International Trade - Mexican Corn Trade, Performances, and Policies - Case Study Example

International trade (Mexican corn trade, performances and policies Introduction The North American Free Trade Agreement had its inception throughtrade negotiations between the different North American countries like United States, Canada, and Mexico. These North American countries started their trade negotiations around 1991. The trade negotiations, which were started by the North American countries, culminated to the making of the North American Free Trade Agreement on 1 January 1994. The creation of the North American Free Trade Agreement in 1994 helped the North American countries in multifarious ways. The Agreement helped in the reduction of tariff and non-tariff barriers among the member states. Further, technical barriers among the member countries were also removed. The wiping out of tariff barriers helped the member countries get the advantage of conducting free trade amongst themselves, especially in the field of imports. In the context of Mexico, it is found that the tariff rates were diminished on a gradual basis on a period of fifteen years. The country of Mexico like its Canadian counterpart included its corn trading activities in the purview of North American Free Trade Agreement. The cultivation of Corn has a long association with the Mexican country. It is found that corn is considered to be one of the important crops cultivated in the region of Mexico. Further, corn also accounts for being the staple food of the country. Thus, the cultivation of corn on huge basis in Mexico involves large amount of labor forces. Hence corn cultivation in Mexico also helps in enhancing the employment potential of the country. (Chowdhury & Allen, 2005. pp. 77-78). The Mexican Corn Trade and Effects of North American Free Trade Agreement The cultivation of corn in Mexico helps the country in generating huge employment opportunities for its people. It is found that corn cultivation in the Mexican country involves around 3 million producers. These 3 million producers operating in the Mexican landscape of corn cultivation contributes to 8 percent of the total population of Mexico. Further, the three million producers are also found to account for 40 percent of the total work force employed in the agricultural sector of Mexico. The corn trade of Mexico was taken for inclusion in the North American Free Trade Agreement charter as the policy makers of the agreement identified some distinct prospects. It is observed that the corn trades of the Mexican region being included in the North American Free Trade Agreement made the country focus more on labor-intensive farming practices. Moreover, it was also found that the corn cultivation undertaken by the agreement of free trade reduced financial pressure of the Mexican government in generating subsidies for the same. Further observation shows that the corn trade being included under the North American Free Trade Agreement helped the Mexican government in controlling the effects of inflation and in sustaining a low wage economic structure. These activities highlighted that the Mexican country would be able to focus more on accumulating financial resources, which previously were drained out. However, on a contrasting note it is found that the government of Mexico fails to render needed wages to the corn cultivators. The above fact makes the corn cultivators flee the rural landscape and migrate over to urban sectors for better employment opportunities. In turn, the above event leads to diminish the economic growth of the Mexican country. Thus, the inclusion of the corn trade in the North American Free Trade Agreement failed to generate any better prospects for the farm laborers. On the other hand, it was found that a large group of industrialists had been greatly helped owing to the inclusion of the corn trade in American free trade agreement. The inclusion of corn trade in the free trade agreement of the region made the industrialist and social elites to gain control over the large agricultural market. An observation made reflects that the corn trade of the region of Mexico countered a huge growth after being included under the North America Free Trade Agreement. (Chowdhury & Allen, 2005, pp. 79-80, 84) Mexican Corn cultivation and Policy Measures The North American Free Trade Agreement is found to curb the interests of the poor farmers of Mexico in transferring monetary gains to the hand of industrial elites. It is observed that the inclusion of corn trade in the American free trade agreement lead to a situation of huge job cuts in the country’s agricultural sector. The poor farmers operating in Mexico were greatly affected owing to the decline of the purchasing potential for the maize crops. Though the volume of maize production in Mexico was found to increase after being included in the American Free Trade Agreement yet the main reason cited for such increase was the labor of the poor farmers. The farmers were mainly found to depend on government subsidy and rainfall for the maize production in Mexico. The plight of the Mexican farmers is considered to develop on the grounds if the amount of subsidies received from America would be reduced. It is considered that the removal of subsidies from America would also contribute in diminishing the financial pressure of the Mexican governments. Apart from the policy changes to be made in the international sphere it was also considered that the Mexican government should also look after changing its own policy. An expectation cited by the agricultural researchers state that the real price of Mexican corn can eventually reduce in the long run. In this regard a steady approach must be taken by the Mexican government to augment the productivity of corn in the country. Approaches must be taken by the government to help the farmers cultivate a developed crop base. This activity would help in ensuring an augmented produce of high yield crops in the region. With the increase in production of high yield crop varieties the farming population of the country would get an access to higher income levels which in turn would help develop the living standards of the poor farmers. In this direction considerable research and technical programs must be taken to augment the potential of crop seeds to deliver best quality. (Fiess & Lederman, 2004, p. 1, 4) Trade Liberalization in Mexico and effects on Corn Trade It is found that trade liberalization had profound impacts on the Mexican Corn Trade. The corn trade in Mexico is mainly centered on the poor population in Mexico thriving on farming practices. The inception of the North American Free Trade Agreement hampered the fate of the poor cultivators making them much poorer. However, the reason for the plight of the poor farmers cannot be alone attributed to the cause of the inclusion of corn trade in North American Free Trade Agreement. In fact, the liberalization policies of the Mexican government were found mainly to center in increasing the exports of the region. The domestic trade policies practiced in Mexico had very less impact on developing the status of corn trade in the region of Mexico. It is found that corn cultivation in Mexico occupies a dominant position in the agricultural system of the country. The corn production employs around 60 percent of the land resources of the country with around 3 million farmers working in it. The inclusion of corn trade in the North American Free Trade Agreement however was found to have rendered some help in selective corn producing districts of the country. The states of Mexico falling in the north western and north central region were found to obtain some benefits owing to the inclusion of corn trade in North American Free Trade Agreement. However, corn production was found to have been more in the central and southern parts of the country. Unfortunately, the states of Mexico falling in these regions showed considerably less benefits obtained from the inclusion to the free trade agreement. The cultivation practices in the central and southern regions are found to be of a subsistence nature. Farming population living in these regions was mainly found to be poor and because of low irrigation facilities thrive mainly on occasional farming practices. The farming practices of the Mexican region was found to be more labor intensive rather than technically driven as in other North American countries like United States of America. It is because the Mexican topography is composed of high terrains, which make farming practices based on mechanical means a bleak possibility. The average corn production in Mexico is found to amount to only 1.7 tons per hectare. Moreover the impact of free trade agreement caused import of corn to increase from the United States of America to Mexico. The trade practices of America led to the reduction in the corn prices in the international market. Losses of the Mexican farmers were compensated by United States through the granting of huge amount of subsidies. However, it is observed that the corn production in Mexico remained stable to a greater extent after also the reduction caused in the corn prices by activities of American trade practices. The amount of corn produced in Mexico rose to 18,000,000 Metric tons in 1994 just when the trade was absorbed by the policy of North American Free Trade Agreement. However, after the period of 1994 the corn production in the country remained almost stable until in 2006 it rose to 20,000,000 Metric Tons. To this extent it is found that the corn trade in Mexico remained unaltered even with the reduction in international corn prices. This event can be attributed to certain governing factors, which helped in keeping the production constant. It is found that lack of proper substitutes of corn cultivation discouraged the farmers to switch over to newer less competitive farming zones. Reasons like proper crop protection methods through increased use of pesticides also help in increasing the production. Further corn being the staple food of the region and being culturally tied to the country of Mexico also augmented the growth of the crop. However, the acts of the Mexican government in importing huge amount of corn above the tariff quotas fixed made the poor cultivators suffer. It was found that the tariff quota rate fixed by the government was 2.5 million metric tons, which was increased to 3.6 million metric tons in 2008. The government of Mexico was further observed to freely allow the excess imports to enter the region without charging any tax on such. (Henriques & Patel, 2004. pp. 3-6; Krueger, 1996. p. 383; Keleman, Hellin & Bellon, 2009. p. 53). The government of the United States on the contrary promoted growth of corn production by increasing subsidies from around 3 billion dollars in 1995 to around 5 billion dollars in 2006. The highest subsidy has been given during the period of 2005 amounting to more than 9 billion dollars. (NAFTA and US Corn subsidies: Explaining the Displacement of Mexico’s Corn Farmers, 2010). Analysis of the liberalization practices of corn trade in Mexico based on Economic Models In the course of growth of international trade between different countries of the world it is found that the pattern of import between the different global nations has exceeded that of the total exports. United States of America has greatly profited owing to the increase in imports. It had led to larger capital inflows in the nation, which helps the country to produce products in huge quantities. The other countries importing on the American products are found to gain a stake in the capital markets. Moreover, with the advent of the free trade regime several restrictions imposed on trading on intra national basis got diminished opening up the markets for goods and services. The passing of the North American Free Trade Agreements between countries like America, Canada and Mexico caused huge amount of American imports to enter these countries. (Krugman & Obstfeld, 2009. p.5). It is further observed that based on the model given by economist David Ricardo, different countries have distinct advantages in the production of certain goods and services. The countries should concentrate more on the production of such gods and services and export such to other nations for gaining competitive advantage. Thus, America being technically more equipped to produce corn exports the same to countries like Mexico and even endeavors to advocate the market price of corn. (Classical Trade Theory and Comparative Advantage, n.d.; Henriques & Patel, 2004. pp. 3-6). However, analysis made on the basis of Heckscher-Ohlin model helps to divulge more in the concept of competitive advantage between the nations. The theory states that countries competing in the production of products in the global sphere are made possible through the contribution of some factor endowments in the production process. In the case of United States of America it is found that factors like improved technology and cultivated land makes cultivation of corn a considerable success. Further, trade between America and Mexico also signifies abolition of trade barriers and homogeneity in demand for corn. Thus, the assumptions of ‘no trade barriers’ and ‘same tastes and fashion’ between the competing countries is also satisfied for the Heckscher-Ohlin model. (The Heckscher-Ohlin Model, n.d. & Henriques & Patel, 2004. pp. 3-6). The analysis of the Mexican agricultural market in relation to that of the United States based on the Hekscher-Ohlin Model of Comparative Advantage can also be given in the form of graphical analysis as follows. For the purpose of analysis the crops chosen are corn and coffee. It is assumed that Mexico produces and consumes A level of corn and B level of coffee with Price Level P1. On the other hand, United States is found to produce and consume C level of corn and D level of coffee with Price Level P2. Both the countries America and Mexico have similar production and consumption likings, which are reflected by the Indifference Curve I. Here, the consumption for Mexico is shown at point X and consumption by United States is shown at point Y. P1 Corn A X C Y I P2 B D Coffee Conclusion Corn in Mexico is observed to be the predominant food product in the staple sector. Moreover, the country of Mexico depends to a great extent on the agricultural produce from the huge amount of land resources and employment of a large number of laborers. However, it is found that the nature of farming practiced in Mexico is mainly of a subsistence type with no support from irrigation and other technical facilities. Moreover, the corn cultivators of the region mainly depend on government subsidies. With the advent of the free trade regime the corn trade of the Mexican country was taken over by the North American Free Trade Agreement. America gained the advantage of the situation and started exporting corn to Mexico, which imported such in excess of the import tariffs. Thus, the poor cultivators of the country became further impoverished as wealth became transferred to the hands of the richer population. References 1. Choudhury, A. & A. Allen. (2005). Impact of NAFTA on U.S. Corn Trade with Mexico. International Journal of Business and Economics. 4(1). pp. 77-85. Retrieved on December 2, 2010 from: http://www.ijbe.org/table%20of%20content/pdf/vol4-1/vol4-1-07.pdf 2. Fiess, N. & D. Lederman. (2004). Mexican Corn: The Effects of NAFTA. Retrieved on December 2, 2010 from: http://siteresources.worldbank.org/INTRANETTRADE/Resources/Pubs/TradeNote18.pdf 3. Henriques, G. & Patel, R. (2004). NAFTA, Corn, and Mexico’s Agricultural Trade Liberalization. Retrieved on December 2, 2010 from: http://www.politiquessociales.net/IMG/pdf/Nafta_Corn_and_Mexico_s_Agricultural_Trade_Liberalization.pdf 4. Krugman, P. & Obstfeld, M. (2009). International Economics: Theory and Policy. Pearson Education Inc. 5. Krueger, A. (196). The Political Economy of American Trade Policy. University of Chicago Press. 6. Keleman, A., Hellin, J. & M. Bellon. (2008). Maize Diversity, rural development policy, and farmers’ practices: lessons from Chiapas, Mexico. The Geographical Journal. 175(1). pp. 52-70. 7. “NAFTA and US Corn subsidies: Explaining the Displacement of Mexico’s Corn Farmers”, (2010). Prospect Journal, Retrieved on December 2, 2010 from: http://prospectjournal.ucsd.edu/index.php/2010/04/nafta-and-u-s-corn-subsidies-explaining-the-displacement-of-mexicos-corn-farmers/ 8. Classical Trade Theory and Comparative Advantage, n.d (lecture notes) 9. The Heckscher-Ohlin Model, n.d (lecture notes) Read More