Retaliatory Tariffs Mexico Placed under NAFTA - Research Paper Example

Running Head: RETALIATORY TARIFFS MEXICO PLACED UNDER NAFTA Retaliatory tariffs Mexico placed under NAFTA The high level of bilateral trading relationship between the United States and Mexico due to the proximity between the two nations has been of great importance for the policy makers of the nations. It is also advantageous to maintain a cordial association with a prosperous and democratic country like Mexico. There exists a strong trading bond between these countries with Mexico being the third largest trading partner of USA and USA being the largest trading partner of Mexico. Since the implementation of NAFTA (North American Free Trade Agreement) the economic tie between USA and Mexico has grown significantly (Villarreal, 2012, p.1). Major impact has been on agricultural trading relation between USA and Mexico. According to trade statistics Mexico exports 80% of its agricultural exports to USA, and since the implementation of NAFTA, agricultural exports between USA and Mexico have increased by 9% every year, thus asserting that NAFTA has benefited both the nations (Agricultural trade, n.d.). The retaliatory tariffs that Mexico implemented on various imported goods from USA continued from March 2009 to October 2011. These tariffs were imposed when USA failed to meet the trucking provisions of NAFTA. Mexico initiated these tariffs keeping within the structure of dispute resolution process of NAFTA. In July 2011, a formal agreement was signed that made decisions regarding implementation of trucking provisions of NAFTA (Zahniser, et al, 2011, p.2). NAFTA NAFTA came into force on January 1, 1994. It created a trilateral trading relation between USA, Canada and Mexico creating the largest single market of goods and services with these neighbouring nations as the members. The customer base of this treaty was nearly 440 million. The objective was to remove all tariffs on goods that are traded between the three nations thus creating a free trade area by the year 2009. The estimated annual valuation of traded goods between these nations was $ 14 trillion. (Ferrell, et al, 2011, p.98) What led to the retaliatory tariffs? USA-Mexico trade relationship NAFTA implementation has brought immense changes in the economic and trading relations between USA and Mexico and all these have had great trade impacts in USA. When NAFTA was signed by the three nations, the USA-Canada free trade agreement was already in practice for five years. There were amalgamations of many industries in USA and Canada. Mexico in the pre-NAFTA era was following a policy to produce goods that would substitute imported goods from the USA. One such example was Mexican automotive industry which was ruled by many decrees pronounced by the government between 1962 and 1989. The tariff rate during that period was very high like 25% on automotive goods that were imported from the USA. The Mexican government also curbed the production of any foreign autos. When NAFTA came into practice, the Mexican government agreed to withdraw all import duties and other import restriction policies (Villarreal, 2012, pp.17-18). The future of Mexico was at stake because of the growing competition in the Asian hemisphere and also because of weakening trade relations with USA. In the year 2006, Mexican government revenue had a shortfall of 1.807 billion new pesos because of high expenditure. This deficit was 4.5% more than that of 2005 (Meyer, 2012, p.32). Non-compliance of Mexican truck provisions The economic conditions of USA and Mexico are greatly dependent on one another with NAFTA as the common bond. The principle trade element of NAFTA has been the Mexican truck issue in the recent years and this has been a major matter of concern to the policymakers of both the nations. As per conditions in NAFTA, commercial trucks of Mexico were to have complete access in the four USA borders by 1995, and complete access anywhere in the nation by 2000 (Villarreal, 2010, p.19). These conditions set by NAFTA were violated by the USA government towards the end of the year 1995. USA began to delay in giving permission to “Mexican-domiciled cargo and passenger services” (Butcher, 2002, p.4-17) to function in several states like California, Texas, Arizona and New Mexico. The reasons that were provided for the delay by the USA government were safety reasons. Negotiations between Mexico and USA continued after 1995 regarding the USA truck safety measures to be imposed on Mexican trucks. These negotiations however could not reach any concrete conclusions. The officials of Mexico argued that the safety measures of their country were in perfect alignment with the USA truck safety measures. In the year 1998, Mexican government made a formal protest under NAFTA dispute settlement provisions against the USA government’s delay in putting into practice the NAFTA trucking provisions. The matter became more serious in 1999 as the next deadline January 1, 2000 was coming up. It was the deadline for permitting Mexican trucks to operate anywhere within USA. By the end of 2009, USA government observed that in spite of the restrictions imposed upon the entry of Mexican trucks inside USA border, many Mexican trucks that did not meet the safety specifications of the USA government and had already managed to start operating by bringing cargo into the USA territory. In order to control the movements of the Mexican trucks, the then USA president Bill Clinton “signed the Motor Carrier Safety Improvement Act of 1999, part of which provided for Foreign Motor Vehicle Penalty and Disqualifications.” (Butcher, 2002, p.4-17) Moreover, the inspection processes in the USA border were not fully effective and DOT (Department of Transportation) accused these inspection processes for the free movement of unsafe Mexican trucks on USA highways. The vital issue here is that permission to Mexican trucks to freely access US highways was not granted on the deadline January 1, 2000, as was authorized by NAFTA. Mexican trucks continued to face restrictions in the USA borders (Butcher, 2002, p.4-17). In the year 2001, there was a unanimous agreement among the members of the arbitration panel that USA government has violated the conditions set by NAFTA regarding Mexican truck issue. The panel criticized the USA government for putting restrictions on the movement of Mexican trucks in the four border states of USA, and permitted Mexico to enforce economic sanction on the US (MacDonald, 2009, p.1641). The final report of the panel got released in February 2001 which implied that “the US blanket refusal to review and consider for approval any Mexican-owned carrier application for authority to provide cross-border trucking service was and remains a breach of US obligations under NAFTA.” (Zahniser & Roe, 2010, p.16) However, President Bush who was newly elected agreed to remove all restrictions over the movements of Mexican motor carriers within USA border. This appeased the Mexican government and the decision to impose retaliatory tariffs was withdrawn at that time. In spite of the announcement made by Bush which stated that USA government would remove all restrictions over Mexican motor carriers to abide by the decisions made by the NAFTA arbitration panel, the actual removal of restrictions did not happen by the set deadline January 1, 2002 (MacDonald, 2009, pp.1641-42). Termination of pilot program The Bush administration launched a pilot program in February 2007 that allowed Mexican trucks belonging to 100 transportation companies to operate without restrictions in US highways. Another pilot program was launched for a period of one year by DOT. These programs permitted previously approved Mexican trucks to move beyond the “25-mile commercial zone in the border region.” Another identical program was launched to permit US trucks to cross the border and commercial zone of Mexico. This program continued for 18 months and in this period 103 Mexican trucks crossed the US border to operate in the nation’s highways. The pilot program got cancelled on March 11, 2009 by the FY2009 Omnibus Appropriations Act (Villarreal, 2012, pp.22-23). Mexico increased tariffs on products exported to Mexico from US – retaliatory tariffs The sudden termination of the pilot program induced the Mexican government to increase tariffs of 34 agricultural products and 43 nonagricultural products that were exported to Mexico from the US. The tariffs were equivalent to almost 5% of the total valuation of agricultural products that Mexico imported from the US. These increased tariffs that varied from 10% to 45% were imposed from March 2009. In the 36 months from March 2006 to February 2009 i.e. the period just before Mexico imposed the increased tariffs, the average valuation of agricultural products that US exported to Mexico was $887 million per year. Some of the principal agricultural commodities with high valuation that US exported to Mexico were exempted from the high tariffs like “corn, soybeans, beef, wheat, pork, and soybean meal.” However, a variety of processed products that were exported in lesser volumes but in terms of agricultural exports had significant prominence were covered by the tariffs. Some examples of those products which were prominent in the list of the tariffs were “prepared soups and broths, condiments other than soy sauce, ketchup, other tomato sauces, mustard, and mustard meal, dog or cat food for retail sale, and frozen potatoes.” The imposition of the retaliatory tariffs came when five months had passed after a decline in the valuation of US agricultural products exported to Mexico. This decline was attributed to the global economic crisis. The retaliatory tariffs had an additional impact over and above this decline as was evident from the sharp decline of those agricultural commodities that were covered by the tariffs, and a lesser rate of decline of those agricultural products that were exempted from the tariffs. In the 12 months after the imposition of the retaliatory tariffs i.e from March 2009 to February 2010, the decline rate of those agricultural products exported from US to Mexico that were not covered by the tariffs was 5.5%. On the other hand, those agricultural products imported to Mexico from US that were covered by the tariffs had a decline rate of 32.6% during the same period. Meanwhile, efforts were being taken by the US and Mexican negotiators to arrive at a solution for the Mexican truck issue. Nevertheless, in spite of such continued efforts, on 19 August 2010 the Mexican government added another 21 items to the tariff list. This expanded list included two items of high trade valuation like pork with trade valuation of $334 million and fresh apples with trade valuation of $205 million. During this same period, Mexican government reduced tariff rates of fresh grapes and fresh potatoes. The tariff reduction of fresh grapes was from 45% to 10% and tariff reduction of fresh potatoes was 20% to 5% (Zahniser, et al, 2011, pp.6-8). However, these retaliatory tariffs were removed in two levels on 2011 after Mexico and the US came to a formal understanding. According to reports there was a decline of US potato exports by 50% for dual reasons of increased tariff rate and loss of market share to Canada. On August 16, 2010, the Mexican government declared a change in the list of products on which retaliatory tariffs would be imposed. In the revised list there were 26 new products including “several types of pork products, several types of cheeses, sweet corn, pistachios, oranges, grapefruits, apples, oats and grains, chewing gum, ketchup.” (Villarreal, 2012, p.23) In addition, the list had removed 16 products including peanuts, dental floss and locks. The rate of tariff was also reduced to vary from 5% to 25%. The list of products and the rates of tariff were repeatedly modified by the Mexican government to keep the Obama administration under pressure so that US government would arrive at a resolution over the trucking matter (Villarreal, 2012, pp.23-24). In October 2011, Mexico suspended all retaliatory tariffs on US products that get exported to Mexico “in response to the implementation of a July U.S.-Mexico agreement.” (Mexico suspends retaliatory tariffs against U.S., 2011) Conclusion The Mexican truck issue has been a subject of conflict between US and Mexico for many years now. The obstinacy of the US government regarding non-allowance of Mexican trucks within US due to safety concerns no longer stands viable because of the present improved security status of the Mexican trucks. In order to bring a permanent solution to this problem, it is necessary that the Obama administration breaks the impulsive pattern of decision making by the US government. The need is to adopt a conciliatory way to abide by the terms and conditions of NAFTA and at the same time implement viable rules and regulations to deal with the problems in connection with the Mexican motor carriers. US government has for a long time defied the terms of NAFTA, and now it is high time USA agrees to comply with NAFTA’s cross border trucking provisions. Once US-Mexico trucking dispute gets solved, the Mexican government will permanently remove all retaliatory tariffs on US products that get exported to Mexico. References Agricultural trade (n.d.) USAembassy, accessed on March 16, 2013 from: http://mexico.USAembassy.gov/eng/eataglance_trade.html Butcher, A.M. (2002) Operation of the Trade Agreements Program, The Year in Trade, 53rd Report 2001, DIANE Publishing Ferrell, O.C., Hirt, G.A. & L. Ferrell (2011) Business: A changing world: 7th ed, Tata McGraw-Hill MacDonald, C. (2009) NAFTA Cross-Border Trucking: Mexico Retaliates After Congress Stops Mexican Trucks at the Border. Vanderbilt Journal of Transnational Law, 42(5), 1631-1662 Mexico suspends retaliatory tariffs against U.S., (21 October 2011) Western Farm Express, accessed on March 16, 2013 from: http://westernfarmpress.com/government/mexico-suspends-retaliatory-tariffs-against-us Meyer, A. (2012) Recovery Sustained, RoseDog Books Villarreal, M.A. (2010) Mexican economy after the global financial crisis, DIANE Publishing Villarreal, M.A. (2012) U.S.-Mexico Economic Relations: Trends, Issues, and Implications, FAS, accessed on March 16, 2013 from: http://www.fas.org/sgp/crs/row/RL32934.pdf Zahniser, S. & A. Roe (2010) NAFTA at 17: Full Implementation Leads to Increased Trade and Integration, DIANE Publishing Zahniser, S., Hertz, T. & M. Argoti (2011) Quantifying the Effects of Mexico’s Retaliatory Tariffs on Selected U.S. Agricultural Exports, IATRC, accessed on March 16, 2013 from: http://iatrc.software.umn.edu/activities/annualmeetings/themedays/ pdfs2011/2011Dec-S09-Zahniser_paper.pdf Read More