NAFTA update and prospects for U.S. cotton - North American Free Trade Agreement's impact on trading relationship between the United States, Canada and Mexico - U.S. Dept. of Agriculture, Foreign Agricultural Service report

Summary

The United States, Mexico, and Canada are involved in free trade negotiations, referred to as the North American Free Trade Agreement (NAFTA). These negotiations began on June 12, 1991, between U.S. Trade Representative Carla Hills and her counterparts from Mexico and Canada. The NAFTA negotiations encompass the entire spectrum of economic interests, including more than 28,000 tariff items in agriculture, textiles, automobiles, energy, and government procurement. If successfully concluded, these negotiations would result in a North American market of more than 360 million consumers and producers with an annual gross domestic product of more than $6 trillion. A NAFTA would complement the successes garnered from the U.S./Canadian Free Trade Agreement (CFTA) which went into effect on January 1, 1989. In addition, a NAFTA would build on the progress already achieved in the U.S./Mexico "Framework" Understanding and the Trade and Investment Facilitation Talks (TIFTs) Understanding. In December 1991, the Presidents of the United States and Mexico reaffirmed their commitment to conclude an agreement as quickly as possible. In order to facilitate this process, the extension of "Fast Track" procedures for negotiating trade agreements such as NAFTA enable the President to present a trade agreement to Congress for approval without the possibility of an amendment. Furthermore, Fast Track procedures allow U.S. negotiators to participate in talks with the assurance that the agreement reached will be the same agreement voted on by the respective NAFTA countries. The objectives of the United States in the development of NAFTA adhere to the following general principles:

-- Reduction to zero of all tariffs with no exclusions, and with transitional measures for sensitive commodities.

-- Significant reductions or elimination of non-tariff barriers to trade within North America.

-- All benefits that are created by NAFTA should only accrue to NAFTA participants. With these objectives in mind, the negotiating groups proceeded to deal with the concerns of each country within six broad areas. These areas are market access; trade rules (such as safeguards); services (such as banking and insurance); investment; intellectual property rights; and dispute settlement. While no date is established for conclusion of the NAFTA, the current Administration would like to successfully conclude these negotiations prior to the expiration of Fast Track authority on June 1, 1993.

Cotton in the NAFTA

The United States and Mexico are both producers and exporters of raw cotton. The United States is the single largest exporter of raw cotton fiber to Mexico and Canada. The combined value of MY 1990/91 U.S. raw cotton exports to Canada and Mexico was $137 million. Canada relies exclusively on raw cotton imports to meet its consumption requirements since it does not produce cotton. Over 80 percent of its raw cotton imports come from the United States. Although Mexico's production declined in recent years, its domestic consumption increased. Mexico now relies heavily on U.S. cotton imports to meet its consumption requirements. Mexico has the largest U.S. Section 22 country import quota for cotton. However, Mexico's quota of 29,697 metric tons has not been filled since MY 1985/86.

NAFTA Prospects and Issues for Cotton

One of the Primary concerns for cotton in the NAFTA is the rules of origin issue. These rules would determine a product's country of origin and hence the tariff rate. The acceptance of these rules ensures that non-NAFTA cotton exporting countries will not benefit from unrestricted, duty-free trade among NAFTA countries. Thus far, the United States is proposing both a fiber forward rule for yarn and a yarn forward rule for fabric and textiles. Under the proposed fiber forward rule, yarn exports within the NAFTA trade area are permissible with NAFTA trade preferences if Canadian, U.S., or Mexican cotton and manmade fibers were used to produce the yarn. The proposed yarn forward rule will allow NAFTA origin to be conferred to fabrics woven or knitted from yarns spun in the NAFTA territory. The Customs Subgroup of the Rules of Origin Negotiating Group is working to harmonize all three countries' means of enforcement and audit procedures so that penalties can be levied against firms that claim NAFTA duty preference for non-NAFTA goods. It is highly unlikely that non-NAFTA raw cotton entering the trade zone will take place. For foreign cotton to be competitive with U.S. cotton in the NAFTA region the foreign export price, plus all delivery costs, should not exceed U.S. mill-delivered prices. A recent USDA study indicated that foreign supplies could not be competitively priced when including the cost of shipping to the NAFTA region. Non-NAFTA shipments would also find it difficult to compete with the quality, timely delivery, and availability of U.S. supplies within the region. Prospects for U.S. raw cotton exports differ between Mexico and Canada. Until the mid-1970's, Mexico ranked among the world's top five cotton exporters, exporting more than half of its crop. However, Mexico's cotton situation changed significantly since the 1970's. Many farmers are no longer cotton producers because of reduced profitability and competition from commodities covered by price supports or special subsidies. Once the second largest producer in Latin America, Mexico now ranks fourth behind Argentina, Paraguay, and Brazil. Recently, large fluctuations in output occurred, resulting in declining exports. Since 1985, exports averaged 302,000 bales, compared to 813,000 bales in the mid-1970's. Conversely, consumption has increased since 1985. For example, the consumption forecast of 800,000 bales for the current 1991/92 marketing year compares with 670,000 bales for the 1985/86 marketing season. Unless production levels increase, consumption needs will have to be met through imports. The United States is in a good position to take advantage of this opportunity. Increases in U.S. exports of raw cotton are, in part, dependent upon Mexico's income growth as a result of the NAFTA. This demand growth could be larger if Mexico receives increased access to the United States for its textile exports. However, there are already indications that Mexican consumption is on the rise in response to population growth and income growth. A preference for U.S. cotton is also expected as Mexican consumers exhibit a demand for finer quality products. Mexico's Ministry of Commerce reported that its textile industry's best sales prospects to Mexican consumers are in cotton and cotton/synthetic fiber blends. Mexico's data reveal a 90-percent increase in cotton and cotton fiber blend categories over 25,000 MT in calendar year 1990. U.S. exports of raw cotton to Mexico increased nine-fold to 200,000 bales between MY 1988/89 and MY 1990/91. Based on current levels for MY 1991/92, U.S. raw cotton exports are expected to exceed that level. U.S. raw cotton export commitments to Mexico currently total 195,000 bales as of April 2, 1992. U.S. export prospects in Canada depend on U.S. cotton continuing to be price competitive with other foreign growths. However, Canada's domestic textile mill consumption and, therefore, U.S. raw cotton exports appear limited because of declining mill activity in the face of rising textile product imports. U.S. raw cotton exports are increasing under lower Canadian import tariffs because of the Canadian Free Trade Agreement (CFTA). In MY 1989/90, U.S. raw cotton exports to Canada increased by 33 percent over the previous marketing year. Exports to Canada in MY 1990/91 leveled off slightly due to a recession. As of March 1992, total U.S. export commitments to Canada total 196,000 bales, which surpasses last season's level.

Outlook for U.S. Cotton Exports

U.S. cotton exports under the NAFTA agreement with Canada are not expected to be significantly altered. Under Canada's CFTA with the United States, lower Canadian tariffs have already led to increases in imports of both U.S. raw cotton and textile fabrics. However, some Canadian textile firms have also moved facilities into the United States in hope of increasing their competitiveness in Canada with imported textile products. For Mexico, expectations are for an increase in textile exports to the U.S. rather than significant increases in Mexican raw cotton production or exports. Under NAFTA, the consumption of raw cotton is expected to increase in North America as incomes rise. Another long-term benefit to the U.S. cotton industry under a successful NAFTA is the motivation for countries in Latin America and the Caribbean to engage in similar negotiations. The U.S. cotton industry could benefit from an extended Free Trade Agreement into South America, Central America, and the Caribbean Basin as their economies grow. Moreover, the projection for consumption in South America, Central America, and the Caribbean Basin in the 1991/92 marketing season is 5.352 million bales, compared with 5.050 million in MY 1985/86. The United States stands to benefit directly because it is a reliable supplier with a production system that is capable of producing many varieties of cotton. Also, the United States has earned a reputation for ensuring timely delivery of cotton. The NAFTA also is in line with the present U.S. Administration's "Enterprise for the Americas" Initiative (EAI). The overall goal of this initiative is towards trade policy reforms between the regions of North America, Latin America, and the Caribbean. The long-term goal is to engage in agreements with groups of countries in the region for purposes of trade liberalization. The NAFTA negotiations should serve as a model for other such agreements in the hemisphere and further enhance the prospects for U.S. cotton.

COPYRIGHT 1992 U.S. Department of Agriculture
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