exploiting comparative advantage under nafta: the grain-ranch and the green-grocer calgary, alberta....
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Exploiting comparative advantage under NAFTA:
The grain-ranch and the green-grocer
Calgary, Alberta. June 2006Calgary, Alberta. June 2006
In Mexico agriculture displays the lowest labor productivity
Source IMCO con datos de INEGI (2002) e ILO (2001)
Labor productivity vs. most productive sector(Sectors Value Added / EAP in sector)Mining = 100%
Labor employed (%share in EAP)
Average productivity as % of the most
productive sector = 25.3%
Mining
Financial services
Utilities
Professional and personal
services Manufacturing
Construction
Commerce and Tourism Agriculture
Communications and transportation
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
And vis a vis the US
Labor Productivity México vs. Estados Unidos(Value Added / EAP in the sector)US productivity 2001 = 100
Jobs (% EAP)
Mining
Financial services
UtilitiesProfessional, personal and community services
Manufacturing
Construction
Commerce, restaurants and hotels Agriculture
Productivity in the US = 100
Productivity in the US = 100
Transports and Communications
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
Hunting for a BIG idea?
1817 David Ricardo:
The theory of comparative advantage explains why it
can be beneficial for two (or more) countries to trade
… even though one of them may be able to produce
every kind of item more cheaply than the other.
What matters
… is not the absolute cost of production (absolute advantage) but rather the ratio between how easily the two countries can produce different kinds of things.
Vision 2008: The grain-rancher and the green-grocer
One Market, deeper and more efficient
Deeply transformed agricultural sectors
Specialization within region
The Ranch
& the
Green-Grocer
US & Canada: grains, cattle and other crops & products intensive in capital and land extension
Mexico: Fruits and greens intensive in labor and diverse benign climate
Desgravaci ón de productos agroali mentari os en el TLCAN
Desgravación
2003
AzAzúúcarcar
Frijol*/Frijol*/MaMaííz*/z*/Leche en Polvo*/Leche en Polvo*/
Papa */Papa */
Cadena AvCadena Avíícola */cola */
Cadena PorcCadena Porcíícola */ cola */ CebadaCebada
Tabaco, cigarros, puros y cigarrillosTabaco, cigarros, puros y cigarrillosVino Vino
Frutas y hortalizas preparadosFrutas y hortalizas preparados
J ugos y conservas de frutas y hortalizasJ ugos y conservas de frutas y hortalizas
Chocolates y preparaciones con cacaoChocolates y preparaciones con cacaoArtArtíículos de la Confiterculos de la Confiterííaa
Semillas oleaginosasSemillas oleaginosas
Cereales, harinas, panCereales, harinas, panManzanas, peras, duraznos y frutos Manzanas, peras, duraznos y frutos
Quesos, mantequilla, yogurt y lQuesos, mantequilla, yogurt y láácteoscteos
ARANCEL 2002
TLCANPRODUCTO
Grasas animales*/Grasas animales*/Huevo frescoHuevo fresco
0.31 US/0.31 US/ kg.kg.70.4%70.4%108.9%108.9%70.4%70.4%
51.6%51.6%
49.4%49.4%
20%20%24.3%24.3%
5%5%2%2%
2%2%
2%2%
2%2%1.0% 1.0% -- 1.5%1.5%
1.0% 1.0% -- 1.5%1.5%1.0% 1.0% -- 2%*/2%*/
2%2%
2%2%
53.5%53.5%9.5%9.5%
2008
Aran
cele
sBa
jos
en 2
002
Aran
cele
sAl
tos
en 2
002
56.356.3
Desgravación
2003
AzAzúúcarcar
Frijol*/Frijol*/MaMaííz*/z*/Leche en Polvo*/Leche en Polvo*/
Papa */Papa */
Cadena AvCadena Avíícola */cola */
Cadena PorcCadena Porcíícola */ cola */ CebadaCebada
Tabaco, cigarros, puros y cigarrillosTabaco, cigarros, puros y cigarrillosVino Vino
Frutas y hortalizas preparadosFrutas y hortalizas preparados
J ugos y conservas de frutas y hortalizasJ ugos y conservas de frutas y hortalizas
Chocolates y preparaciones con cacaoChocolates y preparaciones con cacaoArtArtíículos de la Confiterculos de la Confiterííaa
Semillas oleaginosasSemillas oleaginosas
Cereales, harinas, panCereales, harinas, panManzanas, peras, duraznos y frutos Manzanas, peras, duraznos y frutos
Quesos, mantequilla, yogurt y lQuesos, mantequilla, yogurt y láácteoscteos
ARANCEL 2002
TLCANPRODUCTO
Grasas animales*/Grasas animales*/Huevo frescoHuevo fresco
0.31 US/0.31 US/ kg.kg.70.4%70.4%108.9%108.9%70.4%70.4%
51.6%51.6%
49.4%49.4%
20%20%24.3%24.3%
5%5%2%2%
2%2%
2%2%
2%2%1.0% 1.0% -- 1.5%1.5%
1.0% 1.0% -- 1.5%1.5%1.0% 1.0% -- 2%*/2%*/
2%2%
2%2%
53.5%53.5%9.5%9.5%
2008
Aran
cele
sBa
jos
en 2
002
Aran
cele
sAl
tos
en 2
002
56.356.3
*/Arancel fuera de cuota
Se establecieron plazos de desgravación
gradual de 10 y 15 años para productos
“sensibles”.
La mayoría de los productos que se desgravan
en 2003 tenían aranceles de entre 1% y 2%.
No solo se desgravan los productos
agropecuarios sino también todos sus insumos,
incluyendo maquinaria, equipo de transporte,
agroquímicos, material de empaque y forrajes
Se establecen disciplinas aplicables al comercio
entre las Partes (subsidios internos y a la
exportación, normas técnicas, salvaguardas,
medidas sanitarias y fitosanitarias, entre otras).
A declining tariff schedule would allow for convergence
Mexico’s Total Exports to US & CanadaMexico’s Total Exports to US & Canada
Source IMCO with data from SEIESA, SAGARPA y SE
There’s evidence of some specialization from NAFTA
129.6
126.4
104.6
65.5529.5
599.7
-29.8
-51.2
Cucombers& Peckles
Tequila.
Horticulturalproducts
Peppers
Livestock(beef)
Coffeebeans
Tomatoes
Beer10.5%
10.4%
7.7%
6.6%
5.4%
4.1%
3.6%
2.9%
(% change in value 1993-2002)(% change in value 1993-2002)(Share)(Share)
Mexico’s Total Imports from US & CanadaMexico’s Total Imports from US & Canada
35
111
66
81
-11
115
115
41
233
Soups
Food Preparations
Milk powder
Animal Fat
Leather
Canola
Wheat
Cotton
Barley
Beef
Corn
Soybeans2,322
881
785
(Share)(Share)
11.1%
7.4%
5.6%
5.9%
5.6%
4.8%
2.1%
1.9%
1.6%
1.5%
1.5%
1.4%
(% change in value 1993-2002)(% change in value 1993-2002)
Real growth:Real growth:38%38%
US Agricultural imports by origin US Agricultural imports by origin (Constant 2002* dollars) (Constant 2002* dollars)
Increasing our share in US’ imports
1993: $30,320
2002: $41,934
Resto del Mundo
56%Canada20%
México12%
Brasil4%
Francia4%
Australia4%
Resto del Mundo
53%
Canada21%
México14%
Francia5%
Italia4%Brasil
3%
Fuente : SAGARPA * CPI U.S. Bureau of Labor StatisticsDepartment of Labor en: www.bls.gov
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
However, we keep a steady trade deficit
Mexico’s agricultural trade balanceMexico’s agricultural trade balanceMillones de dólares de 2001*
* CPI U.S. Bureau of Labor Statistics
Without significant FDI and continuing rural poverty
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
*
Agriculture
Foods & Beverages,Tobbacco
Foreign direct investmentForeign direct investment(Million dollars real 2002) (Million dollars real 2002)
Source Secretaría de Economía. Dirección General de Inversión Extranjera.
0
10,000
20,000
30,000
40,000
0 100,000 200,000 300,000 400,000
Rural population
Pop
ula
tion
in p
over
ty
Correlation between rural population and povertyCorrelation between rural population and poverty(Thousand people)(Thousand people)
* Ene-Jul 2005
And a modest nutrition improvement in the population…
(Kgs)(Kgs)
65.7 69.986.8 81.6 90.6 98.2
114.5
1961 1970 1980 1990 2001 1970 2001
Origen vegetalOrigen animal
Mexico EUA 0
50100150200250300
1970 1980 1990 2001 US 2001
CerealsMilkMeatEggsFish
1988
1999
2003
Arge
ntin
a
Braz
il
Ecua
dor
Mexico
Source Desempeño Económico del Sector Agrícola. Taller de Trabajo con SAGARPA Septiembre 2003 McKinsey & Company, Inc.
Underweight prevalence at birth Underweight prevalence at birth (% of population)(% of population)
Per capita daily protein intakePer capita daily protein intake(Grams) (Grams)
Per capita yearly consumptionPer capita yearly consumption
3,4973,465
3,529
3,486
3,567
3,525
3,606
3,712
3,551
1997
1998
1999
2000
2001
2002
2003
2004
2005
Per capita agriculture GDP Per capita agriculture GDP Constant pesos 2005
Source SAGARPA Source SAGARPA
Agriculture per capita income remains stagnated
US Farm Act 2002US Farm Act 2002Payment rates to crops and milk (dollars per ton)Payment rates to crops and milk (dollars per ton)
Direct support to producers in the U.S. has increased substantially
(MLAPs)(MLAPs) (DPCs)(DPCs) (CCPs)(CCPs)
2004 – 07 2002 - 07 2004 - 07
Wheat 101.0 19.1 144.0
Corn 76.8 11.0 103.5
Sorghum 76.8 13.8 101.2
Barley 85.0 11.0 102.9
Oats 91.6 1.7 99.2
Cotton 1,146.4 147.0 1,596.1
Rice 143.3 51.8 231.5
Soybeans 183.7 16.2 213.1
Peanuts 391.4 39.7 545.8
Milk/1 218.3 n.a. 373.5
Source Major Commodity-Related Provisions of the 2002 Farm Act disponible en: http://www.ers.usda.gov/publications/aib778/aib778c.pdf
0.00%
0.40%
0.80%
1.20%
1.60%
2.00%
México E.E.U.U. Canadá
1986-88 2000-2002
Source: OECD
Total support to producersTotal support to producers(% GDP)
Mexico and Canada have also increased support to producers
20 products36 MM ton3.1 MM Ha11.7 ton/Ha
44 products49MM ton11MM Ha4.5 ton/Ha
11 products67 MM ton3.6 MM Ha18.3 ton/Ha
10 products19 MM ton6 MM Ha3.2 ton/Ha
Mexico only42 products
8 MM ton1 MM Ha8.8 ton/Ha
EUA only12 products66 MM ton4 MM Ha
16.5 ton/Ha
A B
C D<1
>1
1
>1 1 <1
E
F
Relative production México / EUA
Rel
ativ
e yi
eld
Mex
ico
/ US
Source Desempeño Económico del Sector Agrícola. Taller de Trabajo con SAGARPA Septiembre 2003. McKinsey & Company, Inc.
Mexican production concentrates in segments without a comparative advantage…
Which entails suboptimal resource allocation… and foregoing substantial trade opportunities
Alfalfa 23.0Sorghum 5.8Maize fodder 4.5Cucumbers 0.4Tangerines 0.4Oilseeds 0.3Cabbage 0.25Vegetables & Horticulture 0.25Tubers 0.23Rice 0.22
Corn 17.5Fruits 13.6Citrus 6.2Orange 3.8Feeds and Fodder 2.7Barley 0.8Melons 0.5Apples 0.4Carrots 0.4Grapes 0.4
Sugar Cane 46.0Millet 5.8Sorghum 3.3Banana 2.1Potatoes 1.5Mango 1.4Avocado 0.9Papaya 0.7Pumpkin 0.6Sweet potatoes 0.1
Veg & Melons 9.4Tomatoes 2.1Leguminous 2.0Peppers and hot peppers 1.8Limes and lemons 1.7Dried beans 1.6Fresh fruits 0.3Green coffee beans 0.3
>1
<1Rel
ativ
e Yi
eld
Mex
ico
/ EU
AR
elat
ive
Yiel
d M
exic
o / E
UA
1
A B
C D
Relative production MRelative production Mééxico / EUAxico / EUA
Mexican production in million tons 2001Mexican production in million tons 2001
>1<1 1
Crops allocation does not reflect comparative advantage, nor market signals
Average 1996-2001Average 1996-2001
Source IMCO with data from Servicio de Información Estadística Agroalimentaria y Pesquera
Farmed surface
Economic density
Cereals 43.8 0.5
Feeds and fodder 23.3 0.8
Fruits 5.7 3.2
Horticultural 2.5 6.6
Vegetables 11.0 0.4
Oilseeds 1.8 0.5
Tubers 0.3 9.1
Other 0.3 2.6
FruitsFruits
Avg. 90-95
Avg. 96-01
Cereals 5.5x 6.5x
Feeds and fodder 3.8x 4.0x
Fruits 1.0x 1.0x
Horticultural 0.6x 0.5x
Vegetables 7.5x 7.5x
Oilseeds 5.5x 6.5x
Tubers 0.5x 0.3x
Other 0.8x 1.2x
2/3 of available farmland is dedicated to crops with low economic density
Profits from crop conversion to FRUITS
Economic density (x =times)
020406080
100120140160
1985
1987
1989
1991
1993
1995
1997
1999
2001
1998
2000
2002
2004
Development banks
Commercial banks
Source: SAGARPA
Financing to primary agribusinessFinancing to primary agribusiness(Billion constant pesos de 2002)
Naturally, lack of financing is at the core of the problem
Also, significant resistance comes from affected sectors in both sides
Product Controversy Sponsor Status
Tuna FishTuna Fish Fishing practice US Resolved
AvocadoAvocado Sanitary conditions US Resolved
Sugar caneSugar cane Access to market Mexico Pending
RiceRice Dumping Mexico Pending
ChickenChicken Dumping MexicoPrivately Resolved
BeansBeans Sanitary conditions Mexico Resolved
HFCSHFCS Discriminatory tax US Pending
0
2,000
4,000
6,000
8,000
10,000
12,000
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
EUA México
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
EUA México
Corn yieldsCorn yields(tons/Ha)
Barley yields Barley yields (ton/Ha)
Source Desempeño Económico del Sector Agrícola. Taller de Trabajo con SAGARPA Septiembre 2003. McKinsey & Company, Inc.
50% of our farmland is allocated to crops where we just cannot compete
150
170
190
210
230
250
270
290
310O
ct-9
6
Abr
-97
Oct
-97
Abr
-98
Oct
-98
Abr
-99
Oct
-99
Abr
-00
Oct
-00
Abr
-01
Oct
-01
Abr
-02
Oct
-02
Abr
-03
Oct
-03
Abr
-04
Oct
-04
Abr
-05
In the highly politicized sugar industry, the crisis has been dealt with using exceptional measures
Wholesale historic price of standard sugar ($/Sack)Wholesale historic price of standard sugar ($/Sack)
Source Coaazucar
ExpropriationExpropriationExpropriationExpropriation
IEPSIEPSIEPSIEPSSurplus exportsSurplus exportsSurplus exportsSurplus exports
Artificially keeping wholesale prices above international markets and substitutes
USD / Metric Ton (2005)USD / Metric Ton (2005)
0
100
200
300
400
500
600
Estándar Refinada Contrato II Contrato 5 Contrato 14LAB México
Fructuosa LABMéxico
Source Coaazucar, USDA. Para los Contratos 11 y 5 el precio es FOB.Se consideró el tipo de cambio interbancario al cierre del mes de Mayo 2005, BANXICO
MéxicoMéxico
Protectionism does not come for free… higher value added sectors intensive in sugar have suffered
Jobs
($/Ton)
+1%+1%
-0.4%-0.4%
Price elasticity of employment in the Price elasticity of employment in the chocolate industrychocolate industry
Source Modelo de Correlación Causal “Entre la industria del Chocolate y los Precios del Azucar”; SAGARPA
A 1% increase in sugar prices results in 0.4% jobs lost in the chocolate industry
Consequences Drop in sales Drop profits Less investment
All the hassle to protect a highly unproductive sector
687072747678808284
Sugar cane
Mexico USA
Sugar Yield (TN / Ha)Sugar Yield (TN / Ha)
Source USDA, Coaazucar
Similar situations are at play in other highly distorted markets
Eventually Doha will liberalize agricultural markets
Keeping historic production patterns will certainly secure current poverty traps
The urgent agenda must focus on Crop conversion taking advantage of comparative advantage
Labor intensive crops Climate diversity intensive crops
Focused effort on areas where we have or can develop competitive advantage
SoybeansSoybeans
RiceRice
PotatosPotatos
CarrotsCarrots
Fresh FruitsFresh Fruits
GrapefruitGrapefruit
Limes & Limes & LemonsLemons
Millions of dollars
2001=100
SpinachSpinach
Roots & Roots & TubersTubers
PulsesPulses
Vegetables & Vegetables & MelonsMelons
BeansBeans
CoffeeCoffee
applesapples
PumpkinPumpkin
GrapeGrape
CornCorn
CitrusCitrus
Fresh produceFresh produce
TomatoesTomatoes
OrangesOranges
TangerinesTangerines
Hot PeppersHot Peppers
OilseedsOilseeds
AsparagusAsparagus
PapayaPapaya
Sweet potatoesSweet potatoes
MilletMillet
Sorghum Sorghum
ColzaColza
AubergineAubergine
WheatWheat
BarleyBarley
ArtichokeArtichoke
CabbageCabbage
CucumberCucumber
BananasBananas
Cane vs. BeetsCane vs. Beets
AvocadoAvocado
MangoMango
PeppersPeppers
Tropical FruitsTropical Fruits
Cu
rre
nt
rela
tive
pro
du
cti
vity
Mex
ico
vs
. EU
A
Trend of productivity México vs. EUA
To WORSEN NEUTRAL To IMPROVE
INF
ER
IOR
SA
ME
SU
PE
RIO
R
Fuente: McKinsey and Company, Inc.
Source Desempeño Económico del Sector Agrícola. Taller de Trabajo con SAGARPA Septiembre 2003. McKinsey & Company, Inc