NAFTA 10 Years After
By John Marsh
Jan 1, 2004 12:00 PM
Nearly 10 years have passed since the North American Free Trade Agreement (NAFTA) was passed in 1994. Considerable debate has ensued concerning NAFTA's impacts on U.S. beef producers in terms of cattle prices received, fair trade practices, and animal health risks.
Supporters of NAFTA emphasized the need for less restrictive markets in North America to expand U.S. exports of livestock and meat products. Also, transportation cost advantages occur because distances to other foreign markets are greater than those within North America.
Opponents of NAFTA concurred that the U.S. could experience export growth. However, they perceived that increased imports of live animals and meat products into U.S. feedlots and meat packing plants could offset those gains.
U.S. live cattle and beef trade, excluding by-products, (called total beef trade, measured on a carcass weight basis) with Canada and Mexico reveals opposite trends of imports relative to exports.
Figure 1 shows total U.S. beef trade on a net export value basis (value of total beef exports less value of total beef imports). The trends show the U.S. net beef deficit increasing with Canada, but decreasing with Mexico.
Specifically, from 1985-2002 the net beef export deficit with Canada increased from -$380 million to -$2.05 billion, or a 439% increase in the deficit. From 1985-2002 the net beef export value with Mexico increased from a -$90 million deficit to a $500 million surplus, or a 656% increase in net value.
For total U.S. beef trade, the net beef export value decreased from -$1.22 billion to -$1.27 billion, or by about 4%. However, the deficit value decreased up to 2001 (4%), but it substantially increased in 2002 due to large meat imports from Canada, Mexico, and Brazil and large cattle imports from Canada.
These trade patterns indicate the U.S. net beef trade position with Canada has declined while the net trade position with Mexico has improved. Various reasons account for these trade positions, but much of it relates to relative surplus production and excess (or unutilized) capacity in the beef industries of the NAFTA countries.
The Canadian cattle industry is roughly 14% the size of the U.S. cattle industry. Nevertheless, Canada is a surplus producer of live cattle and beef carcasses. U.S. beef packers and processors import these commodities because of excess U.S. processing capacity and domestic consumer demand.
Canada also sells its surplus boxed beef products primarily into the U.S., with smaller quantities sold into Mexico and the Pacific Rim countries.
The Mexican cattle industry is roughly 22% the size of the U.S. cattle industry. However, Mexico is a surplus producer of feeder cattle which are exported to the southern U.S. to be finished in commercial feedlots with excess capacity. Mexico is a deficit producer of beef middle meats and high value table cuts, so they import these products from the U.S. and Canada.
The looming question is: What has been NAFTA's effect on U.S. beef cattle markets during this period?
The following analysis compares changes in U.S. net beef imports of live cattle and meat (imports less exports) with Canada and Mexico and their effects on prices and revenues in the fed cattle and feeder cattle sectors. Comparisons are made for the pre-NAFTA period from 1985-1993 and the post-NAFTA period from 1994-2002.
Impacts are also evaluated for changes in U.S. net beef imports that include all trading partners — NAFTA countries, Japan, South Korea, Australia and New Zealand, South America, etc.
The price and revenue adjustments are based on estimates of a statistical demand and supply model of the U.S. beef industry. The parameters are applied to changes in average net beef imports between the two nine-year periods for Canada, Mexico, and the U.S. as shown in Table 1.
Table 2 gives the impacts on cattle prices and revenues (in 2002 dollars) for these two periods. The salient aspects of the trade results are:
U.S. beef trade with Canada reduced U.S. fed and feeder cattle prices and revenues between the pre-NAFTA period and the post-NAFTA period.
U.S. beef trade with Mexico shows the opposite result in that U.S. cattle prices and revenues increased between the pre-NAFTA period and post-NAFTA period.
The negative cattle price and revenue effects of U.S. beef trade with Canada appear to dominate the positive price and revenue effects with Mexico in both cattle sectors.
The 1989 U.S.-Canada Free Trade Agreement (CFTA) was a catalyst that increased U.S. net beef imports with Canada, while NAFTA was merely a continuation of this agreement. As well, the Western Canadian livestock feeding industry, particularly Alberta, grew because of the elimination of Canadian grain transportation subsidies in 1995.
This growth contributed to expanded beef exports into the U.S. The data indicate (Table 1) that average U.S. net beef imports from Canada increased by 128% between the pre- and post-NAFTA periods.
This pattern resulted in reducing fed cattle prices and revenues by $1.35/cwt. and $530 million respectively, and feeder cattle prices and revenues by 77¢/cwt. and $450 million.
U.S. beef trade relationships with Mexico resulted in opposite cattle price and revenue effects between the pre- and post-NAFTA periods. NAFTA increased U.S. exports of middle meats and high value muscle cuts to a growing Mexican economy.
The data shows (Table 1) that U.S. average net beef imports with Mexico decreased by 192% between the two periods. The result was to increase fed cattle price and revenue by 53¢/cwt. and $210 million respectively, and increase feeder cattle price and revenue by 30¢/cwt. and $180 million.
The combined result of U.S. beef trade with Canada and Mexico was net reductions in prices and revenues due to the deficit position with Canada. The combined country effects of Canada and Mexico (see “Total” row in Table 2) indicates net reductions in fed cattle price of 82¢/cwt. and fed cattle revenue of $330 million.
The difference reflects the fact that Canada is a more important U.S. beef trading partner than is Mexico. For example, live cattle and beef import and export trade with Canada and Mexico represented about 5.5% and 2.4% of U.S. beef supplies, respectively, from 1985 to 2002.
The U.S. also exports beef products into the markets of the Pacific Rim, Caribbean countries, and Russia. As a result of increased beef exports into these areas, the negative price and revenue effects of NAFTA were substantially mitigated.
For example, the U.S. net import deficit for all beef trade was reduced by 24% between the pre- and post-NAFTA periods (Table 1). The aggregate result was to increase fed and feeder cattle prices by 88¢/cwt. and 52¢/cwt., respectively, and to increase corresponding beef revenues by $350 million and $220 million (Table 2).
Trade liberalization, growing foreign incomes, foreign preferences for animal source proteins, and U.S. product promotion in foreign markets account for much of the overall trade improvement.
NAFTA has been beneficial to the U.S. beef industry due exclusively to the U.S. beef trade gain with Mexico. However, since 1994 the U.S. has substantially increased its beef trade deficit with Canada. It is not clear whether Canada's contribution to the U.S. beef trade position would have differed much even without NAFTA since U.S. trade liberalization with Canada was already implemented under the CFTA.
Perhaps NAFTA has made a difference for the U.S. in terms of exporting more meat to Canada, conflict resolution in trade agreements, or in terms of the Restricted Feeder Cattle Program. The latter permitted northern tier states to increase feeder cattle exports to Canada as a result of removing test requirements and other costs of animal health restrictions.
The NAFTA impacts on U.S. cattle prices and revenues are relatively small primarily because U.S. beef trade (imports and exports) with Canada and Mexico constitutes only about 7-8% of U.S. beef supplies. When considering net beef trade (imports less exports), it is only about 4% of U.S. beef supplies.
Also, the price impacts in this study do not reflect the rare event (since May 2003) of the U.S. closing its borders to Canadian live cattle and beef due to the single case of bovine spongiform encephalopathy (BSE) found in Canada. Beef producers and economists feel this event was highly amplified by low U.S. cattle inventories and strong domestic and export demand, in producing record cattle and beef prices.
This article is in full text, entitled “Post-NAFTA and the U.S. Beef Market” (Briefing No. 50). It can be downloaded on the Web at http://ampc.montana.edu/publications/AMPCpublications.html.
John M. Marsh is a professor, Department of Agricultural Economics and Economics, Montana State University, Bozeman.
Table 1. Average Values of U.S. Net Beef Trade, Pre-NAFTA (1985-1993) and Post-NAFTA (1994-2000).
Years/Percent Canada Mexico U.S.
(1985-1993) 0.602 0.157 2.122
(1994-2002) 1.373 -0.144 1.617
Percent Change +128 -192 -24
Note: Net Imports are total beef imports less total beef exports.
Table 2. Effects of U.S. Net Beef Imports on Prices and Revenues in the Beef Cattle Sectors, Pre-NAFTA (1985-1993) and Post-NAFTA (1994-2002).
Countries Fed Cattle Feeder Cattle
($/cwt) (billion $) ($/cwt) (billion $)
Canada -1.35 -0.534 -0.77 -0.452
Mexico 0.53 0.209 0.30 0.175
Total -0.82 -0.325 -0.47 -0.277
U.S. 0.88 0.351 0.52 0.218
Note: Net beef imports are total beef imports less total beef exports.