricultural sector, in exchange for advantages -more theoretical than real- for exports of fruits and vegetables.

Principal agricultural and agrarian reforms

1) The agrarian counter-reform
One of the main conquests of the peasant revolution of 1910 in Mexico was the land ownership system, under the form of the ejido or social property. Article 27 of the Constitution prevented large concentrations of land in a few hands and prohibited domestic or foreign mercantile societies from owning land. In the NAFTA negotiations, the ejido was considered a "non-tariff barrier" in preventing foreigners from receiving the same treatment as domestic subjects ("national treatment"). Article 27 was modified to promote a market in land and private investment, and to spur land privatization.

2) Elimination of protectionist measures for the agricultural sector:
Import licenses were the main protection for agricultural/meat producers. In 1984, 780 tariff clauses for the industry were subject to prior licensing; by 1990, only 33 remained, and they were eliminated in 1994 when NAFTA went into effect.

The base period for tarification in NAFTA, as in the case of GATT, is 1986-88. For Mexico, most agricultural/meat products have tariff charges no greater than 20 percent, due to the unilateral reduction decreed by the Mexican government in 1987. Through the tarification method, the import licenses that were still required became tariff-quotas before the agreement took effect. Only those products that had prior licenses are charged tariffs with rates that are rapidly being reduced and enjoy tariff-free import quotas (in-quota tariffs) equivalent to traditional imports before NAFTA.

3) Market access and tariff reduction commitments
During the period the GATT is in effect, that is 1995-2004, developed countries agree to reduce their tariffs by 36 percent on average, with a minimum reduction of 15 percent on each item, while developing countries agree to a 24 percent reduction. With NAFTA, Mexico agreed to liberalize the totality of its agricultural/meat trade, reducing its tariffs by 100 percent. The more sensitive products—corn, beans, powdered milk, chicken, barley, animal fats, and potatoes—are the exceptions, since they will continue to be protected against imports until the year 2008, when tariffs on these items will also be reduced to zero. In accordance with the GATT, tariffs on these products will also be reduced by 24 percent until the year 2004.

The sensitive products have a tariff-free import quota for the United States and Canada, equivalent to traditional imports, which will rise 3 percent annually. The tariff will only be applied to import volumes that exceed the quota. The GATT requires tariff-free quotas equivalent to 3 to 5 percent of consumption. Initial corn quotas for the United States, for example, are equivalent to 12 percent of domestic consumption.

4) Domestic support measures or subsidies
Support measures for agriculture before the reforms (1989-1993) were provided through support prices, higher than international prices, reductions in input costs (credit, seeds, fertilizers, electricity, and water rates) and general services such as research, training, and improving infrastructure. The reforms made a bogeyman out of subsidies for inputs and state services. The majority of the institutions and state-run companies linked to agricultural marketing and production were eliminated or privatized.

Between 1979 and 1982, subsidies for producers were equivalent to approximately half of the agricultural sector's participation in GDP. Between 1989 and 1994, subsidies represented a third of the value of agricultural output. In OCED member countries, they reach 100 percent.

Between 1989 and 1994, net producer subsidies were 30 percent, mainly because domestic prices were higher than international prices. Producers in other OCED member countries received subsidies in the order of 41 percent.

The GATT requires Mexico to reduce its commitment to the Aggregate Measure of Support from 9.5 billion dollars to 8.3 billion dollars between 1995 and 2004. In the 1989-1994 period, it was 7.7 billion dollars.

5) Decoupled subsidies
Based on the supposition that agricultural subsidies distort the agricultural markets, Mexico transformed its traditional subsidies tied to product prices and the cost of inputs and services, into direct payments per hectare to producers, decoupled from price, volume, and product considerations. As a condition for signing NAFTA, Mexico eliminated price supports between 1989 and 1993.

Procampo is the decoupled subsidy program that since 1994 has replaced most of the other subsidies. It is earmarked for all basic grain producers to compensate for the subsidies that other countries extend to their producers and to the loss in income resulting from the opening to the international market. The subsidy per hectare in real terms should be maintained for the 15 years following its application.

II. The Effects of the Reforms, Four Years Later

1. Peasant discontent

The lack of consensus on the reforms and its first effects on lowering product prices in the domestic market—on the unprofitability of agriculture and on the impossibility of marketing the harvests—provoked deep malaise among the peasantry. In addition, the agrarian counter-reform signified a break with the social pact established by the post-revolutionary state with the peasants. The peasant protests, however, did not manage to detain the dizzily approved reforms. Paradoxically, the first day that NAFTA entered into effect, the peasants and indigenous peoples of Chiapas, organized in the Zapatista National Liberation Army (EZLN), rose up to demand: Enough! Among their demands was rejection of the agrarian counter-reform and NAFTA, and they championed the fight against neo-liberalism. The Zapatista movement brought the peasants and Indians to the attention of the world.

2. The trade balance

During the first year NAFTA was in effect, the recurring crisis of the Mexican economy struck again. The growth in imports over that of exports translated into a 24.2 billion dollar deficit that could not be financed with external resources. The devaluation of the peso at the end of 1994 functioned as the best tariff during 1995: Imports declined and exports rose. This was not an effect of NAFTA, but of the exchange rate, and it lasted until inflation caught up with the devaluation. For 1996, the agricultural/meat industry trade deficit registered 1.19 billion dollars, and for 1997 reached 420.4 million dollars.

Agricultural imports were mainly corn, soy, wheat, sorghum, barley, and other oil seeds. Agricultural exports of coffee, fresh vegetables, tomatoes, and fruit were not able to compensate for imports.

3. Lack of respect for the tariffs and import quotas

In an anti-democratic country such as Mexico, in which the peasants don't have a say in defining public policies, despite their representing a high proportion of the economically active population, the minimal commitments to protect agriculture agreed on in the commercial accords are systematically violated by the government in favor of special interest groups. Import quotas and tariffs defined in NAFTA for corn, powdered milk, barley, animal fats, and potatoes have been exceeded with the support of the Mexican government in several of the years in which NAFTA has been in effect. The case of corn imports during 1996—the third year in which NAFTA has been in operation—is one of these examples.

The Mexican government, using the pretext of reduced production as a result of drought—when, in fact, production reached a record level—allowed 5.817 million tons of corn to be imported tariff free: 5.634 million tons from the United States, 155,000 tons from South Africa, and 27,000 from China. The quota for the United States was 2.652 million tons, with imports above this quota to be charged a 189.2 percent tariff. Imports for that year easily exceeded the quota agreed upon for the 14th year of NAFTA (3,671,334 tons), and imports were allowed from China and South Africa tariff free even though these countries are not NAFTA members. The value of the corn imports, 1.0618 billion dollars, was equivalent to the deficit in the agricultural and timber industries trade balances.

The prices paid for the imported corn were always higher than the prices of Mexican corn defined by the government, but importers took advantage of the financial bonanza in the form of support programs for agricultural/meat exports promoted by the U.S. government through the Commodity Credit Corporation (CCC).

The decision to exceed the tariff-free quotas was taken by government institutions and the large grain-consuming companies, many of them multinationals: Anderson Clayton, Bachoco, Continental, Cargill, Elgo, Pilgrims Pride, Purina. The corn producers were not considered in all this, even though they are the ones most affected. The price of Mexican corn was 18 to 23 percent lower than in the previous harvest cycle.

In response to this policy, from September to December 1996, corn producers held mobilizations in Chiapas, Michoacan, Jalisco, Guanajuato, Durango, and Baja California to demand an increase in prices and closing the border to imports. The most important mobilization took place in Chiapas, where 15,000 peasants blocked highways into the main city. The demonstration was repressed by the police, with three peasants dead, several injured, and a dozen disappeared as a result. The Mexican government engaged in dumping practices against domestic corn producers by eliminating tariffs on imports from the United States that exceeded the quota stipulated in NAFTA by more than double (112.5 percent) for the year in question and responded to the just protests of peasants with repression.

4. Reduction of domestic support measures

Subsidy mechanisms that followed the reforms cannot be controlled by the producers. The system of generalized support prices to which producers of specific products had access, and reduced costs for inputs, which was also generalized, were changed in favor of a policy of decoupled subsidies, per hectare, in which the only reference point for the producer is that the amount of the subsidy be at least equal to that of the previous year. The other domestic support mechanisms, such as those contained in the Programa Produce—support for mechanization and infrastructure—and support measures for marketing are applied selectively and not very above-board by the government, without the producers having mechanisms for evaluating the application of subsidies and demanding public accounting.

Thus, during 1995, the Mexican government reduced the volume of subsidies to a level close to zero. According to OECD data, net subsidies for producers went from representing 30 percent in the 1989-1994 period to only 3 percent in 1995. The value of the net producer subsidies was only 354 million dollars, very much below the reductions agreed on in the GATT. The participation of producer subsidies as a percentage of agricultural output was nil: 0.1 percent.

The government's commitment was to maintain the Procampo subsidy or provide direct payment in real terms to producers for a 15 year period. Procampo has been reduced by 33.5 percent between 1994 and 1997. The Produce subsidies are earmarked for large-scale growers who have the capacity to pay a proportion of the cost of the infrastructure. In addition, the subsidies for marketing are not generalized either. Selectivity and discretion in applying the subsidies has served to strengthen the interests of local political groups in the states.

III. Conclusions

The Mexican government—a loyal promoter of the free market, despite the failures of this model within the country—promotes the U.S. position of unbridled liberalism in agricultural markets, supporting WTO negotiations and the creation of the Free Trade Area of the Americas.

Meanwhile, the Mexican peasants have directly suffered the effects of liberalism in agriculture and know that their survival as peasants is threatened by the neo-liberal model. The internationalization of agriculture and agricultural policies—designed from the very centers of world power and for the exclusive benefit of a handful of multinational companies that control the markets—should be confronted with an international movement of peasants aimed at achieving a peasant road (Via Campesina) to development. Even though the GATT commitments are much more benevolent than those demanded by NAFTA, both have the same goals. The World Trade Organization is a common target of all peasants. The positions we will adopt in the Peoples' Summit are key to preventing and changing the global tendencies to convert the world into a kingdom dominated exclusively by and for companies and markets.