Implementation of the North American Free Trade Agreement (NAFTA) began on Jan. 1, 1994. This agreement will remove most barriers to trade and investment among the United States, Canada, and Mexico.

Under NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to 15 years.

All agricultural provisions will be implemented by the year 2008. For import-sensitive industries, long transition periods and special safeguards will allow for an orderly adjustment to free trade with Mexico.

The agricultural provisions of the U.S.-Canada Free Trade Agreement (CFTA), in effect since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural trade between the United States and Canada, with a few exceptions for items covered by tariff-rate quotas (TRQ's), were removed before Jan. 1, 1998.

Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products. The Mexican-Canadian agreement eliminated most tariffs either immediately or over 5, 10, or 15 years. Tariffs between the two countries affecting trade in dairy, poultry, eggs, and sugar are maintained.

Benefits to U.S. Agriculture

Canada and Mexico are, respectively, the second and third largest export markets for U.S. agricultural products. Exports to the two markets combined are greater than exports to Japan or the 15-member European Union. In calendar year 2000, slightly more than one out of every four dollars earned through U.S. agricultural exports was earned in North America.⁽¹⁾

During 1992-2000, the value of U.S. agricultural exports worldwide climbed 19 percent. Over that same period, U.S. farm and food exports to our two NAFTA partners grew by 62 percent. In 2000, approximately $273 million worth of U.S. agricultural products were shipped to Canada and Mexico by U.S. farmers, food processors, and exporters each week. This was an increase of $137 million a week and $7.2 billion a year compared with what they shipped, on average, during the four years prior to NAFTA.

Trade with Mexico: From 1999 to 2000, U.S. farm and food exports to Mexico climbed by $916 million to $6.5 billion -- the highest level ever and the fifth record in five years under NAFTA. U.S. exports of soybeans, cotton, and rice all set new records. By value, more U.S. agricultural products went to Mexico last year than to China, Hong Kong, and Russia combined.

In the years immediately prior to NAFTA, U.S. agricultural products lost market share in Mexico as competition for the Mexican market increased. NAFTA reversed this trend. The United States now supplies more than 75 percent of Mexico's total agricultural imports, due in part to the price advantage and preferential access that U.S. products now enjoy. For example, Mexico's imports of U.S. red meat and poultry have grown rapidly, exceeding pre-NAFTA levels and reaching the highest level ever in 2000.

NAFTA kept Mexican markets open to U.S. farm and food products in 1995 during the worst economic crisis in Mexico's modern history. In the wake of the peso devaluation and its aftermath, U.S. agricultural exports dropped by 23 percent that year, but have since surged back 85 percent since then. NAFTA cushioned the downturn and helped speed the recovery because of preferential access for U.S. products. In fact, rather than raising import barriers in response to its economic problems, Mexico adhered to NAFTA commitments and continued to reduce tariffs.

January 12001 marked the eighth round of tariff cuts under NAFTA, further opening the market to U.S. products. U.S. commodities now eligible for duty-free access under Mexico's NAFTA TRQ's, include U.S. corn, dried beans, poultry, animal fats, barley, eggs, and potatoes. All tariffs are to be eliminated by 2008.

Although agricultural trade has increased in both directions under NAFTA, U.S. exports to Mexico have increased faster than imports

from Mexico. The U.S. agricultural trade surplus with Mexico was $1.47 billion in 2000.

Trade with Canada: Canada has been a steadily growing market for U.S. agriculture under the CFTA, with U.S. farm and food exports increasing an average of nearly 6 percent a year since 1990. U.S. agricultural exports to Canada reached a record $7.6 billion in 2000, an increase of more than 81 percent since 1990. Fresh and processed fruits and vegetables, snacks foods, and other consumer foods account for close to three-fourths of U.S. sales.

U.S. exports of bulk, intermediate, and consumer-oriented products to Canada set records in 2000, with new value highs for vegetable oils, planting seeds, snack foods, breakfast cereals, poultry meat, dairy products, fresh and processed vegetables and fruits and their juices.

Before the CFTA, U.S. products generally accounted for less than 60 percent of total Canadian agricultural imports. U.S. prod-ucts now make up around two-thirds of total import value, as the U.S. share has trended upward at the expense of other suppliers because of lower tariffs and preferential U.S. access under the CFTA/NAFTA. With a few exceptions, tariffs not already eliminated dropped to zero on Jan. 1, 1998.

In 1996, the first NAFTA dispute settlement panel reviewed the higher tariffs Canada is applying to its dairy, poultry, egg, barley, and margarine products, which were previously subject to non-tariff barriers before implementation of the Uruguay

Round. The panel ruled that Canada's tariff-rate quotas are consistent with NAFTA, and thus do not have to be eliminated.

NAFTA Eliminates Trade Barriers

Under NAFTA, all non-tariff measures affecting agricultural trade between the United States and Mexico were eliminated on Jan. 1, 1994. These barriers, including Mexico's import licensing system (which had been the largest single barrier to U.S. agricultural sales), were converted to either tariff-rate quotas or ordinary tariffs.

All agricultural tariffs between Mexico and the United States will be eliminated. Many were immediately eliminated and others will be phased out over transition periods of 5, 10, or 15 years. The immediate tariff eliminations applied to a broad range of agricultural products. In fact, more than half the value of agricultural trade became duty free when the agreement went into effect. Tariff reductions between the United States and Canada had already been implemented under the CFTA.

Both Mexico and the United States protected their import-sensitive sectors with longer transition periods, tariff-rate quotas, and, for certain products, special safeguard provisions. However, once the 15-year transition period has passed, free trade with Mexico will prevail for all agricultural products. NAFTA also provides for tough rules of origin to ensure that maximum benefits accrue only to those items produced in North America.

Protection for Import-Sensitive Crops

In addition to a transition period of up to 15 years for certain products, NAFTA has special safeguards to protect import-sensitive crops. For example, NAFTA liberalizes trade with Mexico in all products, including those farm products previously protected by U.S. Section 22 import quotas. Initially, Mexican exporters are granted a small duty-free quota for Section 22 products in the U.S. market. A relatively high tariff is charged for any sales over that amount. The duty-free quota grows at a 3-percent compounded annual rate over the NAFTA transition period, while the over-quota tariff is gradually phased out. The phase-out period is 10 years for dairy products, cotton, and sugar-containing products, and 15 years for peanuts. NAFTA side agreements also contain special provisions for sugar and frozen concentrated orange juice (FCOJ).

U.S. and Mexican tariffs on sugar will be phased out in conjunction with treatment of U.S. and Mexican border protection on sugar. During the first six years, the United States will reduce its second-tier tariffs on sugar imports from Mexico by 15 percent, while Mexico aligns its tariff regime with that of the United States. In any year that Mexico reaches net surplus producer status during the initial six-year period, it would be allowed access to the United States in an amount equal to its net production surplus, but not exceeding 25,000 tons. Under the NAFTA formula, from the seventh through the fourteenth year of the agreement, a new ceiling of 250,000 tons will be placed on Mexico's sugar exports to the United States. Mexico will be determined to be a net surplus producer when production of sugar exceeds consumption of sweeteners.

U.S. and Mexican tariffs on FCOJ will be phased out over 15 years. The United States will have a tariff-rate quota for FCOJ that will give Mexico annual access for 40 million gallons at a reduced tariff rate, and a higher (normal trade relations) tariff rate for over-quota volumes. There will be no growth in the quota volume over the transition period. The over-quota tariff, however, will decline by 15 percent during the first six years, remain constant from the seventh through the tenth year, and then be phased out over the remaining five years. A price-based safeguard also comes into effect when specified quantity triggers are reached.

NAFTA also contains special agricultural safeguard provisions to provide relief against import surges. These provisions allow only a specified quantity of a selected product to enter at low or preferential NAFTA duty rates. Higher tariffs are automatically triggered when imports reach a specified level. The United States applies this special safeguard on imports of onions, tomatoes, eggplants, chili peppers, squash, and watermelons. Mexico, in turn, applies this special safeguard on three groups of products: live swine and most pork products, apples, and potato products.

Other Key NAFTA Provisions

Sanitary and Phytosanitary Measures: The NAFTA imposes disciplines on the development, adoption, and enforcement of sanitary and phytosanitary (SPS) measures. These are measures taken to protect human, animal, or plant life or health from risks that may arise from animal or plant pests or diseases, or from food additives or contaminants. Disciplines contained in NAFTA are designed to prevent the use of SPS measures as disguised restrictions on trade, while still safeguarding each country's right to protect consumers from unsafe products, or to protect domestic crops and livestock from the introduction of imported pests and diseases.

Although NAFTA encourages trading partners to adopt international and regional standards, the agreement explicitly recog-nizes each country's right to determine the necessary level of protection. Such flexibil-ity permits each country to set more strin-gent standards, as long as they are scientific-ally based. NAFTA also allows state and local governments to enact standards more stringent than those adopted at the national level, so long as these standards are scientif-ically defensible and are administered in a forthright, expeditious manner.

Export Subsidies: The three NAFTA countries will work toward the elimination of export subsidies in North America, in pursuit of the broader objective of eliminating such subsidies worldwide. The United States and Canada will be allowed to provide export subsidies into the Mexican market to counter subsidized exports from other countries. Neither Canada nor the United States is allowed to use direct export subsidies for agricultural products being sold to the other, and both countries are required to consider the export interests of the other whenever subsidizing agricultural exports to third countries.

Internal Support: Under NAFTA, the parties should endeavor to move toward domestic support policies that have minimal trade or production distorting effects, or toward policies exempt from domestic support reduction commitments under the World Trade Organization.

Grade and Quality Standards: The United States and Mexico agreed that when either country applies a measure regarding the classification, grading, or marketing of a domestic product destined for processing, it will provide no less favorable treatment for like products imported for processing.

Rules of Origin

NAFTA improves incentives for buying within the North American region and ensures that North American producers receive the primary benefits of all newly established tariff preferences. Goods not originating from the United States, Mexico, or Canada must be significantly transformed or processed in that country before they receive NAFTA's lower duties for shipment to one of the two other countries.

The NAFTA rules of origin for agricultural products were constructed to prevent Mexico from becoming an export platform for processed products made from subsidized raw materials originating in non-NAFTA countries. There are also strong rules of origin for U.S. import-sensitive commodities, such as citrus and dairy items.

Bulk Commodities: All bulk agricultural commodities, and certain processed products such as orange juice and cheese, are exempt from the de minimis provision, which otherwise allows up to 7 percent of non-NAFTA-origin product to be included in final NAFTA goods.

Citrus: All single-fruit juices (fresh, frozen, concentrated, reconstituted, fortified) must be made from 100-percent NAFTA-origin fresh citrus fruit. The de minimis provision does not apply to any citrus products.

Dairy Products: Only U.S. or Mexican milk or milk products can be used to make cream, butter, cheese, yogurt, ice cream, or milk-based drinks traded under NAFTA preferential rates.

Vegetable Oils: Except for With the exception of certain industrial fatty acids and acid oils, refining of crude oils within a NAFTA country does not confer NAFTA origin. Making margarine and hydrogenated oils from imported crude oils does not confer origin.

Sugar: Refining does not confer origin. In order for sugar to be considered of North American origin, all processing of sugarcane or sugar beets must take place in NAFTA territory.

Peanut Products: Mexico must produce the peanuts to qualify for NAFTA preferential rates on peanuts and peanut products exported to the United States. U.S. exports of peanut products to Mexico are subject to this same rule.

Committees Help Implementation

The NAFTA Committee on Agricultural Trade monitors and promotes cooperation on the implementation and administration of the agricultural provisions. The committee provides a forum for the three countries to consult regularly on trade issues and other matters related to the implementation of the agreement.

The NAFTA Committee on Sanitary and Phytosanitary Measures promotes the harmonization and equivalence of SPS measures, and facilitates technical cooperation, including consultations regarding disputes involving SPS measures. This committee meets periodically to review and resolve issues in the SPS area.

The NAFTA Advisory Committee on Private Commercial Disputes Regarding Agricultural Goods provides recommenda-tions to the three governments for resolving private commercial disputes that arise in connection with transactions in agricultural products. The intent is to achieve prompt and effective resolution of commercial disputes, with special attention to perishable items. The committee is composed primarily of private sector representatives but also has government participants.

Information about FAS programs and services is available on the Internet at http://www.fas.usda.gov 

1. Source: Foreign Agricultural Service/USDA from U.S. Census Bureau.