International Business : BRIEFING BOOK : Mexico Ending Farm Subsidies in Bid to Comply With NAFTA

ISSUE: Mexican President Carlos Salinas de Gortari is phasing out price support payments for corn, beans and other crops and replacing them with direct payments to farmers based on how much land is currently planted in those crops.

The goal is to persuade Mexican farmers to quit producing crops that other nations can grow more efficiently, and shift Mexico’s agriculture to crops such as fruits and vegetables where it has natural competitive advantages.

BACKGROUND: Mexico’s agriculture subsidies have kept farmers growing corn and other field crops that are poorly suited to the soil and climate. The subsidies also violate the General Agreement on Tariffs and Trade.

Ending the $2.2 billion in annual subsidies would also help Mexico’s farmers adjust to the 15-year phase-out of agriculture tariffs spelled out in the proposed North American Free Trade Agreement.

The direct payments (about $4 billion a year) permitted under GATT, are intended to keep farmers in Mexico and enable them to modernize and invest in crops where nature favors efficient winter production for both domestic and export markets.

The most efficient production of fruits and vegetables in Mexico today is financed by U.S. agribusiness, mainly for export back to the United States. Such products are shipped in winter and are largely complementary to California’s summer-producing horticulture industry, according to Roberta Cook of the University of California at Davis.

The United States imported $1.5 billion worth of Mexican fruits and vegetables last year and exported barely one-fifth as much to Mexico, although that gap has been shrinking for several years. California grows nearly half of U.S. fruits and vegetables.

OUTLOOK: Because current tariffs on fruits and vegetables average 16% on U.S. products entering Mexico and 7% on Mexican produce coming here, NAFTA’s tariff phaseout is expected to benefit this country’s growers in the short term.

Because of the differences in seasons, a modernized fruit and vegetable industry in Mexico would create more competitive problems for Florida growers than Californians.

But even if Mexico’s strategy to boost the efficiency of its fruit and vegetable sector succeeds, that production will go largely to its fast-growing domestic market rather than be shipped in large volumes to the United States, predicts UC’s Cook.

The chief impact on California’s farm sector will not occur for 10 to 15 years, she said, and would take the form of reduced U.S. exports to Mexico’s domestic market, which is growing a healthy 2.1 % a year.

But for years to come, due to the efficiencies of the technology-intensive U.S. industry and the inefficiencies in Mexico, the trend is for increased U.S. fruit and vegetable exports to Mexico and slower growth--or even declines, as occurred last year--in imports from Mexico.

The labor impact of the Salinas government’s recent action is less clear. Though substantial direct payments to farmers were seen as essential to keep them in Mexico, numerous U.S. observers said it could have the opposite effect, at least initially.

“If you can get money for not growing corn, wouldn’t you just take the money and run?” asks UC’s Philip L. Martin, a farm economist who has written about the effects of trade liberalization on Mexican migration to the United States.

That might create some short-term benefit to California farmers by flooding the region with more cheap labor. In the longer term, however, a healthy Mexican farm sector able to compete internationally would create stable jobs at home, the most desirable way to stem the migratory tide and ease the burden of immigration on California’s economy.

STRATEGY: Mexico’s farm-subsidy reform is its latest step toward a market economy and, combined with such changes as letting farmers sell or rent their small plots of land to bigger operators, are intended to foster an agriculture industry that can compete within the expected new “borderless” North American economy.

Most California agriculture experts are convinced that the benefits of these moves outweigh any disadvantages, both for the state’s farmers and consumers. As borders open, California’s more aggressive producers will accelerate their follow-the-sun strategies, which increasingly allow year-round production of fruits and vegetables from one end of the hemisphere to another.