The North American Free Trade Agreement

August 1997

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

Under the NAFTA, all nontariff 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, 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, will be removed by January 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 third and fourth largest export markets for U.S. agricultural products, following only Japan and the European Union (EU). Exports to the two markets combined are greater than exports to the 15-member EU. In fiscal year 1996 (October-September), nearly one out of every five dollars earned through U.S. agricultural exports was earned in North America.

From fiscal year (FY) 1990-96, the value of U.S. agricultural exports worldwide climbed 48 percent. Over that same period, U.S. farm and food exports to our two NAFTA markets grew by 72 percent. In FY 1996, U.S. farmers, food processors, and exporters shipped more than $210 million worth of agricultural products to Canada and Mexico a week. This is an increase of $60 million a week and $3.2 billion a year compared with what they shipped, on average, during the 4 years prior to NAFTA.

U.S. agricultural exports to NAFTA partners are continuing to grow this year, with current USDA trade forecasts for FY 1997 showing that exports to both Mexico and Canada will top last year=s records. The 1997 forecast for Canada is $6.2 billion compared with $6.0 billion, and the forecast for Mexico is $5.5 billion compared with $5.0 billion.

Trade with Mexico: From fiscal year 1995 to 1996, U.S. farm and food exports to Mexico climbed by $1.3 billion to top $5 billion -- the highest level ever and the second record in three years under NAFTA. U.S. exports of corn, soybeans, wheat, 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 around 75 percent of Mexico=s total agricultural imports, due in part to the price advantage and preferential access that U.S. products now enjoy. With pork, for example, NAFTA has squeezed virtually all competitors out of the Mexican market, and the U.S. market share increased from 77 percent in 1994 to more than 95 percent last year.

NAFTA kept Mexican markets open to U.S. farm and food products despite the worst economic crisis in Mexico=s modern history. In the wake of the recent peso devaluation and its aftermath, U.S. agricultural exports dropped by only 11 percent in FY 1995, and they surged back with a 34 percent gain in FY 1996. 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 1997 marked the fourth round of tariff cuts under NAFTA, further opening the market to U.S. products. This latest round increased (by 3 percent) the quantity of key U.S. commodities eligible for duty-free access under Mexico=s NAFTA TRQ's, including 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 $1.3 billion in FY 1996, 37 percent higher than the FY 1993 surplus.

Trade with Canada: Canada has been a steadily growing market for U.S. agriculture under the FTA, with U.S. farm and food exports increasing an average of more than 8 percent a year from FY 1990-96. U.S. exports reached a record $6.0 billion to Canada last year, an increase of more than 60 percent since FY 1990. Fresh and processed fruits and vegetables, snacks foods, and other consumer foods account for close the three-fourths of U.S. sales.

U.S. exports of bulk, intermediate, and consumer-oriented products to Canada all set records last year, with new value highs for corn, rice, soybean meal, animal fats, planting seeds, snack foods, breakfast cereals, poultry meat, processed fruits and vegetables, juices, and several other product categories.

Before the 1989 FTA with Canada, U.S. products generally accounted for less than 60 percent of total Canadian agricultural imports. U.S. products 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 FTA/NAFTA. With a few exceptions, tariffs not already eliminated will drop 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, and barley products, which were previously subject to nontariff barriers before implementation of the Uruguay Round. The panel ruled that Canada's tariff-rate quotas are consistent with the NAFTA, and thus do not have to be eliminated.

NAFTA Eliminates Trade Barriers

Under the NAFTA, all nontariff measures affecting agricultural trade between the United States and Mexico were eliminated on January 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 U.S.-Canada FTA.

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), two particularly sensitive products.

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 6 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 6-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 sweeteners (including high fructose corn syrup) exceeds consumption.

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 (most favored nation) 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 6 years, remain constant from the seventh through the tenth year, and then be phased out over the remaining 5 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 the 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 the NAFTA encourages trading partners to adopt international and regional standards, the agreement explicitly recognizes each country's right to determine the necessary level of protection. Such flexibility permits each country to set more stringent standards, as long as they are scientifically based. The 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 scientifically defensible and are administered in a forthright and 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 the 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 particularly strong rules of origin for U.S. import-sensitive commodities, such as citrus and dairy products.

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, and 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: 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.

NAFTA Committees Aid in 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 provides for the establishment of a trilateral advisory committee to provide recommendations 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. The Committee met for the first time in February, 1997 and is developing recommendations to present to the three NAFTA governments.

Last modified: Tuesday, April 21, 1998