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NAFTA free trade myths lead to farm failure in Mexico

Center for International Policy (CIP) | Americas Program Policy Report | December 6, 2007

NAFTA Free Trade Myths Lead to Farm Failure in Mexico

Laura Carlsen

On Jan. 1, 2008 the last remaining tariff barriers permitted under the North American Free Trade Agreement (NAFTA) are slated to fall. Corn and beans were given the longest (15 years) liberalization schedule because they are at the core of Mexican culture and subsistence. Other key products-including sugar, milk, and chicken, which had formerly been regulated under a safeguard agreement to protect Mexican production, are also included.

The tariff removal ostensibly gives full rein to an open-market trade and investment regime between the United States and Mexico. The idea is that all products now enter into a competitive market that will self-regulate to enhance production, efficiency, investment, and, indirectly, the lives of Mexican producers and consumers.

That’s the idea. But what has happened in the Mexican countryside over the past 14 years of NAFTA shows that free trade has been a disaster for small farmers in Mexico.

Corn farmers forced out of business by subsidized imports from the United States have swollen the ranks of migrants to the United States, where many of them contribute their poorly paid labor to the same agricultural sector that displaced them. New generations of children in rural areas see their only future en el otro lado, on the other side, where their fathers, mothers, uncles, or cousins earn the money they send home that enables their families to survive.

Four years ago, on Jan. 31, 2003, nearly a hundred thousand Mexican farmers and supporters from unions, universities, and civil society groups marched in the streets calling for renegotiation of the NAFTA chapter on agriculture and new national farm policy that elevated values of food sovereignty and farm livelihoods above free-trade dictums. The Mexican and U.S. governments not only refused to consider changing the draconian terms of the agreement but the Mexican government continued to allow over-quota imports of corn without charging tariffs, to the detriment of its own farmers.

The movement represented the first time that farmers viewed their plight as part of an international system-economic integration under NAFTA-and not just in the context of national farm policies. As a result, some of the fundamental myths of the free trade model are being questioned as never before in Mexico.

1. The Myth of the Free Market

The first is the myth that free trade exists at all. Mexican farmers are quick to point out that reality deviates far from the logic of free trade-namely that prices are determined by the laws of supply and demand, and that the product produced most cheaply and efficiently always wins.

Three major factors-subsidies, financing, and oligopolies-have created distorted market conditions made-to-order for the world’s most powerful U.S.-based transnational corporations and rigged against the small farmer. As a result, agricultural producers south of the border are being driven off the land.

The first distortion comes in the form of U.S. government farm subsidies. The 2002 Farm Bill authorizes a whopping $248.6 billion in farm supports. Federal government subsidies now make up 40% of the U.S. net farm income. Though they ostensibly serve to keep family farmers afloat, actually the billions in subsidies flow disproportionately to corporate farmers. Along with export-import financing, they assure that huge food and agriculture transnational corporations increase their profits and global reach. Mark Ritchie of the Institute for Agriculture and Trade Policy (IATP) notes that U.S. export subsidies end up in the pockets of the world’s largest grain traders, primarily Cargill and Archer Daniels Midland.

What does this do to the Mexican market? An IATP analysis reveals that in 2001 corn cost an average of $3.41 a bushel to produce in the United States and sold on the international market for $2.28 a bushel. Food First, a California-based policy institute, reports that California rice costs between $700 and $800 an acre to produce but received $650 an acre on the world market and that U.S. wheat is exported at 46% below cost.

There’s a name for this-dumping-and it is supposedly prohibited under both NAFTA and World Trade Organization (WTO) rules. According to the above calculations, the over five million tons of U.S. corn sold in Mexico in 2001 carried a dumping margin of 25%. Analyses from past years show dumping margins of over 30%. Dumped U.S. surpluses erode producer prices; the value of Mexican corn dropped 64% between 1985 (when Mexico signed the General Agreement on Tariffs and Trade-GATT) and 1999. They also leave Mexican producers without a market. The United Nations Development Program estimates that worldwide U.S farm subsidies cost poor countries about $50 billion a year in lost agricultural exports.

Mexican farmers cannot and should not be forced to compete with grains sold at less than U.S. production costs. They lack credit, economy of scale, fertilizers, chemical weed and pest controls, farm equipment, and most importantly, significant government supports. As U.S. farm support increases, Mexican government programs have followed International Monetary Fund (IMF) prescriptions and all but disappeared. During the period from 1990 to 1994, Mexican farmers received 33.2% of their yearly income from the government. For 1995 to 2001, that figure had dropped to 13.2%.

In addition to subsidized prices, cheap and ready access to U.S. financing has played a key role in the glut of grain imports to Mexico, which has devastated domestic prices. The Center for the Study of Rural Change in Mexico (CECCAM) reports that an overriding incentive for importers has been financial. U.S. exporters and government export-financing organisms, particularly the Commodity Credit Corporation (CCC), offer low-cost loans to Mexican importers buying U.S. grains. Although rates have decreased in recent years, prevailing credit rates in Mexico in the mid-1990s were over 30%, while the CCC offered between 7-8%. For Mexico-based import companies, the CCC’s sweetheart rates were like rain in a drought.

The Mexican government, facing the same tight money problem following the 1995 devaluation crisis, looked to the same solution. The $100 billion bailout orchestrated by the Clinton administration in response to the peso crisis included a $1 billion credit that obligated Mexico to purchase corn directly through the CCC program. In the single year between 1995 and 1996, corn imports rose 120%-double the quota stipulated under NAFTA, and all imports were tariff-free. Mexican importers assumed over $1.5 billion in CCC credits that year, and Mexican producers were sold down the river.

Free trade cannot exist in the context of global oligopolies. In contrast to a World Bank report that 73% of Mexico’s rural population lives in poverty (a significant increase over the pre-NAFTA period), the major U.S. agribusiness transnationals have grown by leaps and bounds under the auspices of the free trade model. As international traders with integrated export, import, and production activities, they often receive multiple subsidies under NAFTA from both the U.S. and Mexican governments: 1) as exporters of subsidized U.S. farm products, 2) as recipients of direct export subsidies, 3) as Mexican producers, and as Mexican importers. As small farmers in Mexico lose their land and their livelihoods, Cargill receives the lion’s share of subsidies in the state of Sinaloa-Mexico’s most heavily subsidized agricultural state.

None of these factors stem from farmers’ productivity-the culprit is the failure of Mexican farmers to compete, according to free trade proponents. Instead, these external factors converge to stack the deck against Mexican small farmers.

In light of all these negative tendencies, planners predicted that the majority of Mexican corn farmers would have left the sector by now. They were wrong. Figures show that national corn production has grown and 2007 is expected to be a record year. Despite the constant out-migration, three million Mexican farmers throughout the country still grow basic grains-an increasing number of them women. How, and even more importantly, why, do these farmers persevere against the global market odds?

The answer is that in spite of all that’s been said, the Mexican farming sector is indeed highly subsidized, though not by a government concerned with assuring the viability of agriculture and the security of the country’s food supply. Mexican farmers themselves, and particularly southern farmers living in poverty, subsidize national corn production through a combination of unpaid family labor, small-scale commercial activities, and, especially, the $24 billion in annual remittances sent home by Mexicans working in the United States.

The remittances have a dual role. First, the money sustains agricultural activities that have been deemed nonviable by the international market but that serve multiple purposes: family consumption, cultural survival, ecological conservation, supplemental income, etc. Second, by sending money home, migrants in the United States seek not only to assure a decent standard of living for their Mexican families but also to maintain the campesino identity and community belonging that continue to define them in economic exile. Their money, whether individual or organized, subsidizes rural infrastructure, farm equipment, inputs, and labor, and conserves cultural identity.

The combination of these personal subsidies and subsistence tenacity accounts for the otherwise unaccountable growth in corn production in Mexico-despite the overwhelming "comparative disadvantages" of a distorted international market. They reflect a deep cultural resistance to the dislocation and denial inherent in the free trade model.

2. The Myth of "Comparative Advantages"

As NAFTA was being negotiated, the U.S. Grains Council estimated that in Mexico only 1.7 to 2 million hectares have the capacity to produce close to the U.S. standard of eight tons of corn per hectare (2.47 acres). The implication was that farmers tilling the remaining 6.5 million hectares in corn production should look for other work.

The first reason why these marginal corn producers have not become factory workers or mango growers over a decade later is because they can’t. The idea that Mexican agriculture can be restructured to exploit comparative advantages on the international market is a pipe dream. The characteristics of Mexico’s land and climate limit regions where fruits and vegetables-the NAFTA "winners"-can be grown, and investment is concentrated in a handful of areas in the North. Thus the model exacerbates regional polarization and southern exclusion. Moreover, foreign investment needed to convert crops and develop export industries has failed to arrive. Since the onset of NAFTA, 0.3% of all foreign direct investment went to agriculture-a dismal showing by all accounts.

Several sectors already favored by natural resources, capital, proximity to the U.S. market, and infrastructure have grown during the NAFTA years, but particularly in terms of rural employment, they offer an option to very few farmers. Export agriculture also employs some of the most socially and environmentally harmful methods of food production in the countryside, including the intensive use of migrant family labor, application of chemical inputs with severe short and long term health and environmental effects, documented discrimination against women, exploitation of child labor, and violations of human rights.

Post-NAFTA agricultural trade has not always been easy even for this privileged group. Mexico’s agro-export sector has repeatedly faced trade barriers in the United States. Counter-seasonal tomato farmers in the northern state of Sinaloa fought for years with their counterparts in Florida, who repeatedly closed the border to protect U.S. growers. Until recently, sanitary rules were also applied to protect U.S. growers from competition from avocados from the state of Michoacán.

Still, free marketers insist that Mexican agriculture merely needs social "safety net" programs to assist while employment adjustments are made. What they fail to realize is that small-scale corn production is the millennia-old safety net for all of Mesoamerica. Trying to fit this maize-centered campesino economy-based on cultural preservation, subsistence, and small-scale sustainable agriculture-into the free trade model of comparative advantages is like trying to cram a square peg into a round hole. When Mexican farmers demand new rural policies and a new pact between the state and rural society, they are demanding that the non-market contributions of the campesino economy be recognized as essential to food sovereignty, cultural diversity, environment conservation, and rural employment.

3. The Myth of Free Trade as a Development Model

Since the "lost decade" of the 80s and the polarization of wealth in the 90s, the "trickle-down" theory has fallen into disrepute. Even so, today’s neoliberals still insist that the poor will eventually benefit from the model, and all that’s needed is for the laggards to catch up, convert, modernize, integrate, etc. As NAFTA enters its 15th year and after nearly two decades of trade liberalization under GATT, Mexican agriculture has steadily lost ground: statistics show that the number of people employed in the primary sector (agriculture, livestock, forestry, hunting, and fishing) went from 8.2 million in 1991 to 6.1 million in 2006, dropping from 26.8% of the population to 14.6%.

Meanwhile, there has been no significant progress in improving social indices of poverty, malnutrition, and school desertion. While former President Fox and his cabinet boasted of six billion pesos in agro-export earnings, farmers point out that that money went into the pockets of fewer than 7% of Mexico’s farmers.

A major premise of both NAFTA and the proposed Free Trade Agreement of the Americas (FTAA) is that if a nation stays on the yellow brick road of IMF prescriptions and economic integration, it will reach the Emerald City of U.S. prosperity. These trade pacts offer no alternative routes, no other destinations. Today, gaps in wages and income levels between the United States and Mexico are wider than before. Mexican farmers are saying not only that they can’t compete with the U.S. agricultural model but also that they don’t want to. And they present a long list of reasons why.

One objection encompasses social and environmental concerns about the U.S. agricultural model. The U.S. model is not environmentally sustainable due to the large amount of chemical pesticides, herbicides, and fertilizers applied and the monocropping techniques; it destroys biological, agricultural, and cultural diversity; it decimates rural employment (2% of the U.S. population makes a living farming compared to 25% of the Mexican population); and it increases social inequities by concentrating land holdings.

The second objection cites national sovereignty and dependency issues. The free-trade model creates food dependency through imports (Mexico now obtains 40% of its food from abroad); links the rural sector to the whims of transnational capital instead of to the nation’s consumers and producers; strangles local and regional markets; and encourages dependency on transnational seed and chemical conglomerates.

Farmers have also begun to recognize consumer issues: the U.S. model erodes food quality to the consumer by encouraging junk-food imports and chemical use, and it inhibits culinary diversity and ethnic-based food traditions that have high cultural and health value. Since NAFTA, Mexico has developed a major problem with obesity for the first time due in large part to the increase in imported processed foods.

Because of this, Mexican farmers are not just asking for a little time and money to attain U.S. stature when they reject the 2008 tariff removals. Correcting macroeconomic gaps and promoting structural reforms such as privatization of land, basic services, and natural resources in order to more successfully apply a U.S. model of agricultural is not the objective. Through contacts with U.S. family farmers and environmentalists, they recognize that the United States is well-advanced along paths that Mexico dare not follow if the long term goal is sustainable development, social equity, and a decent quality of living for all. A new model would incorporate a basic principle: a nation’s first moral and political obligation is to assure the right to food and a decent standard of living to its inhabitants by developing national policies that respond to national needs. This includes ensuring the long-term viability of small farmers rather than negotiating their demise; recognizing the environmental, cultural, and social contributions of agriculture; and actively defending food sovereignty and quality.

4. The Myth of the Fail-Proof Policy

Despite the economic crisis in Argentina, and challenges in Venezuela, Bolivia, Ecuador, and other countries, neoliberal planners have systematically refused to acknowledge any responsibility for their model’s failures. This denial of accountability, vital to the ideological defense of free trade, is being challenged directly by farmers’ demands to revise parts of NAFTA. In response, government leaders from all three NAFTA countries have ascribed to the text a moral authority tantamount to the Bible’s and have refused to discuss modifications, although the law clearly allows it.

Confronted by the negative impacts of NAFTA on Mexican agriculture, the Calderón administration has refused to consider renegotiation and insists that free trade is not the source of farmers’ problems. Defenders of rural policy caution against "throwing the baby out with the bath water" and insist on the need to surge forward with structural reforms arguing that the problem is not too much free trade, but too little.
Conclusion: Policies Based on People, Not Myths

If the free market is a dysfunctional myth, and if the model is impoverishing the vast majority of rural producers and contributing to immigration and poverty, should it continue to be considered the organizing principle for Mexican agriculture and the sole basis of the two nations’ trade relations? What’s happened in Mexican agricultural justifies at the least a serious re-evaluation of the NAFTA agricultural chapter. In demanding suspension of the tariff removal, Mexican farm organizations are saying that it’s time to discard the myths and permit human values to play a role in their agricultural policy.

Mexican farmers not only reject an asymmetrical trade agreement that destroys their livelihoods and their communities, they also reject being railroaded onto a one-way street. To compete with the United States means to adopt the U.S. transnational-dominated model of agriculture-a model severely questioned by family farmers in the United States as well. Competing on these terms-the only ones understood by a market driven solely by prices-is unraveling Mexican society. Buying into this corporate myth could jettison 9,000 years of culture, domesticated agriculture, and biological and agricultural diversity.

The failure to resolve the Mexican agricultural crisis in large part caused by NAFTA has increased migration and complicated relations between the United States and Mexico and between our people. But the problem goes beyond migration. The United States could soon have to deal with the destabilizing effects of imposing a rigid free trade model on Mexico that fails to take into account the needs of the poor.

Instead, both countries could rethink trade policies and begin to base new ones on reality, not myths. An integral vision of what rural producers and consumers need and offer forms the basis of the food sovereignty approach developed by the farmers’ movement.

Laura Carlsen is director of the Americas Policy Program (www.americaspolicy.org) in Mexico City, where she has been a writer and political analyst for two decades. Feedback can be directed to lcarlsen(@)ciponline.org. This article was part of a presentation to the U.S. Congress on Dec. 6, 2007.