Economist shows how free trade agreement helped U.S. farmers increase exports to neighbors
A new Virginia Tech study confirms that the North American Free Trade Agreement, commonly known as NAFTA, which has re-entered national politics in recent months as the U.S. presidential election approaches, has increased U.S. agricultural exports to Mexico and Canada even though most of this increase occurred a decade after its ratification.
Jason Grant, assistant professor of agricultural and applied economics in the College of Agriculture and Life Sciences, has completed a study on the effects that gradual “phase-in” periods in regional trade agreements, including NAFTA, have on trade flows. His findings will be published in the August 2008 issue of the American Journal of Agricultural Economics, the premier academic journal for agricultural economists.
“While regional trade agreements do bolster trade in most cases, more than half of the increase occurred eight to 12 years after the agreement went into effect,” Grant said. “Also, the increase in agricultural trade was double that of nonagricultural trade after the eight- to 12-year ‘phase-in’ period, owing to the fact that most nonagricultural trade barriers were successfully dismantled through the multilateral process prior to the signing of NAFTA.”
Most of the increase in members’ agricultural trade, which was only recently brought under the purview of the World Trade Organization, was due to very high trade barriers before NAFTA or other regional trade agreements. According to Grant, agriculture is a “politically sensitive” area in the international trade negotiations. While nonagricultural tariffs have been successfully reduced to 3 to 5 percent, U.S. agricultural exports face taxes that average 40 percent and can be as high as 200 percent on some product lines.
In addition to NAFTA, Grant studied other regional trade agreements such as the European Union, the Mercado Común del Sur, the Andean Pact, the Association of Southeast Asian Nations, and the Closer Economic Relations agreement. According to Grant’s research, the increase in agricultural trade was greater than the increase in nonagricultural trade in every agreement under consideration with the exception of Southeast Asia’s.
“In the last five years alone, we have seen an explosion in the number of regional trade agreements that were notified to the World Trade Organization,” Grant said. “Economists are calling this latest spike the ‘second regionalism.’ The number of these agreements that have been signed and entered into force goes well beyond the first spike that occurred in the late 1960s.”
In 2003, the World Trade Organization was made aware of 250 regional trade agreements, with more than half of those occurring between 1995 and 2002. Grant attributes much of the increase in regional trade agreements to the frustration over the multilateral process of trade negotiations, which is protracted by negotiator’s continual disagreement over the treatment of agricultural trade.
Although regional trade agreements such as NAFTA have gained popularity in recent years, they still have their detractors. “While NAFTA has removed some domestic jobs, there have been huge gains for the majority of U.S consumers through lower prices and increased variety,” Grant said.