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Reshaping NAFTA could be good for Mexico’s economy (and Brazil’s and Argentina’s, too)

This article has been updated to reflect the latest developments on the North American Free Trade Agreement.

The United States will move swiftly to renegotiate the North American Free Trade Agreement (NAFTA), a 23-year-old tripartite deal that removed tariffs and significantly increased commerce between Canada, the United States and Mexico.

The deal has faced harsh criticism from Donald Trump as both candidate and as president. Previously, the White House had indicated that renegotiation of the deal – a key campaign promise – was likely to start in late 2017.

Now, president Trump appears eager to force a renegotation with Canada and Mexico, at one point indicating the US might even exit the deal, according to an April 26 story in the New York Times.

Trump has called NAFTA the “worst trade deal ever”, pointing out that it has contributed to a US trade deficit with Mexico reaching US$63.2 billion last year.

This is the country’s fourth-largest trade deficit, after China, Japan and Germany. America’s deficit with the other NAFTA nation, Canada, was slightly over US$11 billion in 2016.

But that’s only part of the story. Remove cars and auto part imports, for example, and the US deficit with Mexico virtually disappears.

Overall, NAFTA has been beneficial to Mexico, Canada and the US alike. Since it was signed in 1994, foreign direct investments (FDI) in Mexico have averaged 2.6% of GDP (compared to 1% for two decades before NAFTA). At present, annual bilateral trade between the US and Mexico is running at US$580 billion.

Agricultural gains

It is not yet clear what such a renegotiation might include. But much of Trump’s outdated protectionist rhetoric hinges on manufacturing, outsourcing of jobs to Mexico and immigration. Agriculture – a key link between the two nations – does not seem to have entered his calculations to date.

Globalisation may have contributed to manufacturing job losses in the US, but it has had significant benefits for the American agricultural sector. US exports of agricultural products to Mexico have increased nearly fivefold since NAFTA was signed.

For the 2014–15 crop marketing year, US corn production was 360 million metric tons, 13% of which was exported. Mexico accounted for 23% of these exports.

Around 98% of the corn that Mexicans use to make tortillas and other staples of their diet comes from the US. Daniel Aguilar/Reuters

In 2016, Mexico imported US$17.9 billion in American agricultural products: US$2.6 billion in corn, US$1.5 billion in soybeans, US$1.3 billion in pork and US$1.2 billion in dairy products.

Around 98% of the corn that forms a staple of the Mexican diet comes from the US. Mexico also buys 7.8% of all US pork production.

What has been good for US farmers has actually hurt Mexican agriculture. Lulled by a steady supply of cheap US farm products and low transportation costs, and assuming that the good times will continue, Mexico has not diversified its agricultural imports. It depends heavily on US farmers to feed its people, endangering Mexico’s long-term food security.

America losing ground

The US is the world’s top exporter of agricultural products, but there are other global breadbaskets, including Brazil, Australia, Russia, Argentina and Ukraine. As these rivals have adopted more modern farming and agricultural practices and improved their transport and product-handling infrastructure in recent years, America’s global export share has been steadily declining.

Political decisions have at times accelerated this decline. In 1979, the US banned grain sales to the then-Soviet Union because of its invasion of Afghanistan. This forced the USSR to improve its own grain production, and, in 2016, Russia surpassed the US for the first time in wheat exports.

‘Super extra American rice’ in Mexico City. Jennifer Szymaszek/Reuters

Might Donald Trump’s administration be facing a similar watershed moment for American agriculture?

As America threatens to close its agricultural export door, it has damaged Mexico’s confidence in the reliability of its major supplier – perhaps permanently. In a January 2017 Washington Post opinion piece, former Mexican president Ernesto Zedillo wrote that it was a “waste of time” to play “NAFTA tweaking games with the Trump Administration”.

Though Mexico currently has free trade agreements with 45 countries (more than any other country in the world), agriculture has consistently been the most sensitive issue in Mexico’s free trade agreements. Trump has changed that.

Today, the country is accelerating its search for new partners to meet its national agricultural needs. Sensing long-term opportunities, Brazil and Argentina – both major exporters of beef, wheat, soybeans and other prized US agricultural products – are elbowing their way to the front of the queue. Neither currently has a free trade agreement with Mexico.

Mexico’s Deputy Economy Minister Juan Carlos Baker has said that the country is “pretty far advanced with Brazil. Argentina is a few steps behind”, confirming that Mexico could offer South American producers terms similar to those currently enjoyed by American farmers “if it suits us”.

Brazil’s Agriculture Minister Blairo Maggi has announced that the country is “back in the game”.

Mexico is also discussing bilateral deals with Australia and New Zealand, two other main food-exporting countries.

In addition to government-to-government agreements, companies that produce and trade agricultural products are also seeing Mexico’s vast import market with new eyes. One of them is Adecoagro, which owns and leases some 434,000 hectares of farmlands in Brazil, Argentina and Uruguay and harvests two million tons of agricultural products annually.

The New York-traded Buenos Aires-based firm, whose major shareholders include the Hungarian-American investor George Soros, the Dutch Pension Fund PGGM and the Qatar Investment Authority, currently exports agricultural products such as corn, wheat, soybean and cotton to Africa, Asia and Middle East.

It sees NAFTA-related uncertainties as an opportunity to penetrate the Mexican market, especially if Brazilian and Argentinian products are granted favourable US-style export arrangements.

Who doesn’t love Argentine beef? Mexico probably would. Marcos Brindicci/Reuters

Mexico’s brighter outlook

In addition to diversifying its trading partners, Mexico is also seeking to stimulate its domestic agricultural production, according to several government officials and advisers.

New policies currently under consideration would incentivise farmers to produce more, modernise their farms, increase crop yields, and expand cultivable areas. The country is also looking to improve its transportation and storage infrastructure, including ports that could be used for bulk grain imports.

All of these efforts will help put Mexico on more equal footing with the United States in future NAFTA negotiations. So, too, would retaliatory measures against a threatened US border tax. (And, anyway, if the US does decide to implement one, the market is likely to sell off Mexican peso aggressively, making Mexican products cheaper even with new tariffs.)

Like the 1979 US grain ban that helped Russia improve its agriculture, Trump’s vituperation may prove beneficial to Mexico (and bad for the US) in the decades to come.

Mexico’s president is highly unpopular, so getting tough with Trump over NAFTA may be good politics. Carlos Jasso/Reuters

In the meantime, Mexico is facing a tough political and social landscape. President Enrique Peña Nieto’s approval rating is nearing single digits and the the economy is performing anaemically, with 2017 economic growth predicted to be a paltry 1%.

With a presidential election approaching in 2018, Peña Nieto is unlikely to hard sell to his people a new NAFTA that does not appeal to Mexicans. So it would be good politics, too, to play hardball with Trump.

Mexico has more policy options than it thinks. And it may have less to lose than its northern neighbour.

If ending NAFTA hurts farmers in America’s Corn Belt, who voted overwhelmingly for Trump, there goes the Republican’s reelection.

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