International Trade: U.S. Agencies Need Greater Focus to Support Mexico's Successful Transition to Liberalized Agricultural Trade Under NAFTA
Published: 2005-03-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1994, the North American Free Trade Agreement (NAFTA) created the world's largest free trade area and, among other things, reduced or eliminated barriers for U.S. agricultural exports to Mexico's vast and growing markets. As part of a body of GAO work on NAFTA issues, this report (1) identifies progress made and difficulties encountered in gaining market access for U.S. agricultural exports to Mexico; (2) describes Mexico's response to changes brought by agricultural trade liberalization and challenges to the successful implementation of NAFTA; and (3) examines collaborative activities and assesses strategies to support Mexico's transition to liberalized agricultural trade under NAFTA.
section_title: What GAO Found
paragraphs: U.S. agricultural exports have made progress in gaining greater access to Mexico's market as Mexico has phased out barriers to most U.S. agricultural products, and only a handful of tariffs remain to be eliminated in 2008. Total U.S. agricultural exports to Mexico grew from $4.1 billion in 1993 to $7.9 billion in 2003. Despite progress, some commodities still have difficulties gaining access to the Mexican market. GAO found that Mexico's use of antidumping, plant and animal health requirements, safeguards and other nontariff trade barriers, such as consumption taxes, presented the most significant market access issues for U.S. agricultural exports to Mexico. Mexico has put in place several programs to help farmers adjust to trade liberalization, but structural problems, such as lack of rural credit, continue to impede growth in rural areas, presenting challenges to full implementation of NAFTA. Lagging rural development fuels arguments that NAFTA has hurt small farmers, although studies, including some Mexican studies, do not support this conclusion. Opponents of NAFTA want to block further tariff eliminations and are demanding renegotiation of NAFTA's agricultural provisions. Concerned about such opposition, U.S. officials acknowledged the need to promote the benefits of NAFTA, while seeking ways to help Mexico address its rural development issues. Historically, U.S. agencies have undertaken many agriculture-related collaborative efforts with Mexico. Since 2001, U.S.-Mexico development activities have taken place under the Partnership for Prosperity (P4P) Initiative to promote development in parts of Mexico where economic growth has lagged. Recognizing the importance of rural development to the success of NAFTA, Department of State and USDA strategies for Mexico call for building on collaborative activities under the P4P to pursue the related goals of rural development and trade liberalization under NAFTA; however, the P4P action plans do not set forth specific strategies and activities that could be used to achieve these goals.

section_title: Letter
paragraphs: In 1994, the North American Free Trade Agreement (NAFTA) created the  world’s largest free trade area and helped Mexico become one of the largest  and fastest growing markets for U.S. agricultural products. U.S. agricultural  trade officials consider NAFTA a model for U.S. efforts to liberalize free  trade throughout the Western Hemisphere. NAFTA is an ambitious  undertaking, bringing together the United States and Canada, two of the  most competitive and advanced agricultural producing nations, and  Mexico, a developing country with a large rural population still  significantly dependent on traditional agricultural production methods.  Since the beginning of the negotiations, concern over these disparities has  provoked controversy in Mexico regarding the agricultural provisions of  NAFTA, and the debate continues over the benefits of the agreement for  Mexico’s rural areas. This debate has significant implications for the full  and successful implementation of NAFTA and long-term prospects for U.S.  agricultural products in Mexico.
In response to your request for information on U.S.–Mexico agricultural  trade and NAFTA, this report (1) identifies progress made, as well as  difficulties encountered, in gaining market access for U.S. agricultural  exports to Mexico since NAFTA went into effect; (2) describes both  Mexico’s efforts in response to changes brought by agricultural trade  liberalization and challenges to the successful implementation of NAFTA;  and (3) examines U.S.–Mexico collaborative activities and assesses  strategies to support Mexico’s transition to liberalized agricultural trade  under NAFTA.
To address these objectives, we obtained and analyzed official data on  agricultural trade trends from both U.S. and Mexican government agencies.  We discussed the limitations and reliability of this trade data with U.S.  Department of Agriculture (USDA) officials and determined that the trade  data reported by USDA are sufficiently reliable for the purpose of this  report. We conducted an extensive literature search and identified the most  appropriate research and studies on Mexico’s agricultural programs and on  the impact of NAFTA on Mexican agriculture. We took several steps to  ensure the credibility of those studies we used for our report. We also met  with U.S. and Mexican government officials in Washington, D.C., and in  Mexico City. We contacted representatives of U.S. producer groups,  academia, and other experts on U.S.–Mexico agricultural trade and  Mexican agricultural sector development issues, and we reviewed  extensive documentation and academic research provided by these  sources. We also prepared case study analyses for seven agricultural  commodities to illustrate the type of market access problems confronting  U.S. agricultural exports to Mexico. While we describe Mexico’s use of  trade measures, we did not evaluate the validity of their application. The  commodities we selected for the cases studies were representative of  products at various stages of the tariff elimination, different agricultural  sectors (e.g., grains, horticultural, and animal products), various trade  barriers, a range of dispute resolution mechanisms, and varying levels of  export value and volume. We performed our work from February 2004  through February 2005 in accordance with generally accepted government  auditing standards. Appendix I contains a full description of our objectives,  scope, and methodology.
subsections: section_title: Background
paragraphs: Mexico’s accession to the General Agreement on Tariffs and Trade (GATT)  in 1986 initiated a process of market liberalization that provided significant  opportunities for U.S. agricultural exports. By the early 1990s, Mexico had  become the fastest growing export market for U.S. agricultural products,  and the United States enjoyed a substantial net agricultural trade surplus  with Mexico. U.S. agricultural producer groups were generally supportive  when the United States and Mexico entered into negotiations aimed at  creating a free trade agreement, which eventually resulted in NAFTA.
subsections: section_title: NAFTA Commitments Designed to Eliminate Many Agricultural Trade Barriers
paragraphs: In negotiating NAFTA, the United States sought to gain additional market  access for its agricultural exports to Mexico by eliminating Mexican  agricultural tariffs. Mexico’s agricultural tariffs averaged 10 percent,  compared to average U.S. tariffs of 4.5 percent at the time NAFTA was  being negotiated. NAFTA called for Mexico to eliminate tariffs on most  commodities immediately upon implementation of the agreement in 1994  and to do away with nontariff trade barriers, most notably its system of import licensing requirements. Some products that Mexico considered to  be particularly sensitive commodities were granted transition periods for  tariff elimination to allow time for Mexican producers to adjust to  increased import competition.
NAFTA sets forth the specific schedules for tariff elimination and places  commodities in staging categories, or “baskets,” that define when the  commodities should enter the market duty-free. In general, tariffs for  products that were granted transition periods were reduced in equal  increments over a specified time period (see table 1). However, for certain  sensitive commodities (such as corn and poultry) the greater part of tariff  reductions was postponed until the final years of the transition period, a  practice referred to as “back-loading.”
NAFTA also called for Mexico and the other NAFTA partners to replace  quantitative import restrictions with tariff rate quotas (TRQs). Products  subject to TRQs enter the importing market duty-free up to the level of the  quota. Once the duty-free level (quantitative limit) is reached, a duty is  imposed on the over-quota imports. NAFTA partner countries committed to  gradually expanding the duty-free quota for the commodities, reducing the  over-quota tariff charged during the transition period, and ultimately  eliminating the TRQs. As with the phasing out of tariffs, NAFTA TRQs  follow the same scheduled transition periods of 4, 9, and 14 years.
section_title: Application of Trade Measures under NAFTA Are Subject to Disciplines
paragraphs: In addition to providing for the elimination of tariff and nontariff trade  barriers, NAFTA also established disciplines for the application of trade  measures to counter threats or harm to domestic producers and  consumers, such as sanitary and phytosanitary (SPS) requirements,  antidumping and countervailing duties, and safeguard actions. For  example, NAFTA requires that SPS measures must be science-based,  nondiscriminatory, and transparent, and that they are applied only to the  extent necessary to achieve a party’s appropriate level of protection.  Similarly, under NAFTA the parties are required to follow their domestic  legal procedures when applying antidumping or countervailing duties  measures in response to unfair foreign trade practices. NAFTA also calls  for safeguards to be applied through fair and open administrative  procedures and for compensation to be provided for the affected countries.  Under NAFTA, a party’s right to apply a safeguard terminates at the end of  an agreed-upon transition period. Thereafter, a party may apply the  safeguard only with the consent of the exporting party. Moreover, NAFTA  allows the party applying a safeguard to impose duties only up to the level  of its Most Favored Nation duties.
section_title: NAFTA Presented Challenges and Opportunities for Mexican Agricultural Sectors
paragraphs: Many studies projected that Mexico would benefit from improved access to  U.S. agricultural markets for agricultural products under NAFTA. However,  some observers raised concerns about the difficulties Mexico’s more  traditional agricultural producers might encounter as the country opened  up to U.S. products. With more than 22 percent of the population  dependent on the sector, but with many farmers unable to compete under  free market conditions, agriculture is a significant yet vulnerable area of  the Mexican economy. Differences in perceived opportunities and  challenges resulted from the three distinct types of agricultural producers  present in Mexico. Mexico’s agriculture sector consists of a large number  of small traditional farmers, some medium size commercially oriented  growers, and a lesser number of large modern producers. These groups of  farmers differ in many respects including farm size, access to capital, types  of crops produced, and productivity. Small subsistence farmers produce  primarily corn (maize), often at subsistence levels for self-consumption, in  small parcels of less than 5 hectares of mostly rain-fed land. Corn is also  among the major U.S. agricultural exports to Mexico, which is perceived by  some to be in competition with the production of small subsistence  farmers. Medium size farmers are involved in commercial-oriented  operations, however, they face relatively high cost structures, which are  marked by scarcity of capital and insufficiently developed marketing  infrastructure. Some believe that medium size commercial farmers face the  greatest impact from import competition and structural change. On the  other hand, Mexico’s large commercial farmers usually have larger plots of  irrigated land and a higher productivity level. They have better access to  capital, including direct investment and commercial lending from abroad.  Mexican commercial farmers are also typically involved in production of higher-valued commodities, notably fresh fruits and vegetables, which have  undergone dynamic export growth since the early 1990s.
Agricultural trade expansion since NAFTA’s implementation generally has  been consistent with expectations. While U.S. trade data indicates Mexican  agricultural exports have done well under the agreement, some observers  maintain NAFTA has had negative consequences for small farmers. For  example, one study asserts that employment opportunities for Mexican  subsistence farmers have declined under NAFTA. According to this study,  imports of cheaper corn have contributed to lower corn prices in Mexico,  which has led medium size farms to cut back their demand for labor  supplied by subsistence farmers. However, a December 2003 World Bank  report noted that NAFTA did not bring about many of the anticipated  negative effects on poor subsistence farmers and had not had a devastating  effect on Mexican agriculture as a whole. This research notes that as  consumers, Mexican farmers may have benefited from lower corn prices.  In addition, corn production in Mexico has not declined, but rather had  increased by about 14 percent since NAFTA was enacted, to a record high  in 2003. Other research conducted by several Mexican academic  institutions concluded that NAFTA had resulted in benefits for the  country’s farm sector, including increased agricultural exports and greater  investment in agricultural production.
section_title: U.S. Agricultural Exports Have Gained Greater Access to Mexico under NAFTA, but Some Market Access Barriers Remain
paragraphs: As implementation of NAFTA has progressed over the past decade, Mexico  has phased out tariffs on agricultural imports in accordance with the  agreement’s scheduled transition periods of 4, 9, and 14 years and has done  away with a key nontariff trade barrier, import licensing requirements. U.S.  agricultural exporters have benefited both from this process of continued  trade liberalization under NAFTA and from the additional assurances  provided through the NAFTA dispute settlement mechanism. Exports to  Mexico have increased significantly since NAFTA, continuing a trend of  export growth that started in the mid 1980s. However, despite the progress  made, some U.S. agricultural products continue to experience difficulties  gaining access to the Mexican market, typically due to antidumping, SPS  requirements, safeguards, and other trade measures Mexico has put in  place. These difficulties are not unlike challenges U.S. agricultural exports  face in other major markets, such as Canada or Japan.
subsections: section_title: NAFTA Increased Market Access and Provided Additional Recourse for Resolving Disputes
paragraphs: Although Mexico had taken several steps to allow greater access to its  markets prior to 1994, NAFTA provided a legal agreement and framework  through which further market liberalization could take place. Further,  NAFTA’s dispute settlement mechanism provided U.S. exporters with  additional rules and processes for resolving disputes that did not exist prior  to NAFTA.
subsections: section_title: Mexico Successfully Reduced Tariffs and Other Barriers
paragraphs: Mexico has thus far implemented its NAFTA commitments by reducing or  eliminating tariffs according to schedule and removing nontariff barriers,  resulting in greater access for U.S. agricultural goods. In the latest round of  tariff eliminations (on Jan. 1, 2003), Mexico eliminated tariffs on more than  a dozen commodity imports from its NAFTA partners, including products  important to U.S. producers such as rice, soy oil, and pork. On January 1,  2003, in accordance with its commitments under NAFTA, Mexico had  eliminated tariffs or TRQs on all but three commodities: corn, dry beans,  and milk powder.Two of these commodities, corn and beans, are  considered particularly sensitive commodities for Mexican agriculture  because they are among the principal crops of small Mexican farmers and  are also staples of the Mexican diet. TRQs on these commodities are scheduled for full elimination by the end of the 14-year transition period in  2008.
In addition, Mexico has done away with import licensing requirements, a  key nontariff barrier. These import licensing requirements functioned, in  effect, as a type of quota, since only the volume of goods authorized under  the import license could be imported, and they were intended to protect  Mexican producers of agricultural commodities that were sensitive to  foreign competition. Prior to NAFTA, many major U.S. agricultural exports  to Mexico, such as poultry, dairy, wheat, corn, and dry beans, were subject  to import licensing requirements. NAFTA permitted Mexico to use phased- in tariff elimination as a mechanism to transition away from the use of  import licensing requirements. Under the agreement, Mexico immediately  did away with import licensing requirements and converted them to either  regular tariffs or TRQs. Additionally, NAFTA set a schedule to gradually  eliminate both the tariffs and TRQs.
section_title: NAFTA Dispute Settlement Provides Additional Recourse for U.S. Producers
paragraphs: NAFTA also benefits U.S. exporters by providing them with a formal  mechanism for resolving disputes. Under the agreement, disputes that  cannot be resolved through consultations between member countries may  be brought before impartial, independent panels. Since both the United  States and Mexico are members of the WTO as well as NAFTA, the United  States can file trade grievances under the dispute settlement mechanism  provided by either agreement. According to United States Trade  Representative (USTR) officials, the United States generally would utilize  the NAFTA dispute settlement mechanism if it determined that Mexico is in  violation of a provision that is specific to NAFTA and is not covered under  the WTO. These officials explained that the United States would rely on the  WTO’s dispute settlement process if the matter also affected WTO  members that are not members of NAFTA. According to information  provided by USTR, to date, the United States has only brought one agricultural dispute settlement case against Mexico under NAFTA,  compared to four under the WTO process.
According to a U.S. Department of Agriculture (USDA) report, most trade  disputes are resolved through informal discussions or consultations  involving government and private sector representatives, rather than  formal dispute settlement procedures. For example, through government- to-industry negotiations, a minimum price agreement was established for  U.S. apples, and through government-to-government negotiations, an  agreement was reached to modify Mexico’s dry bean quota auctions. In  addition, through industry negotiations, a dispute involving U.S. and  Mexican grape industry labeling regulation was resolved. The use of  industry negotiations also deterred the Mexican cattle industry from filing  an antidumping petition against imports of U.S. cattle. Another alternative  dispute settlement mechanism is the NAFTA Advisory Committee on  Private Commercial Disputes Regarding Agricultural Goods, which  recommends less adversarial resolutions to agricultural contract or  commercial disputes.
section_title: U.S. Agricultural Trade with Mexico Has Continued to Increase since NAFTA
paragraphs: Since NAFTA’s implementation, total U.S. agricultural exports to Mexico  have nearly doubled, rising from $4.1 billion in 1993—the last year prior to  NAFTA’s implementation—to $7.9 billion in 2003 (adjusted for inflation).  Between 1993 and 2003, the value of U.S. exports to Mexico grew on  average by 17.4 percent annually. By comparison, U.S. agricultural exports  to the world grew at an average annual rate of 2.3 percent over the same  time period. U.S. exports to Mexico have comprised an increasingly larger  share of the United States’ total agricultural exports; Mexico’s share grew  from about 8 percent in 1993 to about 13 percent in 2003. Moreover,  according to USDA’s export strategy for Mexico, the full implementation of  NAFTA, a growing urban population, increasing per capita income, and  lack of arable land make Mexico an excellent long-term prospect for U.S.  agricultural products.
U.S. agricultural exports to Mexico already underwent significant growth  after Mexico joined GATT in 1986 and began opening its market to foreign  trade. By the early 1990s, Mexico attained its position as the third largest  importer of U.S. agricultural products, after Canada and Japan. The overall  increases in agricultural exports to Mexico since NAFTA began came about  despite the collapse of the Mexican peso in late 1994, which harmed  Mexican purchasing power for foreign goods and triggered an economic  downturn. Beginning in about 1996, Mexico’s economy began a recovery,  and U.S. exports to Mexico expanded accordingly. Not all increases in  exports to Mexico can be attributed to NAFTA because factors such as  economic growth, weather, exchange rates, domestic supply, and  population growth also affect Mexico’s demand for U.S. products.
U.S. imports of agricultural products from Mexico have also increased  since NAFTA, rising from about $2.9 billion in 1993 to $6.3 billion in 2003  (adjusted for inflation). Agricultural imports from Mexico increased at an  average annual rate of 8.5 percent over the same time period. In 2003,  agricultural imports from Mexico accounted for about 13 percent of the  total value of U.S. agricultural imports from the rest of the world. Figure 1  shows the total value of U.S.–Mexico agricultural trade.
Notwithstanding the potential effects of external factors on trade, NAFTA’s  impact on U.S. exports, particularly for certain key commodities, generally  appears to have been positive. Earlier studies generally concluded that the  agreement would increase U.S. export opportunities for grains, oilseeds, dairy products, tree nuts, and meats. Trends in the trade of the largest  groupings of U.S. agricultural products have been generally consistent with  these predictions. For example, the United States increased exports of  animal products, grains and feeds, fruits and vegetables, and oilseeds to  Mexico since NAFTA. From NAFTA’s implementation in 1994 until 2003,  the value of exports of these key groups of products underwent average  annual increases of between 3.2 percent (oilseeds) and 16 percent (grains  and feeds) (see fig. 2).
section_title: Despite Progress, Market Access Barriers Remain
paragraphs: Some U.S. agricultural products continue to experience difficulties gaining  access to the Mexican market due to the application of nontariff trade  measures. Although Mexico removed import licensing requirements, a key  nontariff trade barrier prior to NAFTA, it still applies several nontariff  measures that affect imports from the United States. According to USDA,  the nontariff measures that present the most significant barriers to market  access for U.S. agricultural exports have been Mexico’s application of  antidumping duties, SPS requirements, and safeguards. In addition to these  trade measures, Mexico has put in place a product tax on all beverages  containing sweeteners other than sugar, which has basically eliminated the  Mexican market for high-fructose corn syrup (HFCS). However, these  impediments are not unlike market access challenges experienced by U.S.  agricultural exports to other major trade partners, including Canada,  Japan, and the European Union.
The following section presents information on the key nontariff barriers  and examples of U.S. agricultural commodities that have encountered  market access challenges in Mexico. The information is based, in part, on  our analysis of market access issues related to seven selected agricultural  commodities: apples, beef, corn, HFCS, pork, poultry, and rice. Our  analysis of each of these commodities is presented in greater detail in  appendix II.
subsections: section_title: Antidumping Actions
paragraphs: The use of antidumping duties continues to pose a barrier to U.S.  agricultural exports to Mexico. The United States has raised complaints in  the WTO regarding Mexico’s application of its antidumping laws on  commodities such as hogs, rice, and beef. The United States requested a  WTO panel with respect to rice and has argued that Mexico’s imposition of  antidumping duties is inconsistent with the WTO Antidumping Agreement.  Mexican officials at the Ministry of the Economy (Secretaría de Economía)  stated that Mexico’s application of antidumping measures to U.S.  agricultural imports was based on an objective and intensive investigation  that determined harm. According to representatives from some U.S.  producer groups and a former senior Mexican government official,  however, there may also be other considerations that affect Mexico’s  antidumping decisions. For example, U.S. apple producers question the  timing of Mexico’s imposition of antidumping duties on apples in August  2002, only a few months before NAFTA’s tariff rate quota on apples was  scheduled to be lifted on January 1, 2003. Additionally, these observers told  us that Mexico’s antidumping actions against certain U.S. agricultural  imports are, to some extent, a response to U.S. restrictions on Mexican  exports to the United States.
section_title: Sanitary and Phytosanitary Measures
paragraphs: NAFTA establishes a number of general requirements to ensure that SPS  measures are only used to the extent necessary to protect plant, animal,  and human health and not as a means to protect domestic producers  fromcompetition. As mentioned earlier, NAFTA calls for these measures  to be science based, nondiscriminatory, and transparent and requires that  the measures be applied only to the extent necessary to achieve an  appropriate level of protection. Mexican officials responsible for plant and  animal health protection maintain that Mexico’s SPS measures are based  on sound science. However, USDA officials and industry group  representatives have raised concerns about the legitimacy of some SPS  measures imposed by Mexico on U.S. agricultural imports as it eliminates  tariffs and tariff-rate quotas. U.S. producer groups told us that they believe  Mexico sometimes uses SPS measures as a means to retaliate for U.S.  policies against its agricultural exports to the United States. For example,  some U.S. producer groups contend that in order to protest U.S.  phytosanitary controls on imports of avocados from Mexico, Mexico’s  agricultural authorities initiated a new policy against U.S. cherries  requiring cherry exports to Mexico to undergo a much more rigorous  inspection process at the border than is warranted. As a result, U.S. exports  of cherries to Mexico dropped significantly because U.S. exporters wanted  to avoid delays at the border that would pose risks with such a perishable  commodity. Moreover, the 2004 proposed work-plan of phytosanitary  measures was not signed. Table 2 illustrates examples of SPS controversies  between the United States and Mexico.
U.S. officials explained that SPS measures are the most commonly used  nontariff measure affecting U.S. market access and may indeed, at times,  be applied to protect domestic producers. According to U.S. and Mexican  officials, determining when SPS measures are justified can be difficult for  several reasons, including different country standards and different  conclusions based on scientific data. Officials from USDA’s Animal and  Plant Health Inspection Service (APHIS) and its Mexican counterpart  SENASICA (Servicio Nacional de Sanidad, Inocuidad y Calidad  Agroalimentaria) informed us that they are working to harmonize U.S. and  Mexican SPS standards to minimize disagreements. In addition, they are  collaborating to lift Mexico’s ban on imports of citrus from Arizona and  areas in Texas due to concerns over fruit fly infestation, as well as to design  and implement a more satisfactory inspection process for U.S. apple  exports to Mexico.
SPS disputes stemming from differing interpretations of scientific data or  differences in regulatory standards illustrate the technical complexity of  plant and animal health protection regulations and their impact on trade.  U.S. officials told us that working through SPS issues with Mexican  authorities under NAFTA provided lessons for later negotiations. They  explained that as developing countries liberalize their markets and begin to  develop mechanisms to address health risks associated with increased  agricultural trade, they often need technical assistance. Thus, the United  States provided trade capacity building assistance to address SPS issues for  some Central American countries and the Dominican Republic in  connection with free trade agreement negotiations with those countries.  The USDA Unified Export Strategy for Mexico notes that beyond  addressing individual SPS issues there must be broader cooperation with  Mexico on technical issues, such as the harmonization of standards,  equivalency of regulatory processes, and transparency in light of the  increasing market integration of the two countries.
section_title: Safeguards
paragraphs: U.S. government officials and U.S. agricultural producer groups told us that  Mexico’s application of certain safeguards to U.S. agricultural products  have been a trade nuisance. In the years following NAFTA, Mexico has  applied special safeguard agricultural provisions on imports of U.S. live  swine, pork, potato products, and fresh apples in the form of TRQs as  provided for in NAFTA. Mexico also applied a safeguard under Chapter 8 of  NAFTA on certain U.S. poultry products. Specifically, under NAFTA,  Mexico’s TRQ on poultry products was to be eliminated on January 1, 2003.  However, in late 2002, Mexico’s poultry industry petitioned the Mexican  government to impose a safeguard on U.S. chicken leg quarters. The  Mexican industry argued that the elimination of Mexico’s TRQ would result  in a surge in imports from the United States which would injure Mexican  producers. USTR officials said the safeguard on poultry was a unique  situation and questioned whether a similar arrangement could be achieved  in other industries. For more information on U.S. poultry exports to  Mexico, see appendix II.
The poultry case also highlights difficulties encountered in the  implementation of a safeguard due to trade data discrepancies. The United  States and Mexico did not agree on the quantity of U.S. chicken leg quarters  that were exported to Mexico in the first half 2003. Mexican data showed a  much larger surge than U.S. data. One U.S. official told us that the main  reason for the large discrepancy was the way Mexico records its initial  import statistics, which is based on notifications of intended imports filed  by Mexican importers, rather than actual imports. After the TRQ on poultry  expired on January 1, 2003, Mexican importers filed large number of  entries, but some never crossed the border. In response to these  difficulties, Mexican officials informed us they have taken steps to clear  notices of intended imports from their database when imports do not  actually occur within a specified time frame.
section_title: Tax on Sweeteners Other than Sugar
paragraphs: In addition to the trade measures discussed above, Mexico has imposed a  tax on beverages made with sweeteners other the sugar, which has led to a  strongly contested dispute between the United States and Mexico  regarding market access for U.S. HFCS exports. Specifically, in January  2002, the Mexican Congress imposed a 20 percent product tax on soft  drinks and other beverages that use any sweetener other than cane sugar.  This action meant that Mexico taxes any beverage containing HFCS, no  matter the amount of HFCS present, at a rate of 20 percent, in addition to  any other taxes already imposed. U.S. importers and producers of HFCS  were affected immediately as Mexican beverage manufacturers switched to  the use of domestically produced sugar instead of HFCS imported primarily  from the United States. Although the tax was temporarily suspended by  presidential decision for a 4-month period, Mexico’s Supreme Court of  Justice unanimously voted to nullify this decision in July 2002. As a result,  the tax was imposed once again. In December 2002, the Mexican Congress  voted to extend the tax. In 2004, the United States filed a dispute case in the  WTO against Mexico’s product tax on HFCS. The case is still pending  resolution. See appendix II for more information on the HFCS case.
section_title: Mexico Enacted Various Agricultural Programs in Response to Trade Liberalization, but Structural Problems Impair Growth and Challenge NAFTA Implementation
paragraphs: Since the early 1990s, the Mexican government has enacted several  agricultural assistance programs to help farmers adjust to the changes  brought by trade liberalization, including NAFTA. Rapid urbanization has  also created political urgency to provide low-cost food by promoting  greater efficiency in domestic food production. The three main programs  had a total budget of over $2 billion in 2003, and their objectives range from  income support to improving agricultural productivity. However, deep- seated structural problems, notably tenuous land ownership and lack of  rural credit, continue to hinder growth and rural development. Opponents  of NAFTA have sought to link lagging rural development and rural poverty  in Mexico to growing imports of U.S. agricultural products. They oppose  further tariff eliminations as called for under NAFTA and demand a  renegotiation of the agricultural provisions of the agreement. This  opposition presents challenges to Mexico’s successful transition to  liberalized agricultural trade under NAFTA.
subsections: section_title: Mexico Has Implemented Several Agricultural Programs and Polices
paragraphs: In response to the changes that market reforms and free trade would bring  to its agricultural sector, Mexico enacted various agricultural programs and  policies since the early 1990s to help farmers adjust to changing economic  conditions. Three of the most significant agricultural assistance programs  have been (1) a major cash transfer program, PROCAMPO (Programa de  Apoyos Directos al Campo); (2) an investment program, Alianza (Alianza  para el Campo); and (3) a marketing support program (Programa de  Apoyos Directos al Productor por Excedentes de Comercialización para  Reconversión Productiva, Integración de Cadenas Agroalimentarias y  Atención a Factores Críticos, formerly Programa de Apoyos a la  Comercialización y Desarrollo de Mercados Regionales). Besides these  three programs, there are other support programs in rural Mexico, such as  Progresa, which was introduced in 1997 to alleviate poverty through  monetary and in-kind benefits, as well as to invest in education, health and  nutrition.
The three major agricultural assistance programs have different levels of  budget and distinct objectives. Appendix III provides a detailed description  of each program.
PROCAMPO is the largest program in terms of annual budget,  amounting to over $1.2 billion in 2003. It provides direct payments to  oilseeds and grains (including corn) producers on a per-hectare basis. In  2001, it supported 2.7 million producers on 13.4 million hectares. Its  objectives are to compensate farmers for expected losses under trade  liberalization and the elimination of price subsidies, to make the free  trade agreement acceptable to farmers, to alleviate poverty, and to  reduce migration from rural areas.
Alianza has an annual budget of around $570 million and supports about  2 million farmers. The program provides matching grants to finance  productive investments and support services. The overall objective of  the program is to improve agricultural productivity by promoting a  transition to higher value crops, improving livestock health, facilitating  technology transfers, and attracting investment in infrastructure.
The marketing support program had an annual budget of about $580  million in 2003 and benefits 240,000 producers. It provides payments to  producers of grains and oilseeds in certain areas, usually on a per-ton  basis. The Mexican government’s evaluation suggests that the program  provides certainty to farmers’ income and is an important factor in  mitigating migration from the countryside.
section_title: Lagging Rural Development in Mexico Fuels Concerns about the Long-term Success of NAFTA
paragraphs: Notwithstanding various farm support programs including the ones  discussed above, some researchers and Mexican and U.S. government  officials noted that Mexico still needs to address structural impediments  that hinder rural development. Some of these problems are related to  Mexico’s tenuous land ownership, known as the ejido system. Some  economists argue that the small size of farm plots under the ejido system  does not make for economically viable production units. In addition, the  ejido system limits farmers’ ability to obtain credit using land as collateral  because the farmers do not have clear ownership of the land. Without  access to credit, farmers cannot shift to new technologies and increase  productivity. According to experts, the lack of rural credit has been a key  impediment to Mexican agricultural development. Mexico’s financial crisis  of 1995 exacerbated the problem of rural development by severely limiting  the Mexican government’s budget available to carry out programs to invest  in rural areas. In addition, according to USDA, other challenges identified  by experts that contribute to the lack of rural development include: low  education level, poor rural infrastructure, environmental problems related  to land use, and low levels of technology.
While U.S. officials note that NAFTA has greatly benefited Mexican  agriculture overall, they express concern about the challenges posed by  lagging rural development to the long-term successful implementation of  the agreement. U.S. officials caution that lagging rural development fuels  the arguments made by opponents of NAFTA that cheap imports from the  United States have depressed Mexican agricultural product prices, hurting  small farmers and deepening rural poverty. In its fiscal year 2005 Unified  Export Strategy for Mexico, USDA acknowledged the need for efforts to  highlight the benefits of NAFTA for Mexico’s economy while seeking ways  to help Mexico address its rural development issues.
The implementation of NAFTA became a major political issue as Mexico  prepared to eliminate tariffs and tariff rate quotas in January 2003.  Elimination of these tariffs provided U.S. agricultural exports even greater  access to the Mexican market. In order to respond to intense criticism by  the opponents of NAFTA at that time, USDA officials had to engage in  extensive dialogue with Mexican legislative and executive officials, and  they mounted a public information drive to explain the benefits of NAFTA  for Mexican agriculture. Ultimately Mexico eliminated the tariffs, but the  administration of Mexican President Vicente Fox found it necessary to  negotiate a national agreement on agriculture with various domestic  constituencies. He intended the agreement—referred to as Acuerdo  Nacional para el Campo—to address concerns about perceived negative  effects of trade liberalization on Mexico’s rural poor. As part of this  agreement, the Mexican government commissioned several Mexican  academic institutions to study the impacts of NAFTA on Mexican  agriculture. This research generally confirmed that structural problems  confronting Mexican agriculture preceded the implementation of NAFTA.  However, certain Mexican producer groups continue to pressure the  government, and a number of members of Mexico’s Congress have strong  ties to groups that oppose NAFTA.
U.S. and Mexican government officials and agricultural experts warned  that there may be considerable opposition to the next round of tariff  elimination in 2008. These officials cited the experience in the months  leading up to the latest round of agricultural tariff elimination in 2003. In  addition, they note that corn, one of the three remaining commodities  scheduled to have tariffs lifted in 2008, is a commodity of particular  concern in Mexico. Corn cultivation has ancient roots in Mexican rural  culture; is central to the Mexican diet, accounting for about one-third of  total calories; and remains the principal crop of subsistence farmers. For  these reasons, eliminating tariffs on corn will be a sensitive cultural issue,  as well as a matter of economic concern.
Certain farm groups in Mexico have argued that allowing cheap imports of  U.S. corn will drive the Mexican agriculture into ruin. Mexican politicians  who oppose NAFTA note the continuing economic distress in rural areas of  Mexico and insist on renegotiation of the agricultural provisions of the  agreement to improve the conditions of Mexican farmers. Although the  total elimination of already low Mexican tariffs on corn may not have much  economic significance for U.S. producers, failure to comply with the final  phase of tariff elimination may undercut support for NAFTA among U.S.  producers who were in favor of the agreement with the expectation that it  would lead to genuinely free trade. Additionally, U.S. trade officials have  expressed serious reservations about any attempt to renegotiate the  agricultural provisions of NAFTA, because it could lead to demands to  renegotiate other aspects of the agreement and undermine the agreement  as a model for trade liberalization throughout the Western Hemisphere.
section_title: U.S. Agencies Undertake Collaborative Agricultural Efforts, but Do Not Focus on Rural Development Challenges to Mexico’s Transition to Liberalized Trade
paragraphs: Over the last 10 years, U.S. agencies, primarily led by USDA, have carried  out numerous activities that benefit both U.S. and Mexican agricultural  interests. However, these activities have not been intended to address the  challenges presented by lagging rural development to Mexico’s transition to  liberalized trade under NAFTA. While the United States provides technical  assistance to more recent free trade partners to facilitate their adjustment  to trade liberalization, no such assistance was arranged for Mexico under  NAFTA. Nevertheless, since 2001 the United States has supported  collaborative efforts to promote economic development in the parts of  Mexico where growth has lagged under the Partnership for Prosperity  (P4P) initiative. Officials from both countries are working on a broader  approach to Mexican rural development under the initiative, but they  recognize that much still needs to be done in this area. In an effort to  support rural development through P4P, the United States has provided  some limited technical assistance to the Mexican government’s new rural  lending institution. Recognizing the importance of rural development to the  successful implementation of NAFTA, State Department and USDA  strategies for Mexico call for building on collaborative activities under P4P  to pursue the related goals of rural development and trade liberalization  under NAFTA; however, the P4P action plans do not set forth specific  strategies and activities that could be used to achieve these goals.
subsections: section_title: United States Pursues Many Collaborative Agricultural Efforts in Mexico
paragraphs: Historically, U.S. agencies have undertaken numerous collaborative  agricultural efforts of mutual interest with their Mexican counterparts;  however, the agencies have not intended those efforts to address the  challenges presented by lagging rural development. USDA, in conjunction  with its Mexican counterparts, has led most of these efforts as part of its  traditional mission of supporting U.S. agricultural production and exports.  With the exception of pest eradication efforts sponsored by the Animal and  Plant Health Inspection Service (APHIS)—approximately $280 million over  the past 10 years—all USDA activities have involved modest funding of less  than $8 million combined since NAFTA was implemented.
Some U.S. agencies have been involved in collaborative efforts with Mexico  in pursuit of plant, animal, and human health objectives. USDA’s APHIS and  Food Safety and Inspection Service and the Food and Drug Administration  have implemented several programs in Mexico to protect U.S. agriculture  and consumers while also facilitating the export of Mexican agricultural  products. For example, APHIS programs are working with the Mexican  government and growers to eradicate the Mediterranean fruit fly.  Eradicating the fruit fly is of great interest for U.S. fruit farmers. However,  eliminating the fly would also allow Mexican farmers to eventually export  fruit crops from formerly infested areas. Over the past 10 years APHIS has  used almost all of its funds in Mexico for collaborative projects to finance  various pest eradication efforts.
USDA’s research, data collection, and marketing agencies, such as the  Economic Research Service (ERS), National Agricultural Statistics Service,  and Agricultural Marketing Service, have worked with their Mexican  counterparts to enhance Mexico’s capacity to collect, analyze, and  disseminate agricultural information. According to ERS officials, these  efforts have improved and facilitated agricultural trade transactions  through the Emerging Markets Program. Economic Research Service  officials said that while the focus of the Emerging Markets Program is to  improve Mexico’s data gathering and reporting systems, USDA has also  benefited from Mexico’s improved capabilities because having reliable  information facilitates public and private decision making for both the  United States and Mexico.
The Agriculture Research Service and the International Cooperation and  Development area of USDA’s Foreign Agriculture Service have participated  in extensive scientific and academic research to improve Mexico’s  agricultural production. According to the Agriculture Research Service,  there are several concerns over agricultural trade, including food safety,  use and consumption of transgenic products, and control of plant and  animal pests and diseases. For a list and description of collaborative  activities with Mexico implemented by USDA agencies, see appendix IV.
section_title: NAFTA Did Not Provide Technical Assistance to Strengthen Mexico’s Trade Capacity
paragraphs: While the United Sates has provided technical assistance and support to  more recent free trade partners through trade capacity building (TCB), no  such assistance was arranged for Mexico when NAFTA was concluded in  1994. TCB became an element of U.S. trade policy after it was introduced  under the WTO Doha Development Agenda in 2001. While it was recognized  that some agricultural sectors in Mexico would find it challenging to adjust  to free market conditions when NAFTA was being negotiated, the  agreement did not require that Mexico should receive any assistance to  facilitate the transition of its farmers to a more open market.
One senior Mexican government official noted that in hindsight TCB or  some type of assistance like it would have been beneficial as Mexico  entered into a free trade environment with two very strong economies (the  United States and Canada). However, this official stressed that Mexico has  done very well under NAFTA overall, although small farmers have not  typically benefited from economic opportunities provided by the  agreement. Even though the United States does not have a comprehensive  effort to provide TCB assistance to Mexico, some U.S. agencies have  undertaken limited activities in Mexico, which they have characterized as  TCB.
section_title: P4P Introduced a Broader Approach to Rural Development
paragraphs: In 2001, U.S. President George W. Bush and Mexican President Vicente Fox  launched the P4P initiative, a new model for bilateral cooperation involving  a public–private approach to collaborative development efforts. This new  initiative is aimed at assisting those economically depressed regions of  Mexico that are the primary sources of migration. These areas tend to be  rural regions in Mexico. While P4P seeks to create a new model for  collaborating on economic development in Mexico, officials from both  countries recognize that few activities have been implemented under P4P  that directly affect poor rural areas and that much still needs to be done in  the area of rural development.
subsections: section_title: P4P Expanded Collaborative Activities to New Areas, but Many Rural Regions of Mexico Remain Untouched
paragraphs: P4P seeks to create a public–private alliance and develop a new model for  U.S.–Mexican bilateral collaboration to promote development, particularly  in regions of Mexico where economic growth has lagged and has fueled  migration. No new funds were specifically allocated to P4P by either  government; instead, the U.S. government sought to refocus resources  already devoted to Mexico to create a more efficient collaborative network.  According to State Department and USDA officials, since its establishment,  P4P has become the umbrella for bilateral development collaboration and  providing a broader approach to Mexico’s rural development needs that  includes occupational and economic alternatives for people in the  countryside.
While this broader approach to rural development has been embraced by  both the United States and Mexico, few activities have been implemented  under P4P that directly affect poor rural areas. At the most recent P4P  conference in Guadalajara, Mexico, a high-level State Department official  responsible for P4P noted that many rural areas throughout central and  southern Mexico have not yet been touched by P4P. Similarly, Mexican  government officials commented that even though the P4P concept holds  much promise, only a few new activities have been undertaken in rural  development. For example, Mexican government officials told us and U.S.  government documents confirm that approximately $10 million allocated  for USAID rural development activities in Mexico under P4P have not yet  been used to fund any new projects.
Nevertheless, since the initiation of P4P, there have been several first-time  achievements that benefit Mexico’s overall economic development. For  example, under an arrangement worked out by the U.S. and Mexican  government in cooperation with private sector financial institutions, the  cost of remittances from the United States to Mexico has dropped by more  than 50 percent over the last 3 years. Remittances from Mexican laborers  living in the United States reached a record $16.6 billion in 2004. In  addition, in 2003 a bilateral agreement was reached through P4P to allow  the U.S. Overseas Private Investment Corporation (OPIC) to operate in  Mexico for the first time. The agency’s mission is to help U.S. businesses  invest overseas to foster economic development in new and emerging  markets. According to OPIC officials, for over 30 years there had been  resistance by the Mexican government to allow the agency to operate in  Mexico because of concerns over sovereignty. Since the bilateral  agreement was signed, the OPIC has provided financing to five projects in  Mexico, including one related to agriculture. For a description of this and  other activities related to rural development by U.S. agencies under P4P,  see appendix V.
section_title: Under P4P, the United States Supports Efforts to Facilitate Rural Access to Credit
paragraphs: One of the few P4P activities to target rural communities is the U.S.  technical assistance provided to the Mexican government’s new rural  lending institution, Financiera Rural. Financiera Rural supports  agricultural and other economic activities in Mexico’s rural sector with the  goal of raising productivity as well as improving the standard of living of  rural populations by facilitating access to credit. Through the USDA  Cochran Fellowship Program, several Financiera Rural officials were  trained in the United States on how to operate a rural credit program.  These officials will serve as trainers for credit managers for Financiera  Rural. In addition, through a USAID fellowship, USDA arranged for a U.S.  expert to assist Financiera Rural in developing a strategic plan. This  strategic plan calls for the development of rural financial lending  intermediaries in Mexico, which will be fostered using a model that  complies with Mexico’s legal framework, determined by a study to be  conducted jointly by the Financiera Rural and the Inter-American  Development Bank. The new strategic plan also proposes that Financiera  Rural fund any productive endeavor in the countryside, not only  agricultural production. Activities could include eco-tourism, rural gas  stations, transportation services, and so on. According to senior Financiera  Rural officials, U.S. technical assistance under P4P has been instrumental  in helping them roll out their rural credit program.
Financiera Rural officials told us that while the assistance they have  received under P4P has had a positive impact, it has been limited. They said  that Financiera Rural faces a great challenge in efforts to address limited  credit availability in the countryside, which, as noted earlier in this report,  is a key factor in Mexico’s lagging rural development. In order to be able to  establish an effective rural lending system for small and medium size  farmers in Mexico, these officials explained that they need to shift from  primarily short-term to long-term credit, develop a network of regional and  local intermediary lending institutions, and provide financing for  alternative rural economic activities beyond direct agricultural production.  Mexican and U.S. officials told us that in order to accomplish these goals  Financiera Rural needs to develop expertise in a number of areas, such as  risk assessment, project management, and loan evaluation. These officials  stated that the expertise in the field of rural credit that exists in the United  States would be helpful in ensuring that Financiera Rural is successful in  providing credit to small farmers and other entrepreneurs in the Mexican  countryside.
section_title: P4P Does Not Specify Activities to Promote Rural Development in Support of Mexico’s Transition to Liberalized Trade under NAFTA
paragraphs: P4P offers an avenue for the United Sates to provide technical assistance  and support to Mexico similar to what it has provided to more recent free  trade partners through TCB, according to a senior USDA official. Similarly,  Mexican officials said P4P provides the opportunity to make technical  assistance available in areas such as rural development, which have not yet  benefited from NAFTA. Recognizing the importance of rural development  to the full and successful implementation of NAFTA, the State  Department’s Mission Performance Plan and USDA’s Unified Export  Strategy for Mexico call for building on collaborative activities under the  P4P to pursue rural development and support trade liberalization.  However, P4P documents generally have little to say about furthering  Mexico’s successful transition to liberalized agricultural trade under  NAFTA, and P4P action plans do not set forth specific strategies and  activities that could be used to advance rural development in support of  free trade.
The lack of specific plans under P4P to pursue rural development in  support of NAFTA is particularly noteworthy because USDA officials  expressed concerns that Mexico’s lagging rural development presents a  challenge to the successful transition to liberalized trade under NAFTA,  including the elimination of remaining tariffs in 2008. USDA officials noted  that the underlying factors in Mexico’s lagging rural development are  structural and need to be addressed internally by Mexico. Nevertheless,  USDA’s Unified Export Strategy for Mexico calls for coordination with the  U.S. Agency for International Development to pursue a rural development  strategy under the rubric of the P4P initiative. This document also  acknowledges the need to continue to underscore the benefits of free trade  for Mexico under NAFTA while seeking ways to help Mexico address its  rural development issues. USDA officials stressed that it is critical to  change the debate from the need for protection from U.S. imports to  promoting rural development in Mexico so that small and medium farmers  can take advantage of the opportunities provided by free trade.
section_title: Conclusions
paragraphs: As tariffs and tariff-rate quotas have been reduced or eliminated under the  provisions of NAFTA, Mexican authorities have come under pressure to put  in place technical barriers to protect producers from perceived harm from  growing U.S. imports. Moreover, while Mexico has taken the steps called  for under NAFTA to liberalize trade, lagging rural development fuels  opposition to further implementation of the agreement. Yet the full and  successful implementation of NAFTA is an important factor in assuring  market access for United States agricultural exports to Mexico, and it is  critical to broader U.S. trade interests because NAFTA is a model for trade  liberalization in the Western Hemisphere. While the strategies of U.S.  agencies in Mexico see an opportunity to build on the P4P initiative to  pursue the related goals of rural development and trade liberalization  under NAFTA, P4P documents generally have little to say about NAFTA.  More specifically the P4P action plans do not set forth specific strategies  and activities that could be used to advance rural development in support  of free trade. P4P offers an opportunity for the United States to design a  multi-agency comprehensive strategy to address the challenges presented  by lagging rural development to Mexico’s transition to liberalized  agricultural trade under NAFTA, rather than providing assistance through  individual measures.
Mexico’s experience adjusting to the challenges of trade liberalization,  ranging from difficulties associated with the application of SPS measures,  problems raised by trade data discrepancies with the United States, and  lagging rural development, illustrate the importance of technical  assistance. While Mexico did not seek assistance under NAFTA to adjust to  trade liberalization, the U.S. government has acknowledged the usefulness  of technical assistance in addressing such challenges by providing TCB  assistance in later trade agreements with developing countries. In Mexico,  P4P offers an avenue for the United States to provide such technical  assistance. A key impediment to Mexican rural development is the lack of  credit in the countryside, and the United States with its significant  experience in rural lending has the technical expertise Mexico seeks.  Moreover, most of Mexico’s structural impediments must be dealt with  internally, but facilitating rural credit is one area in which the United  States, through P4P, is in a position to collaborate with Mexico. Improving  the rural economy through credit facilitation increases the opportunities  for Mexican importers of U.S. agricultural commodities and begins to  counter negative perceptions of NAFTA’s impact.
section_title: Recommendation for Executive Action
paragraphs: To aid the full and successful implementation of NAFTA, we recommend  that the Secretary of State, as the head of one of the lead agencies for the  P4P initiative, work with USDA and other relevant agencies to develop an  action plan under P4P laying out specific collaborative efforts on rural  development that would support the successful implementation of NAFTA.  Such a plan could include a comprehensive strategy that outlines specific  activities that are intended to address the challenges presented by lagging  rural development to Mexico’s successful transition to liberalized  agricultural trade under NAFTA, and sets time frames and performance  measures for these activities.
To promote rural development in Mexico and enhance Mexican small  farmers’ ability to benefit from trade opportunities under NAFTA, which  would also help shape a more positive perception of the agreement, we  recommend that the Secretary of State, as the lead agency for the P4P  initiative, work with USDA and other relevant agencies to expand  collaborative efforts with the Mexican government to facilitate credit  availability in the countryside. This would include providing Mexico with  expertise in the area of rural financing, such as risk assessment, project  management, and loan evaluation.
section_title: Agency Comments and Our Response
paragraphs: We provided a draft of this report to the Department of State, USDA, USTR,  USAID, FDA and OPIC for their review. We received formal written  comments from the Department of State and from USDA, which are  reprinted in appendixes VI and VII, respectively, along with our responses  to specific points. In its written comments, the Department of State agreed  with the need to develop a P4P action plan on rural development, and  noted that on February 17, 2005, the U.S. and Mexican governments agreed  to create a new structure under P4P establishing seven permanent working  groups, including one on rural development. Each of these working groups  has been asked to develop an action plan for 2005 activities. The  Department of State also emphasized that the broader goal of P4P is to spur  economic growth and development in parts of Mexico that have benefited  less from NAFTA (i.e., not limited to rural development) and noted that the  P4P initiative must work within existing resources. The Department of  State raised concerns that the report generally overstates the strength of  opposition to NAFTA in Mexico. However, we do not believe we have  overstated the opposition to NAFTA in Mexico. As noted in the report, U.S.  and Mexican officials expressed concerns about how negative perceptions  of NAFTA may impact successful implementation of the agreement. In  addition, the report recalls the difficulties experienced in Mexico in  anticipation of tariffs elimination under NAFTA in 2003.
In its letter, USDA expressed readiness to work with the Department of  State and with other agencies, under P4P, to develop collaborative efforts  to support Mexican rural development and facilitate the continued and  successful implementation of NAFTA. The Department of State, USDA,  USTR, OPIC, and FDA also suggested clarifications, technical corrections,  and elaboration of certain points which we have incorporated into this  report, as appropriate. USAID comments were incorporated in the formal  letter from the Department of State.
We also obtained comments on key sections of the report from the Mexican  Ministry of the Economy (SE), the Ministry of Agriculture (SAGARPA), and  Mexico’s rural lending institution for small and medium farmers  (Financiera Rural). SE and SAGARPA submitted joint comments. While  commending the overall positive portrayal of the U.S.–Mexican agricultural  trade relationship, SE and SAGARPA expressed concern that the report did  not sufficiently underscore the importance of the Mexican market for U.S.  exports under NAFTA. They cited U.S. trade data to illustrate the dramatic  growth in certain U.S. commodity exports to Mexico since NAFTA has been  in effect. They noted that Mexico is the largest foreign market for U.S. beef  and rice and the second largest foreign market for U.S. corn, pork, poultry,  and apples, some of the commodities our report highlights to illustrate the  effects of Mexican trade measures.
Additionally, SE and SAGARPA commented that our report did not provide  a sufficiently detailed objective analysis regarding the nature and validity of  various Mexican trade measures. These agencies expressed concern that  the report unfairly portrays various Mexican trade measures without an  adequate evaluation of the facts behind Mexico’s implementation of these  measures, such as the scientific support for certain SPS requirements, and  the legitimate findings of antidumping investigations. SE and SAGARPA  also objected to the report’s reliance on the testimony of parties directly  impacted by these measures. Similarly, SE and SAGARPA expressed  disappointment that the report does not examine U.S. trade measures that  impact Mexican agricultural exports to the United States, which parallel  many of the difficulties faced by U.S. agricultural exports to Mexico.  Finally, SE and SAGARPA also stressed that the debate over the impact of  NAFTA on the Mexican rural economy does not have any substantive  implications for the implementation of Mexico’s obligations under the  agreement.
GAO fully recognizes, and our report documents, the vital importance of  the Mexican market for U.S. agricultural exports. We note the rapid growth  in the value of U.S. agricultural exports to Mexico, which grew on average  17.4 percent annually and almost doubled from 1993 to 2003. We also point  out that Mexico is the third largest market for U.S. agricultural exports and  that its share of the U.S. agricultural export market has risen from 8  percent in 1993 to about 13 percent in 2003.
Regarding the concerns raised by SE and SAGARPA about the nature of  GAO’s analysis, we believe the report presents a balanced and objective  description of key Mexican trade measures that affect U.S. agricultural  exports to Mexico. Consistent with GAO’s overarching mission to help  improve the performance and accountability of U.S. government programs  and activities, our report provides recommendations to the Department of  State and USDA to help ensure the successful implementation of NAFTA.  Since it is outside GAO’s jurisdiction to audit foreign government programs  and procedures, our treatment of Mexican trade measures is descriptive  not evaluative. We include testimonial, as well as other evidence, in our  report in order to illustrate the positions of various parties. Throughout the  report we have included the views of responsible Mexican officials and  have added clarifications to the report in response to specific comments  made by these Mexican agencies. For example, we added language to the  report to clarify that the existence of a case under dispute settlement  proceedings does not necessarily mean a trade partner’s actions violate the  provisions of NAFTA or other trade agreements. Similarly, we eliminated  references to difficulties related to labeling requirements and import  permits, which, as USDA officials have acknowledged, have not been used  frequently by Mexico. Instead we focused only on Mexico’s tax on  beverages containing nonsugar sweeteners. In addition, our report covered  a number of areas including collaborative activities of U.S. agencies in  Mexico and concerns about the long-term success of NAFTA, as well as  Mexican trade measures that impact U.S. agricultural exports to Mexico.  While we are aware that Mexican agricultural exports to the United States  also encounter challenges meeting U.S. import requirements, these issues  were outside the scope of this project. We have included language  clarifying the scope of our work in this report.
Regarding the point raised by SE and SAGARPA on Mexico’s determination  to proceed with the implementation of NAFTA, our report does not  question the commitment of Mexican authorities to fulfill their obligations  under the agreement. However, both U.S. and Mexican officials have  expressed concerns about how negative perceptions of NAFTA may impact  successful implementation of the agreement. Some of these officials  recalled the difficulties experienced at the time of the 2003 tariff  eliminations, including mass demonstrations against NAFTA, calls for a  moratorium on implementation of the agreement, and pressure to  renegotiate the agricultural provisions of NAFTA. We believe that in  accordance with U.S. government pronouncements regarding the  importance of NAFTA for U.S. farm interests, it is appropriate for U.S.  agencies to actively plan to support the successful implementation of the  agreement.
In addition to these broader comments on the report’s presentation and  approach, SE and SAGARPA provided technical comments and  clarifications on Mexican agricultural programs, such as clarification on  PROCAMPO payments, and on the crops included under the Direct  Payments for Target Income subprograms. We have made a number of  changes in the report to reflect their comments. Financiera Rural had only  one technical comment on our representation of that agency’s strategic  plan, which we have incorporated into our report.
As we agreed with your office, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days from  the date of this letter. We will then send copies of this report to appropriate  congressional committees and to the U.S. Trade Representative and the  Secretaries of the Departments of Agriculture and State. Copies will be  made available to others upon request. In addition, this report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-4347 or at yagerl@gao.gov. Other GAO contacts and  staff acknowledgments are listed in appendix VIII.
section_title: Objective, Scope, and Methodology
paragraphs: To obtain information about the progress made, as well as difficulties  encountered, in gaining market access for U.S. agricultural exports to  Mexico, we reviewed the commitments in the NAFTA, including the tariff  elimination schedules for agricultural products. We reviewed official  documents related to various phases in the implementation of NAFTA and  met with USDA and USTR officials to document progress made on each  phase of tariff elimination. We studied trade flows to track changes in U.S.  agricultural exports to Mexico, both at the aggregate level and at the  product level using USDA’s Foreign Agricultural Trade of the United States  database. We discussed the limitations and reliability of the trade data with  USDA officials and determined the trade data reported by USDA are  sufficiently reliable for the purpose of this report. We used various price  indexes to adjust the trade value for inflation to convert trade values to  constant 2003 dollars. We reviewed USDA publications on the Mexican  market for U.S. agricultural products, and we reviewed studies by U.S.  government and academic sources on the impact of NAFTA on U.S. exports  to Mexico. We met with officials from USTR, USDA, and various producer  groups to ascertain the progress and the difficulties in market access for  U.S. agricultural exports to Mexico. We obtained from USTR a list of trade  disputes with Mexico since NAFTA and reviewed WTO and NAFTA  documentation on these agricultural trade dispute settlement cases. While  we describe Mexico’s use of trade measures, we did not evaluate the  validity of their application. To illustrate the scope and type of market  access issues faced by U.S. agricultural exports to Mexico, we selected  seven commodities to analyze and present as case studies. Our analysis and  criteria for selecting the commodities is presented in appendix II.
In order to review how Mexico has responded to the challenges and  opportunities presented by free trade in agriculture and explore remaining  challenges to the successful implementation of NAFTA, we reviewed  relevant studies and research prepared by the Mexican Ministry of  Agriculture (Secretaría de Agricultura, Ganadería, Pesca y Alimentación– SAGARPA), the World Bank, the United Nations Food and Agriculture  Organization, and USDA. We conducted an extensive literature search,  screening the results to identify the most appropriate research and studies.  We considered various screening criteria including source, timing, and  venue of publication. We cross checked key conclusions in various studies  to assess their credibility. We reviewed the methodologies described for the  studies we report on to determine their limitations. We also interviewed  several authors of key studies we used in our report to clarify our  understanding of their methodology and their conclusions. Finally, we  discussed the conclusions of these studies with other experts including  agricultural researchers and U.S. and Mexican government officials with  expertise in the area of Mexican agriculture.
We obtained data from SAGARPA and the Mexican National Institute of  Statistics, Geography, and Information Technology (Instituto Nacional de  Estadisticas, Geografía, e Informática) on agricultural production. We did  not assess the reliability of the production data; however, the general trend  of production is consistent with what is widely reported in other studies.  We reviewed official Mexican government documents and other studies,  which describe the major agricultural policies in Mexico since early 1990s.  We interviewed current and past SAGARPA officials and the officials from  the Ministry of the Economy (Secretaría de Economía–SE), who are  familiar with current agricultural programs and the evolution of these  programs under NAFTA.
We obtained information from USDA agencies (FAS, APHIS, ERS, NASS,  ARS, FSIS, and AMS) and from FDA on agriculture-related collaborative  activities they have undertaken in Mexico for the 10 years that NAFTA has  been in effect (1994 through 2004). This information included activity  descriptions and funding by agency. To assess the quality and reliability of  the data submitted by each agency, we interviewed the agency officials  responsible for the data and reviewed the data provided. When we noted  discrepancies or gaps in the data, we discussed these with the agency  officials and obtained corrections and/or clarifications. Based on our work,  we determined that the data were sufficiently reliable to portray overall  levels of expenditures and the nature of these activities. For USDA  agencies, we compiled this data in a set of tables presented in appendix IV.  These tables reflect funding for activities implemented by these agencies  from 1994 through 2004; however, some of the agency activities started  before 1994, while others were concluded before 2004. For FDA we present  a summary description of agency activities in the same appendix.
We met with State Department officials in Washington, D.C., and U.S.  embassy officials in Mexico to discuss U.S. efforts under the Partnership  for Prosperity (P4P). We reviewed documents from the Department of  State on P4P including the 2002 and 2003 P4P reports to Presidents Bush  and Fox, the P4P Action Plan, testimonies by State officials, and press  releases on P4P activities. In order to report on P4P activities related to  agriculture or rural development, we discussed agency plans and ongoing  activities with USDA, U.S. Agency for International Development, and  Overseas Private Investment Corporation officials. We also discussed the  impact of P4P with Mexican government officials from SAGARPA, the  Mexican Ministry of the Economy (SE), the Mexican Ministry of Foreign  Affairs (Secretaría de Relaciones Exteriores), and Mexico’s rural lending  institution for small and medium size farmers (Financiera Rural).
We conducted our review from February 2004 through February 2005 in  accordance with generally accepted government auditing standards.
section_title: Case Studies of Selected U.S. Agricultural Exports to Mexico
paragraphs: To illustrate the range of market access barriers faced by certain U.S.  agricultural exports to Mexico, we selected seven products to analyze and  present as case studies: apples, beef, corn, high-fructose corn syrup  (HFCS), pork, poultry, and rice. Each of the case studies includes a brief  background and history of the exported product’s experience accessing the  Mexican market, a description of the types of market access barriers each  product faces, and a summary of the current status of market access issues.  We selected commodities as representative of (1) products at various  stages of the tariff elimination schedule; (2) different agricultural sectors— for example, grains (rice), horticultural products (apples), and meat (pork);  (3) products that face varying types of tariff and nontariff barriers; (4) the  range of mechanisms used in attempting to settle market access disputes;  and (5) varying levels of export volume and value. Information presented in  the case studies is based on our analysis of trade data, review of U.S.,  Mexican, WTO, and NAFTA official documents, and interviews with U.S.  and Mexican government officials and various private sector  representatives.
subsections: section_title: Apples
subsections: section_title: Background and Trade Data
paragraphs: Prior to NAFTA, Mexico restricted access to its fresh apple market through  import licensing requirements and the application of a 20 percent tariff. In  1991, Mexico eliminated the licensing requirements. As part of its NAFTA  commitments, Mexico established TRQs on apples, which were to be  phased out over a 9-year period and result in duty-free access for U.S. apple  imports by 2003. USDA reports that U.S. apple exports to Mexico have  exceeded these specified TRQ amounts in each of the years following  NAFTA’s implementation. The United States is the world’s leading apple  producer, and apples comprised the largest portion of fruit exports to  Mexico in 2003. U.S. apple exports to Mexico accounted for nearly 23  percent of U.S. worldwide apple exports. Between 1994 and 2003, the total  quantity of fresh apple exports to Mexico increased by an average of 4.7  percent annually, and the value of exports totaled nearly $71 million in 2003  (see fig. 3).
A key market access issue for U.S. apple exporters is the way Mexico has  sought to exercise oversight for the application of its phytosanitary  requirements. Mexico requires phytosanitary certificates for U.S. apples  due to concerns about apple maggots in shipments. According the USDA’s  Economic Research Service, most countries accept U.S. systems  approaches for pest management as adequate protection against the threat  of apple maggot. Mexico, however, requires that apples undergo a process  called “cold treatment” before U.S. apple shipments can be imported into  Mexico. Additionally, Mexico required that the Mexican government  inspect and certify U.S. storage and treatment facilities. The treatment and  inspection process increased U.S. producers’ cost of exporting apples to  Mexico. In 1998, Mexico turned over supervision of the inspection program  to USDA. Nevertheless, according to the U.S. Apple Association, some  apple-producing states have been effectively shut out of the Mexican apple  market because of the prohibitive treatment and certification costs. For  example, the association representative noted that producing states like  Pennsylvania, the fourth largest apple-producing state in the country,  cannot recoup the “hundreds of thousands of dollars” of costs incurred  through these inspections.
In addition to Mexico’s phytosanitary treatment and certification  requirements, Mexico initiated an antidumping investigation against U.S.  apples in 1997 and imposed a preliminary import duty of more than 100  percent on Red and Golden Delicious apples. In 1998, the U.S. apple  industry and the Mexican government signed an agreement suspending this  duty, and the U.S. industry agreed to comply with a minimum-price  scheme. U.S. apple exports to Mexico declined in 1998 (when the  antidumping duty was in place) but experienced large, successive  increases in 1999, 2000, and 2001 under the price agreement. However, in  August 2002, the minimum price scheme was dropped at the request of  Mexican growers, and Mexico resumed the dumping case and imposed  antidumping duties of more than 45 percent on U.S. apples. As a result, U.S.  exports decreased in 2002 and 2003. According to the U.S. Apple  Association, the timing of the Mexican imposition of the dumping duty was  notable, since NAFTA’s tariff rate quota and duty on apples were to be lifted  on January 1, 2003. For this reason, the association noted that many U.S.  apple exporters question the merits of the dumping allegations and  maintain that Mexico is inappropriately restricting market access in order  to protect its domestic industry.
section_title: Current Status and Future Challenges
paragraphs: U.S. apple industry representatives note that Mexico’s policies restrict U.S.  producers’ access to Mexico’s market. The U.S. apple industry notes that  the treatment certification process takes several years and can be  prohibitively costly in U.S. states where there are fewer producers to share  costs. Furthermore, the U.S. apple industry is very fragmented, which is a  significant challenge in dealing with market access problems in Mexico.  For example, even though producers find the certification process  burdensome, the industry does not have a joint strategy on how to address  this problem.
section_title: Beef
subsections: section_title: Background and Trade Data
paragraphs: In 1992, 2 years prior to NAFTA’s implementation, Mexico raised tariffs on  imported beef from zero to 20 percent. Per NAFTA, Mexico immediately  eliminated these tariffs on imports of most U.S. beef products, and U.S. beef exports to Mexico increased. The recession that followed the 1994  peso crisis caused U.S. beef exports to Mexico to drop sharply by 1995, and  exports did not recover fully until 1997. U.S. beef exports have grown  steadily since 1995, and USDA notes that this increase is linked partially to  the continuing improvements in the Mexican economy. Between 1994 and  2003, the volume of U.S. beef exports to Mexico increased by an average of  21 percent annually, and beef exports to Mexico accounted for 22.4 percent  of the volume of U.S. beef exports worldwide (see fig. 4). The value of  exports to Mexico in 2003 totaled $604 million.
Although the volume of U.S. exports to Mexico has been increasing steadily  over the past 10 years, market access for U.S. producers has been affected  by antidumping actions and a ban on U.S. beef following the discovery in  the United States of one cow (originally imported from Canada) with  bovine spongiform encephalopathy (BSE) or “mad cow disease.” First, in  1994, the Mexican National Livestock Association initiated an antidumping  case against certain types of beef imports by claiming discriminatory  pricing on the part of U.S. exporters. Following industry-to-industry  negotiations, the U.S. National Cattlemen’s Beef Association and the  Mexican National Livestock Association signed a memorandum of  understanding that formalized an agreement to (1) share U.S. technologies  with Mexican producers and (2) coordinate both groups’ efforts to promote  beef consumption in Mexico. As a result, the Mexican National Livestock  Association dropped the dumping petition.
However, in 1998 charges were made once again that the United States was  dumping beef in Mexico. On August 1, 1999, Mexico announced  antidumping tariffs that varied by company. Individual U.S. beef exporters  appealed these tariffs, and on October 10, 2000, Mexico published a set of  revised antidumping tariffs for certain beef exporters. These duties range  from zero to 80 cents per kilogram, depending on the company and the type  of beef. On June 16, 2003, the United States requested WTO consultations  on Mexico’s antidumping measures on rice and beef, as well as certain  provisions of Mexico’s Foreign Trade Act and its Federal Code of Civil  Procedure. In addition, a NAFTA Chapter 19 panel is expected to rule  shortly on whether these duties were applied in accordance with Mexican  law.
According to the National Cattlemen’s Beef Association, the root of the  beef trade dispute in Mexico lies in the lack of differentiation between the  values for various cuts of meat. In Mexico, the different cuts of beef  generally all have the same value, whereas in the United States different  cuts of beef have different values. These different values have led to  antidumping cases against the United States because any commodity that  sells for less than the value of the product in the home country is  considered dumping. According to the National Cattlemen’s Beef  Association representative, demand for variety meats (such as tripe and  liver) is significantly higher in Mexico than it is in the United States.  Because of these demand conditions, U.S. exporters can sell variety meats  at a lower price, which leads Mexico’s industry to believe the United States  is dumping these products on the Mexican market.
In addition to facing dumping duties, the detection of one case of BSE in  the United States in December 2003 led Mexico to impose a ban on all U.S.  beef products. In March 2004, Mexico was the first country to reopen its  market to certain types of U.S. beef products (U.S. boxed beef under 30  months of age), expanding the list of allowable beef products in April 2004,  and USTR reports that the U.S. government is working to re-open the  remainder of the market as soon as possible.
section_title: Current Status and Future Challenges
paragraphs: According to producer group officials, market access for U.S. beef exports  to Mexico has generally been very good, as evidenced by overall increases  in trade. Both U.S. and Mexican industries plan to continue working  together to resolve any potential trade disputes through industry  negotiations. USTR notes that U.S. and Mexican beef and cattle industries  are increasingly integrated, with benefits to producers, processors, and  consumers in both countries.
section_title: Corn
subsections: section_title: Background and Trade Data
paragraphs: Corn is an important commodity in Mexico; in addition to being a dietary  staple, white corn is the principal crop for many Mexican small farmers,  and historically corn production is a fundamental feature of Mexican rural  culture. Consequently, NAFTA negotiations regarding the phase-out of  import barriers for corn were particularly sensitive. Prior to NAFTA,  Mexico restricted access to its corn market through import licensing  requirements, and there was no guaranteed level of access for U.S. imports.  During NAFTA negotiations, it was widely believed in Mexico that  immediate increases in imports of U.S. corn would displace Mexican corn  producers. As a result, NAFTA negotiators agreed to allow Mexico to  replace its import licensing requirements with transitional TRQs that will  be phased out over a 14-year period—the longest transition period set forth  in the agreement.
The United States has been one of the major foreign suppliers of yellow  (feed) corn to Mexico, and U.S. exports to Mexico comprised 13 percent of  all U.S. corn exports worldwide in 2003. Between 1994 and 2003, the  volume of U.S. corn exports to Mexico increased by an average of 18.5  percent annually (see fig. 5). The value of exports to Mexico in 2003 totaled  $651 million.
Although Mexico’s removal of restrictive import licensing requirements did  away with a significant barrier to U.S. access to Mexico’s corn market, a  number of other factors have affected U.S. exports before and after  NAFTA’s implementation. For example, in the early 1990’s, Mexico lifted a  ban on using corn to feed livestock, which immediately increased demand  for imports of yellow corn from the United States, which had been  declining for several years. In 2003, yellow feed corn exports comprised  more than 80 percent of U.S. corn exports to Mexico. Additionally, in the  years following NAFTA, Mexico has usually allowed higher levels of  imports than are required under the NAFTA TRQs in order to ensure that  domestic demand for corn is fully met. Thus, Mexico has generally applied  much lower tariffs on these additional quantities than those set forth under  the agreement. These more liberal market access policies for yellow (feed)  corn imports are driven in part by a need to provide feed for Mexico’s  expanding livestock industries. Notwithstanding these policies toward feed  corn imports, a USDA analysis of Mexico’s corn market notes that imports  of white corn (i.e., corn generally used directly for human consumption)  from the United States have declined since 2000, partly because the  Mexican government has provided marketing funds to domestic producers  of white corn. Additionally, USDA reports that in a significant departure  from past practice, Mexico levied the NAFTA-specified above quota tariff  rate of 72.6 percent on white corn in 2004. Mexico’s tax on beverages  sweetened with HFCS has also contributed to the decline in U.S. corn  exports to Mexico. The tax has depressed Mexican production of HFCS,  which is made from imported corn.
section_title: Current Status and Future Challenges
paragraphs: U.S. exports of corn to Mexico are expected to increase significantly as  Mexico eliminates the transitional TRQs in 2008. However, some industry  groups noted concern about Mexico taking other steps to protect its  sensitive domestic corn market. For example, one U.S. industry  representative noted that it will be important for the U.S. government to  ensure that Mexico does not use SPS requirements as a barrier to U.S.  imports. On the other hand, other observers note that an expanding  economy in Mexico will increase consumer demand for meat and, in turn,  continue to increase demand for U.S. corn imports as feed for Mexican  livestock production.
Additionally, certain farm groups in Mexico have argued that allowing duty- free imports of U.S. corn will lead to a total collapse of Mexican  agriculture, and they have vowed to mount an unprecedented campaign to  stop the last round of tariff eliminations. Mexican politicians who oppose  NAFTA note the continuing economic distress in rural areas of Mexico and  insist on renegotiating the agricultural provisions of the agreement to  improve the conditions of Mexican farmers. Although the total elimination  of already low Mexican tariffs on corn may not have much economic  significance for U.S. producers, failure to comply with the final phase of  tariff elimination may undercut support for NAFTA among U.S. producers  who were in favor of the agreement with the expectation that it would lead  to genuinely free trade. Furthermore, U.S. trade officials have expressed  serious reservations about any attempt to renegotiate the agricultural  provisions of NAFTA because it could lead to demands to renegotiate other  aspects of the agreement and undermine the agreement as a model for  trade liberalization throughout the Western Hemisphere.
section_title: High-Fructose Corn Syrup
subsections: section_title: Background and Trade Data
paragraphs: Impediments confronted by U.S. HFCS exports to Mexico are related to  difficulties encountered by Mexican cane sugar exports to the United  States. Trade friction between the United States and Mexico over HFCS  came to a head in 1997, when Mexico initiated an antidumping  investigation of U.S. exports of this product. Based on the results of this  investigation, Mexico imposed antidumping duties beginning in 1998. This  triggered a lengthy WTO dispute settlement proceeding, in which the  United States eventually prevailed in 2001. Thereafter, Mexico eliminated  its antidumping duties but imposed a tax on beverages made with any  sweetener other than cane sugar, including HFCS. The United States has  challenged Mexico’s beverage tax in the WTO, and that dispute is still  pending. Mexico defends its beverage tax, noting that the United States  has not complied with its market access commitments with respect to  Mexican cane sugar. However, the U.S. government has rejected Mexico’s  arguments linking these two issues.
As shown in figure 6, U.S. exports of HFCS began to decline in 1999 after  Mexico imposed the antidumping duties, and dropped to nearly zero after  Mexico imposed the beverage tax in 2002.
Market access issues began in 1997 when Mexico imposed preliminary  antidumping duties on U.S. exports of HFCS. In 1997, Mexico’s National  Chamber of Sugar and Alcohol Industries, the association of Mexico’s sugar  producers, filed a petition in which it claimed that U.S. HFCS was being  sold in Mexico at less than fair value and that these imports constituted a  threat of material injury to Mexico’s sugar industry. As a result of these  claims, the Mexican Ministry of the Economy responded by imposing  antidumping duties on U.S. HFCS. In 1998, USTR invoked a WTO dispute  proceeding to challenge Mexico’s action, and in 2000, a WTO panel ruled  that Mexico’s imposition of antidumping duties on U.S. imports of HFCS  was inconsistent with the requirements of the WTO Antidumping  Agreement. At that time, Mexico agreed to implement the panel  recommendation by September 22, 2000. However, on September 20, 2000,  Mexico issued a new determination and concluded that there was a threat  of material injury to the Mexican sugar industry and that it would maintain  the antidumping duties.
The United States maintained that Mexico’s new determination did not  conform to the WTO panel’s recommendations and challenged this new  determination before a WTO compliance panel. The WTO compliance  panel agreed with the U.S. position. Mexico appealed this ruling. The WTO  Appellate Body agreed with the compliance panel’s conclusions and  recommended that Mexico comply with its obligations under the WTO  Antidumping Agreement. While Mexico revoked its antidumping duties on  HFCS in April 2002, in January of that year the Mexican Congress imposed  a 20 percent tax on soft drinks and other beverages that use any sweetener  other than cane sugar, which effectively shut out U.S. HFCS from the  Mexican market.
The Fox administration acted to suspend the beverage tax from March 6  through September 2002. Mexico’s Supreme Court, however, ruled the  suspension to be unconstitutional and reinstated the tax effective July 16,  2002. The United States argues the HFCS beverage tax is inconsistent with  Mexico’s obligations under the WTO, which calls for treating imported  products no less favorably than comparable domestic products. The United  States considers that the beverage tax is inconsistent because it applies to  beverages sweetened with imported HFCS, but not to products sweetened  with Mexican cane sugar. In June 2004, the United States challenged  Mexico’s beverage tax in the WTO.
section_title: Current Status and Future Challenges
paragraphs: The dispute over Mexico’s beverage tax is pending before a WTO panel.  The sugar industry would like to negotiate a resolution to the sweetener  dispute. At this time, private meetings have taken place between sugar  producer groups in the United States and Mexico, and the industries are  working to reach a resolution before 2008.
section_title: Pork
subsections: section_title: Background and Trade Data
paragraphs: Prior to 1994, Mexico levied a duty of 20 percent on U.S. pork, but under  NAFTA, Mexico agreed to establish TRQs to be phased out over a 9-year  period that ended on January 1, 2003. For several categories of pork  products, U.S. pork exports to Mexico greatly exceed the quantitative  limits of the TRQs, and Mexico generally allowed the additional product to enter without applying the over-quota tariff. Additionally, NAFTA  permitted Mexico to establish a special agricultural safeguard tariff rate  quota for certain cuts of pork, under which Mexico can apply higher tariffs  if imports of that product exceed specified levels. If imports rise above  that level, the duty reverts to the lower of the current Most Favored Nation  or pre-NAFTA levels. The safeguard levels expanded 3 percent each year  until the provision expired on January 1, 2003.
U.S. pork exports to Mexico have increased significantly since NAFTA,  with the total volume of U.S. exports rising by an average of 18.5 percent  annually between 1994 and 2003 (see fig. 7). Exports to Mexico accounted  for 22.3 of U.S. pork exports worldwide, and U.S. exports to Mexico totaled  about $217 million in 2003.
In November 2002, Mexican producers submitted a dumping complaint to  the Mexican government, alleging that U.S. exporters were engaging in  price discrimination by selling pork to Mexican buyers at lower prices than  they would sell to buyers in other countries. On January 7, 2003, Mexico  initiated the antidumping investigation against U.S. pork. According to U.S.  pork producers, the Mexican association that requested the investigation  does not represent the Mexican pork industry, and, therefore, did not have  a legal right to make the request. The producers of pork in Mexico—the  slaughterhouses and the packers—stated that they do not want the  investigation to proceed and asked that it be terminated. On May 28, 2004,  the Mexican government terminated the January 2003 investigation and  initiated a more limited antidumping investigation on hams only.
Even after the antidumping case was filed against U.S. pork, Mexico  continued to be the second major market for U.S. pork exports.  Furthermore, USDA officials stated that any decreases in pork exports due  to the case were more than offset by the increase in demand for pork  following Mexico’s ban on U.S. beef products after a case of BSE was  discovered in the United States. In addition, USDA noted that demand for  U.S. pork exports to Mexico correlates closely to income growth in that  country (i.e., the rise of the middle class). Thus, while Mexico’s tariff  reductions have been an important contributing factor to the growth of U.S.  pork exports to Mexico, the far more significant drivers of export growth  have been the rapid recovery of the Mexican economy following its  recession in 1995 and continuing income and economic growth since then.
section_title: Current Status and Future Challenges
paragraphs: The U.S. government has questioned the basis of the May 2004 ham  antidumping investigation. Furthermore, USTR asserts that the United  States is actively working to prevent potential actions that Mexico may  take on exports of U.S. pork. USTR officials believe that Mexico’s January  2003 initiation of a pork dumping investigation and a May 2004 initiation of  a ham dumping investigation may violate WTO rules and questions the  statistics being used by the Mexican government to determine the level of  imports. USTR has engaged the Mexican government to terminate the ham- dumping investigation, to resolve differences on trade statistics, and to  seek alternatives to trade restrictive measures. Despite the antidumping  dispute, Mexico and the United States have pledged to build on their long  history of cooperation regarding swine and pork bilateral trade on the basis  of equal and mutual benefit.
section_title: Poultry
subsections: section_title: Background and Trade Data
paragraphs: Prior to NAFTA, Mexico restricted access to its poultry market through  import licensing requirements and 10 percent tariffs on imports. As with  other products subject to import licensing, Mexico replaced these barriers  with TRQs as part of its NAFTA commitments. NAFTA called for the TRQs  to be phased out over a 9-year period, with duty-free access for U.S. poultry  by 2003. Per NAFTA, the larger portion of the tariff cuts was to be  implemented in the latter half of the phase-out period—a process referred  to as “backloading.” Mechanically deboned meat, which is used by Mexican  sausage manufacturers, comprises the most significant portion of U.S.  poultry exports to Mexico. Since NAFTA, the Mexican government has  chosen not to impose the above-quota tariff on this commodity due to the  Mexican sausage industry’s high demand for the product, and, as a result,  U.S. exports have routinely exceeded the TRQ levels set forth in the  agreement. Between 1994 and 2003, imports of U.S. dark meat chicken  parts have also generally exceeded the transitional TRQ levels. The United  States is the major foreign poultry supplier to Mexico’s market, and Mexico  is typically among the top three markets worldwide for U.S. poultry  exports. From 1994 to 2003, the volume of U.S. poultry meat exports to  Mexico increased by an average of 5.7 percent annually (see fig. 8). U.S.  exports to Mexico accounted for 11.4 percent of U.S poultry meat exports  worldwide, and the value of U.S. poultry exports to Mexico totaled about  $260 million in 2003.
Demand for certain U.S. poultry products in Mexico was driven, in part, by  insufficient domestic poultry production in Mexico. Additionally, because  U.S. domestic demand for dark meat is low relative to Mexico’s consumer  demand, U.S. producers have been able to keep dark poultry meat prices  relatively low and thus attractive to Mexican buyers. Over the years since  NAFTA’s implementation, Mexico’s domestic poultry industry has  expanded, and concern about U.S. competition among Mexican producers  has increased commensurately.
As the end of Mexico’s transitional TRQ on poultry products drew near in  2002, the Mexican poultry industry petitioned the Mexican government to  apply a safeguard on imports of U.S. chicken leg quarters. The petitioners  argued that the end of the TRQ would result in an import surge from the  United States and injury to Mexico’s domestic industry. Article 703 of  NAFTA would have permitted Mexico to impose duties of up to 240 percent  on U.S. poultry imports, if NAFTA’s conditions for a safeguard were met.  Rather than face such potentially high tariffs and a disruption to U.S.  exports, U.S. producers, in industry-to-industry negotiations with the  Mexican petitioners, agreed to a more favorable regime.
In July 2003, Mexico issued a final safeguard determination that imposed a  TRQ which allows the quota to expand each calendar year through 2007, at  which point the duties will be eliminated. The within-quota duty is zero,  and the initial over-quota duty was 98.8 percent, which declines each year  until reaching zero on January 1, 2008. The U.S. and Mexican governments  agreed on a package of compensation measures in response to the  safeguard. In particular, Mexico agreed not to impose any other restrictions  on U.S. poultry products and to eliminate certain SPS restrictions. The U.S.  government also agreed, following consultations with U.S. industry, to  consent to Mexico’s application of the safeguard past the expiration of the  transition period.
Some poultry industry representatives noted that settlement of the poultry  safeguard issue brought some initial criticism from other U.S. producer  groups, who maintained that the settlement set a precedent for Mexico to  force renegotiation of its NAFTA commitments. However, USTR officials  stated that the United States will not consider any renegotiation or  rescission of Mexico’s NAFTA commitments and views the poultry  settlement as a unique workable solution that forestalled possible  significant disruption to U.S. exports. They doubted a similar outcome  could be achieved in other industries.
section_title: Current Status and Future Challenges
paragraphs: USDA reports that domestic poultry production in Mexico continues to  expand. USDA and industry representatives said that the additional  protection for Mexican producers established under the safeguard  settlement will provide Mexican producers additional time to prepare for  free trade. USDA also notes that demand for poultry, combined with an  expanding Mexican economy and a removal of the ban on some U.S.  poultry exports, will continue to increase demand for U.S. poultry  products. Nevertheless, some U.S. industry representatives remain  concerned and noted that once the TRQ expires, Mexican authorities may  employ other measures, such as sanitary restrictions, as a means to  constrain U.S. access to Mexico’s market.
section_title: Rice
subsections: section_title: Background and Trade Data
paragraphs: The United States is the primary supplier of rice to Mexico, mostly due to  the fact that Mexico has banned or placed strict phytosanitary standards on imports of rice from Asian countries since the early 1990s. The United  States exports both rough (i.e., unprocessed) rice and milled (i.e.,  processed) rice to Mexico, although demand for rough rice is much higher.  As a result of the lack of supply from Asian producers and the high demand  for rough rice, rough rice accounted for about 90 percent of the total  volume of U.S. rice exports to Mexico in 2003. Prior to NAFTA’s  implementation, Mexico levied duties of 20 percent on brown and milled  (i.e., processed) rice and 10 percent on rough (unprocessed) rice. Under  NAFTA, Mexico agreed to phase out rice tariffs over a 9-year period, with  all tariffs to be eliminated by 2003. With the phasing out of tariffs on rice,  the volume of U.S. exports has increased by an average of 14.4 percent  annually from 1994 to 2003 (see fig. 9). U.S. rice exports to Mexico  accounted for 17.7 percent of U.S. rice exports worldwide, and exports to  Mexico totaled about $140 million in 2003.
In December 2000, Mexico initiated an antidumping investigation on  imports of long-grain milled rice from the United States. Mexican rice  millers (who process rice that competes with U.S. milled rice imports)  alleged that U.S. milled rice is being sold in Mexico at a prices less that its  fair market value. The Mexican government subsequently levied  antidumping duties in April 2000 and June 2002 on specific U.S. rice  imports. A U.S. rice industry representative told us that the U.S. rice  industry attempted to resolve the issue through the industry-to-industry  negotiations but that the negotiations were unsuccessful. Following the  industry negotiations, the United States formally requested WTO  consultations with Mexico in June 2003. These consultations were held  from July 31 through August 1, 2003, on the basis of concerns regarding  Mexico’s methodology for determining injury to the domestic market and  for calculating dumping margins. WTO consultations failed to resolve the  issue, and in February 2004 a WTO dispute panel was formed to resolve the  case. The U.S. rice industry representative said that several other U.S.  commodity groups were supporting this case in the WTO because the case  deals with broad issues related to Mexico’s application of the antidumping  law that could affect their exports as well.
section_title: Current Status and Future Challenges
paragraphs: A ruling on the WTO dispute is expected in April 2005. Notwithstanding the  outcome of the case, U.S. rice exporters generally benefit from preferential  access under NAFTA and Asian exporters’ restricted access to the Mexican  market. USDA reports indicate that U.S. exporters could face increased  competition in the milled rice market in Mexico should Asian exporters  satisfactorily meet Mexico’s phytosanitary concerns.
section_title: Three Major Mexican Agricultural Programs
paragraphs: Recognizing the challenges and anticipating the opportunities that market  reforms and free trade posed for its farm sector, the Mexican government  has implemented several programs to help its farmers adjust to changing  economic conditions. The three main support programs implemented since  the early 1990s are PROCAMPO, marketing support, and Alianza.
PROCAMPO (Programa de Apoyos Directos al Campo)
Budget: PROCAMPO is the largest agricultural support program,  accounting for 35 percent of Mexico’s Agriculture Ministry’s (SAGARPA)  budget in 2003, around $1.27 billion.
Goal: PROCAMPO is a 15-year program that provides transitional  income support to Mexican agriculture as it undergoes structural  changes in response to market conditions and the phasing out of trade  barriers under NAFTA. The political objective is to manage the  acceptability of the free trade agreement among farmers and to prevent  extensive levels of poverty and out-migration.
How it operates: The program makes payments on a per-hectare basis to  any producer who cultivates a licit crop on eligible land or utilizes that  land for livestock or forestry production or some ecological project.  Eligible land is defined as that which has been cultivated with corn,  sorghum, beans, wheat, barley, cotton, safflower, soybeans, or rice in  any of the three agricultural cycles before August 1993. There are three  types of PROCAMPO payments: preferential, traditional, and  capitalized. Preferential payment is for producers with fewer than 5  hectares in nonirrigated lands who only produce in the spring-summer  cycle. For the spring-summer 2003 agricultural cycle, the payment levels  equaled 1,050 Mexican pesos ($100) per hectare. The traditional  payment is for the rest of the producers. It was 905 pesos ($86) per  hectare in 2003. The capitalized payment is made under certain  conditions to producers who request the sum of their future  PROCAMPO payments.
Beneficiaries: During 2001, 2.7 million producers with a total of 13.4  million hectares received PROCAMPO payments. Around 75 percent of  farmers in the PROCAMPO database have less than 5 hectares of land.
Changes in the program: There was a proposal in November 2002, as  part of a broader Mexican government initiative for rural support, to  update the payments according to yields. However, this action was  never put into practice. Another program will be created for producers  who are not currently registered in PROCAMPO, who also may be  considered for assistance to smooth out income fluctuations. Also, the  National Agreement’s emergency spending proposal contains 650  million pesos ($62 million) for the inclusion of additional land on the  PROCAMPO roster. According to Mexican officials, even where there  are new producers enrolling, the total benefiting area has not changed  because those new producers are filling the place left by former  producers whose lands are no longer eligible to receive support.
Impact: PROCAMPO has become an important source of some rural  households’ income, and it may have income multiplier effects when  recipients put the money they receive to work to generate further  income. The Mexican government reported that between 1989 and 2002  incomes from agricultural businesses have lost importance, while other  sources, such as government support programs, remittances, salaries,  and wages, have increased their share in rural households’ income.  Scholars have found payment from PROCAMPO has forestalled the  income decline of subsistence farmers. In addition, scholars found that  payment from PROCAMPO generated an income multiplier effect,  which meant that the PROCAMPO payment was used productively and  generated additional income for rural households. However, scholars  believe that the level of payment from PROCAMPO was not large  enough to offset the risks of switching to more profitable crops, which is  part of the goals of the marketing support program (discussed below).
Marketing Support and Regional Market Development Program (Programa  de Apoyos Directos al Productor por Excedentes de Comercialización para  Reconversión Productiva, Integración de Cadenas Agroalimentarias y  Atención a Factores Críticos, formerly Programa de Apoyos a la  Comercialización y Desarrollo de Mercados Regionales)
Budget: The marketing support program is the second largest  agricultural program. Marketing Support and Regional Market  Development Program accounts for about 16 percent of SAGARPA’s  budget. For 2003, the budget was around $580 million.
Goal: The program supports various aspects of agro-marketing and  commerce. The Agricultural Marketing Board (ASERCA) was created to  substitute the traditional direct intervention that the government  formerly made through a parastatal state trading enterprise for sorghum  and wheat.
How it operates: The program has seven subprograms: (1) direct  payment to producers, (2) price supports, (3) collateral loans, (4) crop  conversion, (5) other types of support, (6) slaughter house certification,  and (7) special support for corn. The major subprogram is the direct  payment to producers. This program provides payments to producers of  rice, corn, wheat, sorghum, barley, canola, copra, peanuts, cotton, and  safflower in certain areas, usually on a per-ton basis.
Beneficiaries: Beneficiaries of the marketing support program on  average have more land than PROCAMPO payment recipients.  According to Mexican government documents, around 22 percent of the  respondents to its annual survey of the marketing support program have  fewer than 5 hectares, while almost half have more than 15 hectares. In  2004, the program supported 240,000 producers.
Changes in the program: In 2003, Mexican farmers asked for support  that would “mirror” what was provided U.S. farmers under the U.S.  Farm Bill, which led the Mexican government to establish “target  income” support. The new program has seven subprograms including  direct payments for (1) target income, (2) slaughtering in certified  slaughter houses, (3) accessing domestic forages, (4) crop conversion,  (5) price hedging, (6) pledging, and (7) other specified activities.  Additionally, barley, copra, and peanuts are no longer on support list.  For a period of 5 years, the government plans to guarantee a target  income, expressed per ton, for producers of certain grains and oilseeds.  Nearly 17 billion Mexican pesos ($1.6 billion) have been designated for  this program. In determining whether a producer has reached the target  income, the government evaluates a producer’s income from selling on  the market, and if the income from selling on the market falls short of  the target income, the government will provide additional support to  ensure that farmers’ incomes reach the set target. Under the former  program, just a few states were able to request support, while the new  program makes payments to producers with commercial surpluses in all  states.
Impact: The program has had an impact on crop patterns and migration.
The “target price” program has led to concentration in basic crop  production instead of crop diversification. Mexican officials hope the  new “target income” approach will help farmers to be more responsive  to the market conditions. A Mexican official document points out that  the program is an important factor in mitigating migration from the  countryside, but the document also recognizes that the program did not  succeed in integrating farmers into the marketing chain. Thirty percent  of the respondents to the program annual survey said they would have  sought employment somewhere else if they had not received this  assistance. A USDA study of grain production finds that the marketing  supports, along with the constitutional reforms that allow the rental of  ejidal lands, have facilitated the emergence of large-scale farms of corn  and dried beans.
Alianza (Alianza para el Campo)
Budget: Alianza accounts for about 15 percent of SAGARPA’s budget,  about $570 million in 2003.
Goal: The goals of the programs are to boost agricultural productivity  and promote the transition to higher value crops. The objectives include  increasing producer income, improving the balance of trade, achieving  an agricultural production growth rate higher than the population  growth rate, and supporting the overall development of rural  communities.
How it operates: The programs were grouped under four categories:  agriculture, livestock, phytosanitary, and technology transfers. Activities  include better use of water and fertilizer, adoption of improved seeds,  better disease and pest control practices, improved genetic quality of  crops and livestock, improved cattle stocks, better health and sanitation  practices, and pasture development and related infrastructure  development for increased production. These programs are  decentralized and are financed jointly by federal and state governments  and producers.
Beneficiaries: The evaluation done by the United Nations Food and  Agriculture Organization (FAO) found that the program serves farmers  with various socio-economic backgrounds, educational levels, ages,  farm size, and income levels. The FAO evaluation also found that  medium size producers have benefited the most from the agriculture  program, and 24 percent of small farmers have benefited.
Changes: In 2002, for the first time, general objectives were established  for all the sub programs. These objectives are to (1) increase income, (2)  diversify employment options, (3) increase investment in rural  development, (4) strengthen producer group organizations, and (5)  advance sanitary standards. To achieve these objectives, strategies were  established to integrate standards, bring together regional producer  groups, and discuss important issues such as land and water use. Also in  2002, there was recognition by the government of a need to transfer  technology and investment to the rural sector.
Impact: The FAO evaluation pointed out some benefits from Alianza.
For example, technology helped certain areas get access to water.  Alianza also created a forum to consolidate processes of participation  and implementation of different policies for the agricultural sector,  allowing the participation of the state and producers in the  conversation. The same evaluation pointed out that the additional  employment generated from the program was modest.
section_title: U.S.–Mexico Collaborative Activities Benefit Agricultural Trade (1994–2004)
paragraphs: While U.S. development assistance to Mexico has been limited, U.S.  agencies have undertaken numerous collaborative efforts that benefit both  U.S. and Mexican agricultural interests. Most of these efforts have been led  by the United States Department of Agriculture (USDA), in conjunction  with its Mexican counterparts, in support of overall agricultural production  and trade objectives. USDA’s Foreign Agricultural Service officials noted  that historically USDA has had a very strong collaborative relationship with  Mexico’s Ministry of Agriculture. USDA’s Animal and Plant Health  Inspection Service (APHIS) has invested more funds in collaborative  efforts with Mexico than of any USDA agency, about $280 million, since  NAFTA was implemented. Besides APHIS’s collaborative activities, six  other USDA agencies—the Economic Research Service (ERS), the  Agricultural Research Service (ARS), the Foreign Agricultural  Service/International Cooperation and Development (FAS/ICD), the  Agricultural Marketing Service (AMS), the Food Safety and Inspection  Service (FSIS) and the National Agricultural Statistics Service (NASS)— have participated in agricultural collaborative projects in Mexico. However,  funding for collaborative activities in Mexico from these agencies has been  very modest, about $7.5 million combined over the past 10 years. In  addition to collaborative efforts implemented by USDA agencies, the Food  and Drug Administration (FDA) has also had a role in activities that benefit  Mexican agriculture.
subsections: section_title: Animal and Plant Health Inspection Service (APHIS)
paragraphs: In the course of fulfilling its responsibilities of protecting and promoting  U.S. agricultural health, APHIS has collaborated with Mexico for over 50  years (see table 3). APHIS has also implemented programs that facilitate  agricultural trade from Mexico, such as its preclearance programs.  Furthermore, APHIS has been by far the U.S. agency that has invested the  most money in agricultural collaborative efforts with Mexico, the bulk of it  on its Medfly and Screwworm eradication programs. APHIS reported  spending a total of about $286 million on its plant and animal health  activities in Mexico since the implementation of NAFTA.
Since 1996, ERS has spent $2.5 million in funding to implement the  Emerging Markets Program to enhance Mexico’s capacity to collect,  analyze, and disseminate agricultural information. ERS officials said that  Mexico’s enhanced data-gathering and reporting capability also benefits the  USDA because reliable information allows the agency to make better  informed decisions on bilateral agricultural trade. For a full list and  descriptions ERS activities, see table 4.
In June 1998, ARS and Mexico’s Agriculture Research Institute, Instituto  Nacional de Investigaciones Forestales, Agriclas y Pecuarias (INIFAP),  signed a Letter of Intent to promote U.S.–Mexico collaboration in  agricultural research programs. Since then, ARS has spent about $2.3  million on several collaborative projects involving ARS and Mexican  scientists. According to ARS officials, it is important for the United States  that scientists in Mexico have academic backgrounds similar to their  American counterparts’ in order to reach common solutions to problems  that impact agriculture in both countries. For a full list and descriptions  ARS activities, see table 5.
Over the past 10 years, FAS/ICD has spent a total of $1.8 million on its  Scientific Cooperation Research Program (SCRP) and Cochran Fellowship  Program (CFP). Under SCRP, U.S. and Mexican scientists have conducted  joint research and scientific exchanges for over 20 years to help solve  mutual food, agricultural, and environmental problems. Since NAFTA was  enacted, SCRP has sponsored 32 joint agricultural research projects among  U.S. and Mexican universities and other research institutions, of which  about half have been related to trade. In addition, FAS administers CFP,  which provides U.S.-based agricultural training opportunities for senior  and midlevel specialists and administrators from the Mexican public and  private sectors who are concerned with agricultural trade, agribusiness  development, management, policy, and marketing. For a full list and  descriptions of FAS/ICD activities, see table 6.
AMS has spent about $548,200 since 1994 in collaborative activities with  Mexico. Most of AMS activities consist of providing training to Mexican  fresh fruit and vegetable inspectors to help them meet U.S. inspection  standards. For a full list and descriptions of AMS agricultural collaborative  activities, see table 7.
NASS has been involved in a few collaborative activities in Mexico since  1997. Using the Emerging Markets Program, NASS has spent $361,000 to  help improve the agricultural statistics system and methodology in Mexico.  As part of this assistance, NASS provided training to analysts from  Mexico’s agricultural statistics service, Servicio de Información y  Estadística Agroalimentaria y Pesquera (SIAP). This training focused on  methodology for preparing official agricultural statistics. For a full list and  descriptions of NASS activities, see table 8.
Since 2001, FSIS has implemented a small number of activities valued at  $298,412 under the Emerging Markets Program in Mexico. Most of these  activities consist of providing training and technical assistance to Mexican  meat and poultry exporters to help them meet U.S. import regulations. For  a full list and descriptions of FSIS activities, see table 9.
In its efforts to protect U.S. consumers, FDA has also undertaken activities  that benefit Mexican agricultural producers. FDA’s approach has been to  work with Mexican government agencies to help them establish effective  food safety regulatory, inspection, and enforcement infrastructure,  focusing particularly on microbiological hazards. For example, if a food- borne disease outbreak resulting from a Mexican import occurs, FDA  determines the cause and works with the Mexican government to try and  resolve the problem and develop a system to prevent future outbreaks.  FDA officials explained that in 1997 their agency launched its Food Safety  Initiative (FSI) to improve the safety of the U.S. food supply, which  includes imported foods. Because Mexico exports around $3 billion in  fruits and vegetables to the United States each year, an important FSI  component has been to help Mexican commodity exporters become more  familiar with FDA regulatory requirements and to improve their ability to  comply with U.S. food safety regulations. FDA activities under FSI have  basically involved a series of training programs since 2002 for Mexican fruit  and vegetable exporters, academics, and government officials. In addition  to activities under FSI, FDA established the Southwest Import District  Office in 1999 to enhance food inspection activities along the Mexican  border. The Southwest Import District inspects imported goods entering  the United States through the Mexican Border from Brownsville, Texas, to  San Diego, California. During the last 4 years, FDA’s Center for Veterinary  Medicine has also participated in training and assisted in the establishment  of a program in four agricultural states of Mexico to monitor pathogens  that are transmitted via contaminated food. FDA reported it has spent  about $1.8 million for its activities related to agricultural production in  Mexico since NAFTA went into effect.
section_title: Recent U.S.–Mexico Collaborative Agricultural Activities under Partnership for Prosperity
paragraphs: The Partnership for Prosperity (P4P) initiative has a few collaborative  programs that are oriented towards agriculture. On the U.S. side, USDA’s  FAS, OPIC, and USAID have played key roles in implementing the  programs. Overall, P4P seeks to create a public-private alliance and  develop a new model for U.S.–Mexican bilateral collaboration to promote  development, particularly in regions of Mexico where economic growth  has lagged and is fueling migration. No new funds were specifically  allocated to P4P by either government since the program’s inception;  instead, the U.S. government has sought to refocus resources already  devoted to Mexico to create a more efficient collaborative network.  According to State Department and USDA officials, since its establishment,  P4P has become the “umbrella” under which development collaboration  between the United States and Mexico takes place.
USDA’s FAS has worked closely with several Mexican government  agencies, including Mexico’s new rural lending institution, Financiera  Rural, to incorporate P4P’s broader approach to rural development and  assistance to small farmers. For example, FAS arranged for USAID to use  its U.S. fellowship program to place one of its participants at Financiera  Rural. Through this fellowship, Financiera Rural hosted a professor from  the University of Minnesota who assisted the agency in developing a  strategic plan to incorporate the new paradigm for rural development  proposed in the P4P conferences, acknowledging that Financiera Rural is  better suited to operate as a second-tier lender. This strategic plan calls for  the development of rural financial lending intermediaries in Mexico, which  will be fostered using a model that complies with Mexico’s legal  framework, determined by a study to be conducted jointly by the  Financiera Rural and the International Development Bank. The new  strategic plan also calls for the agency to fund any productive endeavor in  the countryside, not only agricultural production. Activities could include  such things as eco-tourism, rural gas stations, and transportation services.  According to Financiera Rural officials, the guidance provided by the  USAID fellow has positively contributed to Financiera Rural operations  because funding and access to these types of resources and knowledge are  not otherwise available in Mexico. Furthermore, the fellowship has  provided support in trying to resolve the issue of limited credit  availability—one of Mexico’s most significant structural problems.
According to U.S. Embassy officials in Mexico, one of the most significant  accomplishments under P4P has been the bilateral agreement to allow the  Overseas Private Investment Corporation (OPIC) to operate and provide  financing in Mexico. OPIC’s mission is to help U.S. businesses invest  overseas, to foster economic development in new and emerging markets,  and to complement the private sector in managing the risks associated with  foreign direct investment. According to OPIC officials, for over 30 years  there had been resistance by the Mexican government to allow the agency  to operate in Mexico because of concerns over sovereignty. Mexico did not  want a U.S. government agency to provide loans in Mexico because that  would mean that the agency could ask for collateral and possibly own  Mexican property in the case of default on a loan. However, in 2003, an  agreement was reached through P4P to allow OPIC to operate in Mexico.
Since the bilateral agreement was signed, OPIC has begun to provide  financing for five projects in Mexico, including one related to agriculture.  For the agriculture-related project, OPIC approved a $3.3 million loan to  Southern Valley Fruit and Vegetable, Inc., of Georgia to develop a new  farming project in Mexico that will serve as a winter division of the  company that will grow, package, and ship cucumbers, squash, eggplant,  and zucchini. The project will employ approximately 300 laborers and  professionals in an area of high unemployment. Southern Valley has  committed over $2.2 million in equity to the project.  OPIC officials  indicated that they expect their lending portfolio to grow in Mexico.
USAID plans to expand its activities in Mexico to support rural  development. USAID officials explained that, overall, USAID has not had a  large presence in Mexico, and historically funding for activities in Mexico  has been limited. Furthermore, USAID activities in Mexico have typically  been in the areas of population, democracy, governance, health, and micro- financing, instead of agriculture. However, in 2004 USAID received an  added $10.2 million specifically for rural development in Mexico, which  brought its budget to $32 million. USAID is now working with other U.S.  and Mexican agencies to develop projects to assist rural areas of Mexico. In  recent months USAID has initiated several activities targeting rural  development including:   Small Farmer Support/Rural Business Development: Through this  activity, USAID award h is providing targeted business development and  marketing services to agricultural producer organizations and  cooperatives in the southern rural states of Oaxaca and Chiapas.
Connecting Small Producers with Market Opportunities: In partnership  with Michigan State University and USDA, USAID launched this activity  in late 2004 designed to allow small and medium producers to better  compete for opportunities in the mushrooming domestic market for  food and produce.
Rural Finance: In late 2004, USAID expanded what had been an urban- focused micro-enterprise finance program to include rural finance as a  priority activity.
University Partnerships: In 2004, USAID focused the ongoing Training,  Internships, Exchanges, and Scholarships annual partnership  competition on proposals that would spur agribusiness and other issues  tied to rural economic growth. In August 2004, USAID awarded five new  partnerships directly related to rural development.
section_title: Comments from the U.S. Department of State
paragraphs: The following are GAO’s comments on the State Department’s letter dated  March 16, 2005.
subsections: section_title: GAO Comments
paragraphs: 1. We revised title to make clear that we are not suggesting that Mexico  has failed to implement its obligations under NAFTA’s agricultural  provisions. 2. We do not believe that we overstate the opposition to NAFTA in  Mexico. As noted in the report, U.S. and Mexican officials have  expressed concerns about how negative perceptions of NAFTA may  impact successful implementation of the agreement. In addition, the  report recalls the difficulties experienced in Mexico at the time of  tariffs elimination under NAFTA in 2003. 3. We changed language in the two locations of the report cited by the  State Department to clarify that as a matter of course the United States  has not committed to providing technical assistance to its post-NAFTA  free trade partners. The report now states simply that the United States  has recently provided such assistance. 4. The points about the P4P Initiative noted by the State Department are  also mentioned in our report. We did not consider it necessary to make  revisions to address these points.
5.
In our recommendations we identify the Secretary of State as the head  of one of the agencies taking the lead on P4P activities. We have added  a footnote in appendix V on P4P activities to clarify the roles of the  Departments of Commerce and Treasury. While these departments also  have a leading role in P4P activities, they are not directly involved in  activities related to rural development or the agricultural sector, and  therefore our recommendation is not addressed to these agencies. 6. Our review was concluded by the time the Partnership for Prosperity  working groups cited by the State Department had taken place. These  developments may represent the first steps in addressing our  recommendation. 7. We revised appendix V of the report to include key elements of the  information provided on recent USAID activities.
section_title: Comments from the U.S. Department of Agriculture
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those listed above, Ming Chen, Francisco Enriquez, Matthew  Helm, Sona Kalapura, Jamie McDonald, Marisela Perez, and Jonathan Rose  made key contributions to this report.