THE U.S.-MEXICO FREE TRADE AGREEMENT: ISSUES AND IMPLICATIONS FOR THE U.S. AND TEXAS CITRUS INDUSTRY

THE U.S.-MEXICO FREE TRADE AGREEMENT: ISSUES AND IMPLICATIONS FOR THE U.S. AND TEXAS CITRUS INDUSTRY C. Parr Rosson III and Flynn J. Adcock* U....
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THE U.S.-MEXICO FREE TRADE AGREEMENT:

ISSUES AND IMPLICATIONS FOR THE

U.S. AND TEXAS CITRUS INDUSTRY

C. Parr Rosson III and Flynn J. Adcock*

U.S.-Mexico Free Trade Issues for Agriculture Series

TAMRC International Market

Research Report No. IM-3-91

April 1991

*

T AMRC Assistant Coordinator and Extension Economist, Texas Agricultural Extension Service, and Graduate Assistant, respectively, Department of Agricultural Economics, Texas A&M University.

U.S·MEXICO FREE TRADE AGREEMENT: ISSUES AND IMPLICATIONS

FOR THE U.S. AND TEXAS FRESH VEGETABLE/MEWN INDUSTRY

Texas Agricultural Market Research Center (TAMRC) U.S.-Mexico Free Trade Issues for Agriculture Series, TAMRC International Market Research Report No. IM-3-9I, by Dr. C. Parr Rosson III and Mr. Flynn J. Adcock. Texas Agricultural Market Research Center, Department of Agricultural Economics. Texas A&M University. April 1991.

ABSTRACT: This report provides background information on citrus crops grown in Texas and other regions of the United States and Mexico, discusses the potential effects of a U.S.-Mexico FTA on the U.S. and Texas citrus industry, and outlines the key issues relating to citrus likely to be at the center of U.S.-Mexico FTA negotiations. The information provided should help focus the debate on free trade with Mexico and will be used in ongoing research to Quantify magnitudes of potential impacts and to estimate likely outcomes of a U.S.-Mexico FTA.

The Texas Agricultural Market Research Center (TAMRC) has been providing timely. unique. and professional research on a wide range of issues relating to agricultural markets and commodities of importance to Texas and the nation for more than two decades. TAMRC is a market research service of the Texas Agricultural Experiment Station and the Texas Agricultural Extension Service. The main TAMRC objective is to conduct research leading to expanded and more efficient markets for Texas and u.s. agricultural products. Major TAMRC research divisions include International Market Research, Consumer and Product Market Research, Commodity Market Research, and Contemporary Market Issues Research.

U.S.-MEXICO FREE TRADE AGREEMENT: ISSUES AND IMPLICATIONS

FOR THE U.S. AND TEXAS CITRUS INDUSTRY

EXECUTIVE SUMMARY

The proposed U.S.-Mexico free trade agreement (FrA) will attempt to expand trade in goods and services with Mexico through the phased reduction and eventual elimination of tariff and non­ tariff barriers to trade. The purpose of this paper is to consider likely impacts of a U.S.-Mexico FTA on the U.S. and Texas citrus industry and to identify critical issues relevant to citrus for the upcoming negotiations. Key points of the paper include the following: •

The U.S. has historically maintained a deficit in citrus trade with Mexico. The U.S. has imported over 90% of all Mexican fresh orange and grapefruit exports in recent years. Mexico accounts for less than 1% of total U.s. orange and grapefruit exports. Mexico supplies 4% of the U.S. orange juice market.



The removal of all tariff and non-tariff barriers to U.S.-Mexico citrus trade, along with harmohization of sanitary and phytosanitary rules and marketing order requirements, would potentially have moderate impacts on the Texas citrus industry. U.S. citrus imports from Mexico would likely increase, with orange juice increasing more than fresh fruit due to the relatively higher level of the orange juice tariff. Due to infrastructure limitations, U.S. exports to Mexico would have limited potential to expand in the near-term.



If U.S.-Mexico trade barriers are lowered, citrus producers should expect to experience lower prices as imports from Mexico increase. U.S. production also would decline. Subsequent impacts on the packing and marketing infrastructure would result in reduced returns to these businesses and lost employment.



Potential gainers from freer trade include grower/shippers in Mexico who will experience higher prices and returns due to expanding exports. U.S. consumers will have access to a wider variety of products at lower cost.



Prospects for Canadian participation and trade impacts on third country markets may have important implications. Canada already is a major market for U.S. citrus. As trade is liberalized and markets expand, U.S. producers should be in a position to gain additional revenues from shipments to Canada. As Mexico supplies more of the U.S. and Canadian orange juice markets, impacts on other suppliers could be expected.



Priority issues to clarify and monitor during the upcoming negotiations include tariff and non-tariff barriers to trade, transition mechanisms such as "snapback" provisions, the environment and food safety, competitive advantage of Mexico due to low wage rates and low cost inputs, infrastructure development in Mexico, water availability and quality, harmonization of phytosanitary rules and marketing order requirements, and impacts on border economies.

U.S·MEXICO FREE TRADE AGREEMENT: ISSUES AND IMPLICATIONS FOR THE TEXAS CITRUS INDUSTRY Mexico ranks as the largest foreign supplier of horticultural products to the U.S. Mexico is also the seventh largest U.S. export market for horticultural products. Total U.S. fruit and vegetable imports from Mexico reached $1.2 billion in 1990. U.S. fruit and preparation imports ",er(;;/alued at $325.7 million, accounting for 27% of all U.S. horticultural imports from Mexico (Figure 1). Citrus imports represented $10.8 million. U.S. fruit and preparation exports to Mexico were valued at $45 million in 1990. Although little citrus was exported to Mexico in 1990, 3,700 metric tons (mt) were shipped in 1989 (Figure 2). U.S.-Mexico trade in citrus is characterized by import duties in both countries, import licensing requirements in Mexico, U.S. marketing orders, and phytosanitary regulations in both countries. This report provides background information on citrus crops grown in Texas and other regions of the United States and Mexico, discusses the potential effects of a U.S.-Mexico FTA on the U.S. and Texas citrus industry, and outlines the key issues relating to citrus likely to be at the center of U.S.-Mexico FTA negotiations. The information provided should help focus the debate on free trade with Mexico and will be used in ongoing research to quantify magnitudes of potential impacts and to estimate likely outcomes of a U.S.-Mexico FTA. BACKGROUND Recent trends is U.S. consumption of fresh fruits and vegetables indicate that citrus is losing ground relative to non-citrus fruits and vegetables (Figure 3). Total U.S. vegetable consumption has increased by 37% since 1975 to 48 kilograms (kg)/person. Non-citrus fruit consumption has expanded by 27% during this same period to 33 kg/person. At the same time, U.S. citrus consumption has declined from 14 kg/person to II kg/person, a drop of 21%. Although stable during the mid-1980s, . citrus consumption fell following the freezes in 1983 and 1989. U.S. fresh orange consumption has also fallen in recent years from over 7 kg/person to under 6 kg/person (Figure 4). Grapefruit has been somewhat more stable, declining from 4 kg/person in 1975 to 2.6 kg/person in 1985. Since then, grapefruit consumption has increased and remained near 3.2 kg/person. The consumption of other citrus, such as lemons and limes, has remained relatively constant at about 2.3 kg/person. The 1989 freeze that severely damaged U.S. citrus orchards also affected those in Northern Mexico. As Mexican production recovers, U.S. imports of citrus products will likely increase again, helping to boost per capita consumption back to near 1983 levels. U.S. orange juice consumption has been steadily increasing over the last decade (Figure 5). In fact, movements have expanded 18% to 53 million hectoliters (MHL) since 1985. Even with this increase, total orange use in the U.S. has barely kept pace with population growth as per capita consumption has held near 20 liters/person during the 1980s. Chilled orange juice consumption has grown the most to represent one-third of total juice consumption at 16.2 MHL (Table 1). Frozen concentrate has remained fairly steady at 35 MHL. However, share of total orange juice use accounted for by frozen concentrated orange juice (FCO}) has declined from 77% in 1979 to 67% in 1989. Although orange juice imports by the U.S. quadrupled during the early 1980s, imports appear to have leveled off and begun declining. Imported juice represented 25% of total U.S. consumption in 1989 compared to almost 50% in 1985. Brazil is the major U.S. import supplier, accounting for 75% of world orange juice trade in the late 1980s. Although less than 4% of total U.S. consumption in 1989, imports from Mexico have more than doubled since 1985.

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The likely impacts and issues for citrus relating to a U.S.-Mexico FTA must be considered in the context of the current citrus market situation in Mexico and current citrus trade linkages between the two countries. Consequently, this section provides an overview of the Mexican citrus market situation and outlines the U.S.-Mexico citrus trade flows linkage and related trade issues. Mexican Citrus Market Situation Several dimensions of the Mexican citrus market are discussed here, including the current Mexican citrus supply and demand situation, Mexican citrus processing, and Mexican citrus prices. Mexican Citrns Supply and Demand Situation

The orange and grapefruit situation in Mexico present some interesting similarities and differences. Each citrus type is discussed in turn below. Mexican Orange Situation Orange production in Mexico expanded nearly 85% over the last two decades (Figure 6). Production increased from 1.3 million mt in 1970 to 2.4 million mt in 1990. Oranges produced in the state of Nuevo Leon in 1990 will likely move into processing in 1991, due to the low quality of oranges produced following freeze damage in 1989. For the second half of the 1980s, the area devoted to orange production in Mexico increased from 425,000 acres to 642,000 acres (Figure 7). While non-bearing area represented 29% of orange acreage in 1985, the share increased to 44% by 1990. In 1985, four states (Vera Cruz, San Luis Potosi, Tamaulipas, and Nuevo Leon) accounted for 86% of total orange area in Mexico. Over 27,000 acres of orange production in Nuevo Leon were uprooted following the 1989 freeze. Over 17,000 of those acres were non-bearing acres. The remaining acreage uprooted (10,000 acres) were bearing acres. Some of the Mexican orange acreage shifted to Vera Cruz, Sinaloa, and Tabasco (USDAc). Mexican orange yields averaged 5.6 mt per acre in 1985 (Figure 8). Mexican yields reflect a wide disparity, ranging from a low of .3 mt/acre in Nuevo Leon to a high of 8.1 mt/acre in Baja California Norte. Major production areas such as Vera Cruz and Tamaulipas experienced yields of 7.2 mt/acre and 7.0 mt/acre, respectively. Due to freeze conditions in 1989 and subsequent tree uprooting, there will likely be little orange production in Nuevo Leon over the next several years. Orange acreage in Tamaulipas and Vera Cruz should experience slightly higher levels of output as yields exceed 8.0 mt/acre. Orange utilization in Mexico experienced little growth during the 1970s, followed by moderate growth during the 1980s (Figure 9), Fresh orange consumption represents over 80% of Mexican use and is composed of two major segments: fresh consumption and fresh squeezed for juice. About 20% of market demand is represented by processing, which expanded by one-third from 1988 to 1990. As with any perishable commodity, orange consumption varies with quantities available, as became apparent in the freeze year of 1983. Mexican per capita orange consumption has declined steadily since the mid-1970s (Figure 10). Fresh orange consumption in Mexico has dropped from 26 kg/person in 1975 to 21 kg/person in 1990. This 20% decline in consumption occurred despite a doubling of Mexican orange output. These utilization patterns reflect Mexican consumer preference for fresh squeezed juice over eating oranges as fruit and the growing importance of processing as a final outlet for orange production in Mexico.

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Mexican Grapefruit Situation Mexican grapefruit production peaked at 200,000 mt in 1980 (Figure 11). Since that time, production has declined and become somewhat erratic, reflecting periodic freeze conditions. Mexican grapefruit production was estimated at 120,000 mt in 1990, slightly exceeding the levels of the late 19708. Total area devoted to grapefruit in Mexico has increased froid 13,000 acres in 1985 to 15,000 acres in 1990. In 1985,26% of total harvested acreage was in Vera Cruz, followed by Oaxaca (17.6%), Tabasco (13.9%), Tamaulipas and San Luis Potosi (11% each), and Nuevo Leon (3.9%). The other top five grapefruit producing states in Mexico included Jalisco, Michocan, Yucatan, Puebla, and Baja California Norte, together representing 14.8% of the total. However, these figures may not accurately reflect the current situation due to tree uprooting following the 1989 freeze, especially in the area of Nuevo Leon. Harvested acreage represented an overwhelming share of total grapefruit acreage in 1985 (Figure 12), Non-bearing acreage began to grow after the 1989 freeze and represented one-third of the total by 1990. Major Mexican grapefruit varieties include the red table-type grown in, Tabasco and Vera Cruz. These are grown mainly for export to the U.S. and Europe as fresh fruit. The white fleshed varieties are grown in Tamaulipas and Vera Cruz for juice production or for peeled slices to be used in salads. Mexican grapefruit yields range from 2.4 mt/acre in San Luis Potosi to 8.0 mt/acre in Vera Cruz and Baja California Norte. Yields throughout Mexico averaged 5.3 mt/acre in 1985. Yields are expected to reach 10.0 mt/acre in 1991, comparable to 1990 and reflecting recovery from freeze damage in 1989. Although yields have nearly doubled since the mid-1980s, new acreage brought into production since 1989 is on productive land that yields are expected to increase further, given adequate water and favorable weather patterns over the next several years. Damaged fruit areas in Nuevo Leon are expected to produce little or no grapefruit in 1991. Although Mexican grapefruit utilization declined 75% between 1981 and 1984, recovery was experienced during the mid-1980s. Total utilization has increased from 78,000 mt to 120,000 mt since 1988 (Figure 13). Fresh use represented three-fourths of total grapefruit utilization in Mexico (80,000 mt) in 1990. Fresh use in Mexico has increased by 25% since 1988, reflecting greater available supplies. Mexican per capita fresh grapefruit consumption, while low relative to oranges, is 2.0 kg per person and appears to be increasing only slightly (see Figure 10). Most of the fresh use is for the domestic market with about 2% used for export. Domestic consumers prefer fresh grapefruit and fresh juice to other types for processed products. Grapefruit are popular as components of weight loss programs for many consumers. While citrus fruit use appears to be on a short-term upward trend, the gap between non-citrus fruits and citrus is widening (Figure 14). Mexican per capita consumption of non-citrus reached 60/kg in 1985 compared to citrus at 35 kg/person. This compares to 50 kg and 40 kg, respectively in 1982. Mexican Cit1Us Processing

The discussion of citrus processing focuses on oranges and grapefruit. Orange Processing Over 80% of total orange juice is processed in three states in Mexico: Vera Cruz, Tamaulipas, and Nuevo Leon (Figure IS). Orange concentrate consumption is expected to increase only slightly in 1990, as the preference for fresh squeezed juice causes most concentrate to be exported. Mexico exported about 99% of all concentrate juice to the U.S. in 1989 (43,000 mt). Mexican orange juice exports to the U.S. have been highly erratic since 1977 (Figure 16). This trade is subject to a

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5.095/hectoliter (hI) import tariff. When converted to an ad valorem basis, the U.S. import tariff appears to be highly but inversely related to Mexican concentrate juice exports to the United States. As the tariff has increased, Mexican exports to the U.S. have declined. This relationship was especially strong for 1977, 1980, 1982, 1985, and 1988. Other markets for exports have included Germany, Spain, Ghana, and Japan. Due to high dome.stic demand, exports are not expected to be as high in 1990. Total concentrate imports by Mexico reached 244 mt in 1989, with 93% supplied by the U.S. Imports are expected to decline slightly in 1990 as Mexican output recovers and more concentrate is shipped to Northern Mexico. Mexican orange juice imports are subject to a 20% ad valorem import duty. Mexican orange juice concentrate prices averaged 53.75/gallon in 1989, a 31% increase over 1987. Grapefruit Processing Over 30,000 mt of Mexican grapefruit were processed in 1990, well below the 70,000 mt in 1980 and representing 35% of total utilization. Processing will likely increase only slightly during the coming years as competition from the peeled sections industry keeps processing supplies lower than normal. In addition, full recovery from previous freezes may limit availability until new acreage in Vera Cruz and other areas comes into production. Domestic use of grapefruit juice is expected to play a smaller role than the export market. Prices for Fresh Market Citrus

Movements in Mexican fresh citrus market prices (Mexico City wholesale market) are highly seasonal (Figure 17). Fresh orange prices reached about 5500/mt during the month of August in both 1989 and 1990 followed by a sharp decline to under 5200/mt. Although the low price prevailed through April of 1989 and gradually increased from May through August, the pattern was somewhat different in 1990. Market strength was experienced beginning in February of 1990 and continued until April when prices reached 5335/mt. Most of this upward trend was likely due to the December 1989 freeze which reduced available supplies and to the continued strong demand in both the fresh squeezed and the processing markets. Mexican farm prices for oranges averaged 5106/mt from 1985­ 89 (the Mexican Ministry of Agricultural and Water Resources, SARH). Prices moved higher to 5171/mt in 1989. reflecting the freeze conditions and short supplies. Price patterns for grapefruit are similar to those for oranges (Figure 18). July and August represented the peak price months for 1989/90 with prices in the Mexico City market reaching 5600/mt in both years. Seasonal lows for 1989 fell to 5100/mt in January through March, increasing to over 5400/mt by June. Due to short supplies and strong demand by both consumers of fresh product, 1990 prices ranged from 5200/mt in January to over 5300/mt in June. These figures for 1990 represent almost twice the value for fresh grapefruit during the Texas shipping season compared to 1989. Average export prices to the U.S. reached 51.024/mt during late 1989. Mexican farm prices for grapefruit averaged 575/mt from 1985-88 with 1988 on-tree prices falling to 557/mt. The U.S.-Mexico Citrus Trade Linkage The U.S. both exports and imports some citrus and citrus products from Mexico. Exports are relatively small and imports compete with U.S. production of fresh and processed product. After

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reviewing the U.S.-Mexico import and export picture for fresh vegetables and melons, this section discusses issues relating to import competition, and related trade issues.

u.s. Citrus Exports to Mexico U.S. citrus exports to Mexico were highly erratic during the 1980s (Figure 19). Mexican debt, a strong U.S. dollar, and high Mexican inflation combined to reduce purchasing power in Mexico. After averaging almost 2,000 mt during the last half of the 1970s, U.S. citrus exports to Mexico quadrupled from 1979 to 1981. The Mexican debt crisis of 1982, coupled with the freeze in 1983 reduced exports to 700 mt. Exports eventually recovered, reaching a record 4,800 mt by 1985. U.S. citrus exports to Mexico dropped to 3,700 mt by 1989. Oranges exports to Mexico were just over 1,300 mt while grapefruit were 300 mt. The balance was composed mostly of lemons (1,850 mt). Although the major Latin American market for U.S. citrus, Mexico is only a small purchaser of U.S. citrus. Mexican imports of 3,754 mt of citrus from the U.S. in 1988/89 represented less than I % of total U.S. citrus exports (USDAa). Japan purchased 49% of all U.S. citrus valued at $307 million in 1989. Canada imported 126,000 mt from the U.S. valued at $80 million. The European Community, including France, Holland, and the United Kingdom, purchased 16% worth $73 million. Other major foreign markets for U.S. citrus include Hong Kong and Taiwan. Mexico purchased less than 1% of U.S. grapefruit and orange exports in 1989. Major markets for grapefruit were Japan, the EC-12 and Canada which purchased 90% of all U.S. grapefruit exports valued at$217 million in 1989. Almost 85% of all U.S. orange exports were shipped to Japan, Canada, and Hong Kong in 1989.

u.s. Citrus Imports From Mexico U.S. citrus imports from Mexico averaged 40,000 mt during the 1980s (Figure 20). However, imports almost doubled from 1985 to 88, increasing from 32,000 mt to 63,000 mt. Mexico has supplied over two-thirds of all citrus imported by the U.S. since 1987 at an annual average of 55,000 mt. During this same period, U.S. imports of grapefruit from Mexico declined to almost zero. U.S. orange imports from Mexico. however, increased from 7,000 mt to 12,000 mt, after declining from 40,000 mt in 1979. Most of the difference is composed of Persian limes (35,000 mt). Key lime imports from Mexico are prohibited due to citrus canker. However, the Animal and Plant Health Inspection Service (APHIS) recently ruled that what had previously been considered "canker" was actually "alternaria" which does not require Quarantine. Key lime imports can be expected to enter the U.S. when and if the Quarantine is lifted (USDAc). Worldwide, fresh orange exports from Mexico have averaged about 35,000 mt per year since 1975 (Figure21) of which the U.S. accounts for a major share in most years. In 1989, for example. almost all fresh orange exports were destined for the U.S. In most years, however, about 50% of total fresh Mexican orange exports enter the U.S. market. Fresh oranges entering the U.S. face an import duty of $.022/kg and must be inspected by APHIS at the Mexican packing sheds. The cost of this inspection is borne by the Mexican producers. In addition, Mexican fruit must be in full compliance with the Marketing Order quality standards imposed on all U.S. and foreign citrus entering Texas. This compares to a 20% ad valorem duty for U.S. exports of fresh oranges to Mexico. Mexican import licenses for fresh citrus were phased out in 1987, following the entrance of Mexico into the General Agreement on Tariffs and Trade (GATT) and efforts to comply with major GA TT rules. In addition to tariffs, U.S. fresh orange exports are subject to a sanitary import authorization issued by SARH.

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While important in the late 1970s, grapefruit exports from Mexico declined during the 1980s reflecting low and uncertain supplies (Figure 22). Grapefruit exports peaked at 25,000 mt in 1980. Since then the importance of the processed market and several freezes have caused fresh exports to become erratic and decline. Mexico exported 2,400 mt of grapefruit in 1989 but only a small share (653 mt) entered the U.S. This compares to the relatively high proportions exported to the U.S. from Mexico in previous years. Fl ..nce was the major market for Mexican grapefruit, purchasing 1,267 mt in 1989, followed by Holland (258 mt), the United Kingdom (179 mt), and Canada (61 mt). The U.S. maintains a seasonal tariff on grapefruit from Mexico (Figure 23). This tariff ranges from $.018/kg in October to $.022/kg in August through September and then up to $.029/kg for the rest of the year. As Mexican grapefruit export prices have increased from $180/mt in the early 1980s to over $900/mt in 1989, the tariff now represents less than 3% ad valorem compared to 16% in 1984. Global Mexican grapefruit juice exports in 1989 were 947 mt of which 96% (911 mt) entered the U.S. (USDAc). The U.S. duty on Mexican grapefruit juice is $.95/hl. Other foreign markets for Mexican grapefruit juice included Holland (23 mt), Spain (6 mt), and Panama (4 mt). Mexico imported 61 mt of grapefruit juice in 1990, all from the U.S. These imports were subject to a 20% ad valorem tariff.

u.s. Competitiveness with Citrus Imporls from Mexico While costs of citrus production in Mexico is an important factor determining the degree to which Mexican citrus imports enter the U.S. market, other factors such as transportation, marketing, and infrastructure will playa key role in the overall competitive position of Mexican relative to U.S. citrus. The U.S. would likely face increasing import competition from Mexico if marketing orders were eliminated and if Mexican citrus complied with U.S. phytosanitary regulations (USITC). Other major factors affecting the competitiveness of U.S. and Mexican citrus include labor, land, water, climate, technology, and transportation. Although Mexico has lower labor costs than the U.S., limited water resources and a poor transportation system in Mexico may limit import competition in the near term. The potential exists for a significant increase in imports of fresh citrus from Mexico (USITC). Frozen concentrated orange and grapefruit juice imports also could be expected to increase. Related Trade Issues

Water use, allocation, and quality are among the most important potential issues related to more open trade in citrus with Mexico. The Lower Rio Grande Valley Water Authority estimates that current demand for surface water is approaching 3.0 million acre feet. Available supplies only approach 2.0 million acre feet. Additional citrus production in Northern Mexico as a result of a U.S.­ Mexico FTA could be expected to strain this limited resource even further. The question of water allocation in Mexico may also limit expansion in some areas. Although water has been subsidized in the past, the Mexican water policy is currently under review with the intent of charging a higher rate to industries exporting citrus and other agricultural products than that which is charged industries oriented toward producing staple foods for the domestic market. More intensive agricultural use of land has the potential to result in lower water quality on both sides of the border. As water levels are reduced, the potential for higher soil salinity increases.

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POTENTIAL EFFECTS OF A U.S.-MEXICO FTA ON THE CITRUS INDUSTRY

While the U.S. is the major importer of Mexican citrus, Mexico is not a major market for U.S. citrus. Given th~ limited current per capita income growth rate in Mexico, moderate increases in Mexican imports of U.S. citrus could be expected. The current trade imbalance in citrus between the U.S. and Mexico may remain, however, because a large share of Mexican citrus acreage of both oranges and grapefruit is currently non-bearing. A U.S.-Mexico FfA would likely provide an incentive to expand production onto the idle acreage in Mexico. As output responds, especially in the northern areas, more citrus will be shipped to the U.S. Although U.S. exports of fresh citrus to Mexico may experience a moderate increase as a result of a U.S.-Mexico FfA,limitations in Mexican communication and transportation infrastructure, as well as inadequate freezer storage, may provide an incentive for the U.S. to ship less perishable fresh citrus and more processed citrus products, at least in the near term. If capital investment increases in Mexico as a result of the FfA as many believe will happen, leading to improvements in Mexican infrastructure, Mexican imports of fresh U.S. citrus could be expected to expand. Trade impacts on cross-border investment and production could prove significant. Given the apparent Mexican cost advantage in citrus production and the competitive nature of production along the border region in particular, the Mexican citrus industry could well follow current growth trends in processed food exports. Mexican exports of processed foods have increased at an annual rate of 20% compared to 5% for fresh products in recent years. Under more liberal trading rules, some major citrus processing facilities could relocate to Mexico from the U.S. to take advantage of lower costs for labor, power, and other inputs. In addition, less restrictive regulations for labor and other input use, combined with no costs for Workmen's Compensation, give Mexico an advantage for increased future processed citrus production and export. Although U.S. tariffs on citrus imports are at a relatively low level, complete removal of all tariff and non-tariff barriers to trade, along with harmonization of sanitary and phytosanitary regulations between the U.S. and Mexico, would likely have moderate impacts on states which produce the same labor-intensive crops as Mexico. Citrus production in Texas, California, Florida, and Arizona would likely experience losses in market share due to additional import competition from Mexico. Further, due to the shortage of investment capital in Mexico and potentially high relative returns combined with the competitive advantage in labor costs, additional U.S. investment will most likely occur in labor-intensive industries such as citrus production follow the successful negotiation of a U.S.-Mexico FfA. Larger U.S. imports of citrus and citrus products from Mexico induced by a U .S.-Mexico FTA would place downward pressure on U.S. citrus producer prices and returns. If the U.S. demand for Mexican citrus is price responsive, as is likely the case, then lowering tariffs would reduce U.S. consumer prices for citrus and citrus products from Mexico. The result would be substantially higher imports and consumption. In the near term, little displacement of domestic packing and marketing facilities would likely occur. Over the long term, however, Texas production could decline, followed by loss in employment, and lower returns associated with citrus production and marketing. Packing and other marketing infrastructure would be pressured to relocate nearer areas of production in Mexico. Potential losers under free trade appear to be citrus producers and related marketing services located in or near current production areas. While there is some doubt whether these industries would face major adjustment because of more open trade with Mexico, it does appear that at least moderate

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periods in the U.S. Such measures were implemented for fresh fruits and vegetables in the U.S.­ Canada agreement and extend for 20 years after implementation of the provisions of the agreement. Issue 4: The Environment and Food Safety Adequate harmonization of food safety standards between the U.S. and Mexico will be a priority issue in the FTA negotiations for consumers who are concerned about the presence of chemical residues in fresh produce. In addition. concerns about water availability, cost. and quality must be addressed to preclude excessive use of limited resources. Sanitary and phytosanitary regulations in both countries must be addressed to assure consistency. Labor laws. tax policy, and worker safety issues must be standardized to preclude either country from gaining an artificial advantage. Intensified agricultural production and increased water use along the Rio Grande River will strain an already limited resource and could possibly cause deterioration of water quality. Issue 5: Competitive Advantage The ejido system of community land. allowing free access and use of that land. provides Mexican farmers essentially an indirect subsidy for the production of certain crops. In addition. Mexican labor costs are one-tenth those of the U.S., giving Mexico a definite advantage in production, harvesting, and packing of citrus. The U.S. has an advantage in more efficient marketing infrastructure. access to capital, and new technology. Artificially low water costs in Mexico. valued at only one-fifth of actual cost, have given a cost advantage in the past. While these costs are gradually being increased to their full value. Mexico will continue to have a competitive advantage in the near term. The ejidos will continue to have access to essentially "free" water. Export-oriented commercial industries such as citrus processing. are expected to face higher water costs immediately. The gap in technology is narrowing. As Mexico develops its export-oriented sectors. such as citrus, more capital will flow into Mexico. In the long-run, the infrastructure gap will narrow as well. Issue 6: Third Country Access The potential to produce citrus in other Latin American countries and ship to the U.S. through Mexico will increase as trade is liberalized. Strict rules of origin and enforcement of those rules is necessary to assure the integrity of a U.S.-Mexico FTA. It also is likely that as Mexico exports more to the U.S .• third country exports to the U.S. will be displaced. This seems highly likely for processed products such as concentrate and other less perishable products. In addition, as incomes increase in Canada, the prospects for additional U.S. and Mexican exports will increase. Issue 7: Infrastructure Development in Mexico Limited infrastructure in Mexico to handle perishable products such as citrus suggests that any increase in U.S. exports to Mexico will likely be in the form of semi-processed and processed products. To meet the needs of expanded citrus exports, necessary investment in cooling facilities. storage, roads, and communications will be required.

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Issue 8: Impacts ()n Border Economies Domestic U.S. infrastructure specialized to handle citrus and citrus products can be expected to face additional pressure to adjust to increased imports from Mexico. There will be opportunities to more effectively utilize existing capacity as access to Mexican fruit is increased. Over the long­ term, these'facilities will face pressure to relocate closer to production which has shifted to more cost efficient or productive regions. Serious question exists regarding the economic viability of Maquiladora operations under a U.S.-Mexico FTA. More intensive production of citrus in Mexico. especially processing citrus for export. could lead to higher wages in Mexico which would attract labor from border areas, exacerbating an already critical labor situation in some regions and leading to higher U.S. costs in production and processing. Issue 9: Political Considerations Opposition to free trade with Mexico is mounting. The AFL-CIO, United Auto Workers, and the Textile Workers Union, along with other trade associations and organizations have voiced strong opposition to more open trade, arguing that jobs will be lost to Mexico and that wages will drop. In addition, some groups fear that major shares of domestic production and processing will relocate to Mexico to take advantage of the less restrictive regulatory environment. Opportunities exist for agricultural groups and associations to provide input into the negotiation process.

Issue 10: Market Information and Data Currently. reliable information and market intelligence about investment, trade potential, prices, buyer specifications, labelling and packing requirements, and general exporting requirements are not readily available to U.S. interests wishing to do business in Mexico. The U.S., with a large public information system, provides similar information to foreign interests free of charge in most cases. Although not a major trade issue. this question is important to assure adequate market access to U.S. participants in U.S. -Mexico trade. Additional data on market price differentials, shipping and handling costs, and costs of production and policies would facilitate critical analyses of market potential and competition in Mexico.

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REFERENCES Fairchild, G.F. and D.L. Gunter, "Production Trends Around the World - Brazil, Cuba, Mexico," "Fresh Citrus Fruits," in W.F. Wardoski. et. al.,eds. (Westport, CT: The AVI Publishing Company, Inc. 1986). Hall, K.D. and C. Livas-Hernandez, Mexican Agriculture Databook, Texas Agricultural Market Research Center Report No.IR-3-90, Texas A&M University, College Station, Texas, Sept. 1990. International Monetary Fund, Intemational Financiol Statistics, various issues. Ministry of Agriculture and Rural Hydrology (SARH), Private Communications, Mexico City, Mexico. U.S. Department of Agriculture (USDAb), Agriculturol Stotistics,

1983 - 1989.

U.S. Department of Agriculture (USDAc). Annual Report for CitnlS, Foreign Agricultural Service, 1990. U.S. Department of Agriculture (USDAa),Foreign Agricultural Trade of the Service, selected years.

u.s.,

Economic Research

U.S. Department of Agriculture (USDAd), "Fruit and Tree Nuts: Situation and Outlook Report Yearbook," Economic Research Service, TFS-254, August 1990. U.S. Department of Agriculture (USDAe), "Vegetables and Specialties: Situation and Outlook Report _ Yearbook," Economic Research Service, TVS-252, November, 1990. U.S. International Trade Commission (USITC), "The Likely Impact on the U.S. of A Free Trade Agreement With Mexico," Report No. 2353, Washington, D.C., February 1991.

U.S ORANGE JUICE CONSUMPI10N, IMPORTS AND IMPORTS FROM MEXICO

TABLE 1

FCOJ

CHIlLED

CANNED

TOTAL

TOT IMP.,IIl! CONS.

MEX.IMP.,IIl! CONS ".!"

Million HectoUters Single Strength Equivalent 79

34.9

7.8

1.8

44.5

6.01/13.5

2.8/ .7

80

39.7

8.8

2.0

50.5

3.79/7.5

.08/ .2

81

38.2

8.0

1.9

48.1.

8.11116.9

.26/ .5

82

35.2

6.9

1.7

43.8

14.99/34.2

.66/1.5

83

36.5

6.9

1.5

44.9

15.12/33.7

1.04/23

84

34.9

10.0

1.3

46.2

21.77/47.1

1.13/2.4

85

33.0

10.5

1.1

44.6

22.02149.4

35/.8

86

34.6

12.0

1.1

47.7

22.14/46.4

1.24/2.6

87

34.4

13.7

1.2

493

19.79/40.1

1.55/3.1

88

36.5

14.2

1.1

51.8

15.64/30.2

1.98/3.8

89

35.9

16.2

1.2

53.8

14.72/27.4

1.71/3.2

Source: FATUS, Fruit & Tree Nuts Bit & Outlook Yearbook and Quarterlies.

1 Hectoliter

= 100 liters = 26.42 gallons

Single Strength Equivalent for FCOl calculated from 42 degree Brix Gallons (1 Million Gallons 42 degree Brix X 4.156 + 1.029 == SSE Mil X .03785 = Million HL)

TABLE 2

MEXICO: ORANGE AND GRAPEFRUIT AREA TREE NUMBERS, AND SUPPLY/UTILIZATION 1988 • 1990

Oranaes

1990

1989

1988 Gra~lhdt

OraI!&!:S

Gra~rrult

Oral!&!:s

For~;i;8st Gra~rrult

P1anted Area (1000 Acres)

481.8

12.4

558.4

12.4

6425

14.8

Harvested Area (1000 Acres)

276.8

7.4

313.8

9.9

363.2

9.9

57.5

59.7

56.3

79.8

56.5

66.9

Bearing Trees (1,000 No.)

25,550

680

30,000

864

34,000

983

Non-Bearing Trees (1,000 No.)

23,240

498

22,800

312

30,000

325

TOTAL TREES (11,000 No.)

48,790

1178

52,800

1,176

64,000

1,308

52.3

57.7

56.8

73.5

53.1

75.2

2,268

75

2,200

100

2,400

118

1

0

2

0

1

0

TOTAL SUPPLY

2,269

75

2,202

100

2,401

118

Domestic Consumption (Fresh - 1,000 M1)

1,917

45

1,719

68

1,899

80

344

30

482

30

500

35

8

0

1

0

2

3

2,269

75

·2,202

100

2,401

118

Share Harvested (percent)

(Share Bearing Percent)

PrQduction (1,000 M1) Imports

Processed Use (1,00 M1) Exports TOTAL DEMAND

Source: USDA, Foreign Agricultural Service, Citrus Annual, MX 0202, November 1, 1990

Figure 1. U.S. Fruit and Preparation

Imports from Mexico, 1990

Other Fresh Fruit $197

Citrus $10.8

Prep. or Preserved

Orange Juice $89

Source: USDA

Total $325.7 Million Dollars

Figure 3. U.S. Consumgtion of Fresh

Fruits & Vegetables, 1975-89

KILOGRAMS/PERSON

50

40

.~

r

'"

"'"

",

--

~----~ -'1.

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