CLOSING CASE Tomato Wars When the North American Free Trade Agreement (NAFTA) we
ID: 463210 • Letter: C
Question
CLOSING CASE
Tomato Wars
When the North American Free Trade Agreement (NAFTA) went into effect in December 1992 and tariffs on imported tomatoes were dropped U.S. tomato producers in Florida feared that they would lose business to lower-cost producers in Mexico. So they lobbied the government to set a minimum floor price for tomatoes imported from Mexico. The idea was to stop Mexican producers from cutting prices below the floor to gain share in the U.S. market. In 1996 the United States and Mexico agreed on a basic floor price of 21.69 cents a pound. At the time, both sides declared themselves to be happy with the deal. As it turns out, the deal didn't offer much protection for U.S. tomato growers. In 1992, the year before NAFTA was passed, Mexican producers exported 800 million pounds of tomatoes to the United States. By 2011 they were exporting 2.8 billion pounds of tomatoes, an increase of 3.5-fold. The value of Mexican tomato exports almost tripled over the same period to $2 billion. In contrast, tomato production in Florida has fallen by 41 percent since NAFTA went into effect. Florida growers complained that they could not compete against low wages and lax environmental oversight in Mexico. They also alleged that Mexican growers were dumping tomatoes in the U.S. market at below the cost of production, with the goal of driving U.S. producers out of business. In 2012, Florida growers petitioned the U.S. Department of Commerce to scrap the 1996 minimum price agreement, which would then free them up to file an antidumping case against Mexican producers. In September 2012 the Commerce Department announced a preliminary decision to scrap the agreement. At first glance, it looked as if the Florida growers were going to get their way. It soon became apparent, however, that the situation was more complex than appeared at first glance. More than 370 business and trade groups in the United States—from small family-run importers to meat and vegetable producers and Wal-Mart Stores—wrote or signed letters to the Commerce Department in favor of continuing the 1996 agreement.
Tomato farming is an important business globally. Tomatoes originated in the South American Andes, near where Peru is today, and were used early on by the Aztecs in southern Mexico as a food.
Source: © Joe Raedle/Getty Images
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Among the letter writers was Kevin Ahern, the CEO of Ahern Agribusiness in San Diego. His company sells about $20 million a year in tomato seeds and transplants to Mexican farmers. In a letter sent to the New York Times, Ahern noted that “yes, Mexico produces their tomatoes on average at a lower cost than Florida; that's what we call competitive advantage.” Without the agreement Ahern claimed that his business would suffer. Another U.S. company, NatureSweet Ltd., grows cherry and grape tomatoes under 1,200 acres of greenhouses in Mexico for the American market. It employs 5,000 people, although all but 100 work in Mexico. The CEO, Bryant Ambelang, said that his company couldn't survive without NAFTA. In his view, Mexican-grown tomatoes were more competitive because of lower labor costs, good weather, and more than a decade of investment in greenhouse technology. In a similar vein, Scott DeFife, a representative of the U.S. National Restaurant Association, stated, “people want tomato-based dishes all the time.... You plan over the course of the year where you are going to get your supply in the winter, spring, fall.” Without tomatoes from Mexico, a winter freeze in Florida, for example, would send prices shooting up, he said. Faced with a potential backlash from U.S. importers, and U.S. producers with interests in Mexico, the Commerce Department pulled back from its initial conclusion that the agreement should be scrapped. Instead, in early 2013 it reached an agreement with Mexican growers to raise the minimum floor price from 21.69 cents a pound to 31 cents a pound. The new agreement also established even higher prices for specialty tomatoes and tomatoes grown in controlled environments. This was clearly aimed at Mexican growers, who have invested billions to grow tomatoes in greenhouses. Florida tomatoes are largely picked green and treated with gas to change their color.
Sources: E. Malkin, “Mexico Finds Unlikely Allies in Trade Fight,” The New York Times, December 25, 2012, p. B1; S. Strom, “United States and Mexico Reach Tomato Deal, Averting a Trade War,” The New York Times, February 3, 2013; J. Margolis, “NAFTA 20 Years After: Florida's Tomato Growers Struggling,” The World, December 1, 2012.
Case Discussion Questions
1) Was the establishment of a minimum floor price for tomatoes consistent with the free trade principles enshrined in NAFTA?
2) Why despite the establishment of a minimum floor price have imports from Mexico grown over the years?
3) Who benefits from the importation of tomatoes grown in Mexico? Who suffers?
4) Do you think that Mexican producers were dumping tomatoes in the United States?
5) Was the Commerce Department right to establish a new minimum floor price, rather than scrap the agreement and file an antidumping suit? Who would have benefited from an antidumping suit against Mexican tomato producers? Who would have suffered?
6) What do you think will be the impact of the new higher floor price? Who benefits from the higher floor price? Who suffers?
7) What do you think is the optimal government policy response here? Explain your answer.
Explanation / Answer
1. The free trade principles of NAFTA wanted to encourage free trade among Canada, the United States, and Mexico in order to increase competitiveness and benefit manufacturers and consumers. The free trade principles aim to eliminate tariff and non-tariff barriers to free trade. Now, the establishment of minimum floor price was clearly against the free trade principles enshrined in NAFTA. This was because the minimum floor price acted as a non-tariff barrier aimed at limiting the competitive advantage of Mexico in order to protect the interests of producers of tomato in Florida.
2. Despite the establishment of a minimum floor price tomato imports from Mexico have grown mainly due to a combination of several reasons. Firstly, Mexican producers are able to supply tomatoes at the established floor price as their cost of production is low, thanks to the low wages in Mexico. Secondly, the quality of tomatoes grown in Mexico is superior compared to Florida tomatoes. Mexico has a weather which is conducive for growing tomatoes. In Florida, tomatoes are treated with gas to change the color as they are plucked green.
3. US based business and trade groups who are involved in the production of tomatoes in Mexico stand to gain as they can import cheap tomatoes from Mexico and sell them at a higher price in USA. Suppliers of materials to the tomato growing industry (like the suppliers of seeds or farming equipment) also gain.
In terms of the sufferers, the producers of tomatoes in USA, mainly in the Florida region are at the losing end. This is because their output is less competitive compared to Mexico's output both in terms of quality as well as price. The import of tomatoes from Mexico reduces the demand for tomatoes grown in Florida, causing the business of Florida growers to suffer.
4. No, I don't think that Mexican producers were dumping tomatoes in the United States. They were merely using their competitive advantage in this area, thanks to low wages, conducive weather and lax environmental regulations in Mexico. Dumping will happen when growers in Mexico are said to be practicing predatory pricing by selling tomatoes in USA at a price lower than in Mexico.
5. Yes, the Commerce Department was right. The facts and evidence of the case clearly points out that Mexico was not dumping tomatoes in the United States. Hence, the Commerce Department could not have filed an antidumping suit.
If an antidumping suit were filed, the Florida growers would have benefited. In terms of sufferers, Mexican growers, US based business and trade groups who are involved in the production of tomatoes in Mexico and suppliers of materials to the tomato growing industry (like the suppliers of seeds or farming equipment) stand to lose.
6. The higher floor price of 31 cents a pound will be beneficial for Florida growers as it will increase the price competitiveness in the market. They will have that extra cushion that has been provided by the increase in the floor price.
The higher floor price will, to some extent, reduce exports from Mexico. Mexican exporters will now not be able to sell below 31 cents a pound and thus they will lose some of their competitive advantage.
7. The optimal government policy response should be to remove all forms of barriers. Currently it has imposed non tariff barriers in the form of floor price. Even this should be eliminated to allow free trade in the true sense. When this is allowed, Florida growers will be forced to increase their competitiveness in the market. At present they are reluctant to do so due to the limited protection in terms of floor price.