STRUCTURAL CHANGE AS A SOURCE OF TRADE DISPUTES UNDER NAFTA

1. STRUCTURAL CHANGE AS A SOURCE OF TRADE DISPUTES UNDER NAFTA ANDRES ROSENZWEIG PICHARDO GENERAL DIRECTOR OF AGRICULTURAL STUDIES MINISTRY OF AGRICULTURE, LIVESTOCK, RURAL DEVELOPMENT, FISHERIES AND AGRI-FOOD Tucson, Arizona February, 2001

2. IMPORTS/PRODUCTION RATIO Imports/Production Imports/Production IMPORTS 1994 IMPORTS 1999 1994 (%) 1999 (%) PRODUCT Value 1/ Value 1/ Value 1/ Value 1/ Maize 369.5 600.2 10.4 21.7 Wheat 189.3 336.8 25.2 77.7 Sorghum 394.8 426.9 88.5 69.7 Barley 6.7 39 10.9 54.6 Rice 104.1 122.3 136.7 168.4 Bovine meat 337.0 595.2 10.2 19.4 Swine meat 107.2 131.8 6.2 7.3 Poultry meat 89.4 82.6 4.5 3.8 1/. Million dollars. Source: CEA and SAGARPA with Secretary of Economics data. SECTOR WITH SUBSTANTIALLY GREATER EXPOSURE TO THE INTERNATIONAL MARKET DUE TRADE LIBERALIZATION Import penetration has increased in all these products, with the exception of surghum and poultry, due to: • Higher growth of human consumption than production. • Higher demand of processing industries.

3. AGRIFOOD EXPORTS/TOTAL EXPORTS RATIO, MEXICO – WORLD Million dollars ARG 99/94 Concept 1994 1995 1996 1997 1998 1999 Total exports of Mexico 60,817.2 79,540.6 96,003.7 110,236.8 117,459.6 136,391.1 17.53 Agri – food exports Mexico - World 4,031.7 5,786.2 5,724.7 6,337.5 6,746.0 6,985.9 11.62 Agri – food exports / Total Exports of Mexico (%) 6.6 7.3 6.0 5.7 5.7 5.1 (5.03) PERFORMANCE OF MEXICAN AGRIFOOD EXPORTS WITH NAFTA AND REST OF THE WORLD ARG 7,000 10.9% 6,000 5,000 (Million dollars) 4,000 3,000 2,000 ARG 15.8% 1,000 - (Years) 1994 1995 1996 1997 1998 1999 Rest of the World Mexico-NAFTA Source: SAGARPA and Secretary of Economics. MEXICAN AGRICULTURAL EXPORTS FIGURES The share of agri-food exports to total exports has been diminishing, even though agri-food exports have increased at an ARG of 11.6 per cent. Data shows no trade diversion on the side of exports due to NAFTA. Trade remains concentrated with NAFTA Partners.

4. AGRIFOOD IMPORTS/TOTAL EXPORTS RATIO, MEXICO – WORLD Million dollars ARG 99/94 Concept 1994 1995 1996 1997 1998 1999 PERFORMANCE OF MEXICAN AGRIFOOD IMPORTS Total exports of Mexico 60,817.2 79,540.6 96,003.7 110,236.8 117,459.6 136,391.1 17.53 WITH NAFTA AND REST OF THE WORLD Agri – food imports Mexico - World 7,343.2 5,252.9 7,678.3 8,610.1 8,546.7 6,985.9 11.62 ARG Agri - food imports / Total Exports of Mexico (%) 9,000 4.4% 12.1 6.6 8.0 6.9 7.3 6.3 (12.2) 8,000 7,000 6,000 5,000 (Million dollars) 4,000 3,000 ARG 2,000 (2.2%) 1,000 - (Years) 1994 1995 1996 1997 1998 1999 Rest of the World Mexico-NAFTA Source: SAGARPA and Secretary of Economics. MEXICAN AGRICULTURAL IMPORTS FIGURES Food imports vs total exports measures vulnerability according to FAO. This index is decreasing for Mexico, due to the performance of the economy as a whole. Data shows trade diversion on the import side due to the NAFTA.

5. AGRICULTURAL TRADE BALANCE/AGRICULTURAL GDP RATIO Million dollars Concept 1994 1995 1996 1997 1998 1999 Agricultural Trade Balance Mexico - World (1,332.3) 1,176.6 (1,433.0) (730.7) (1,134.4) (977.6) Agricultural GDP 22,216.4 14,348.3 18,393.4 20,109.5 20,080.2 20,488.5 Agricultural Balance/ Agricultural GDP (%) (6.0) 8.2 (7.8) (3.6) (5.6) (4.8) Source: SAGARPA with Secretary of Economics data. AGRICULTURAL TRADE BALANCE/AGRI-FOOD GDP RATIO Million dollars Concept 1994 1995 1996 1997 1998 1999 Agri-foodTrade Balance Mexico - World (3,311.5) 533.3 (1,953.6) (1,311.6) (1,864.0) (1,560.9) Agri-food GDP 41,968.1 28,546.4 35,023.5 39,168.4 39,785.8 43,845.6 Agri-food Balance/ Agri-food GDP (%) (7.9) 1.9 (5.6) (3.3) (4.7) (3.6) Source: SAGARPA with Secretary of Economics data. MEXICAN AGRICULTURAL AND AGRI-FOOD TRADE BALANCES The deficit in agri – food productos is equal to 3.6 per cent of agri – food GDP.

6. AGRICULTURAL EXPORTS/AGRICULTURAL GDP RATIO 25,000 35 29.4% 30 20,000 25 21.1% 20.6% 20.4% Million dollars 15,000 20 (%) 20.3% 15 10,000 13.0% 10 5,000 5 0 0 1994 1995 1996 1997 1998 1999 Agricultural Exports México-World Agricultural Exports / Agricultural GDP (%) Agricultural GDP AGRICULTURAL EXPORTS / AGRICULTURAL GDP RATIO Agricultural exports have gained importance in agricultural GDP: • 21.1 per cent of agricultural GDP is generated by exports. • 15.9 per cent of agri – food GDP is generated by exports.

7. POTENTIAL MARKET FOR MEXICAN AGRICULTURAL AND AGRIFOOD SECTOR, 1998 A potential market of 902 million of consumers is open or will be for Mexican products. NAFTA and the European Union remain the major market for increasing agricultural and agri – food exports. Population (millions) PIB per cápita (dollars) Country or Region North America Canada 30 19,354 United States 270 30,483 Mexico 97 4,099 Central America Guatemala 11 1,722 Honduras 6 895 El Salvador 6 1,978 Costa Rica 4 2,620 Nicaragua 5 401 South America Colombia 41 2,510 Venezuela 23 4,131 Chile 15 5,249 Bolivia 8 1,073 European Union 368 22,191 Israel 6 16,754 EFTA 12 32,921 TOTAL 902

8. POTENTIAL MARKET FOR MEXICAN AGRICULTURAL AND AGRIFOOD SECTOR, 1998 Agricultural Policies for the period 2001 – 2006 will be established in the next “Agricultural and Rural Development Plan”. Elaboration is under process. Some general highlights are: • Greater emphasis in rural development policies (health care, education, living conditions in the country side, among others). • Strong commitment to alleviate rural poverty. • Greater role of state governments in public expenditure decisions. Enhancement of the federalization process. • Further liberalization of agricultural markets. Redefinition of the “agricultural marketing support program”. • More emphasis in better marketing practices vis a vis raising the level of production. • Strong commitment with free trade. • Strengthening of rural financial markets. Adjustment and changes in those institutions that provide financing to the countryside. Redefinition of the role of the government in both credit and risk management programs. • Adjustments to main existing Programas “PROCAMPO an the Alianza para el Campo”, in order to improve equity and efficiency.

9. 2000 e/ 2001 Gross Domestic Product Real Growth % 7.1 4.5 Nominal (thousand million pesos) 5,496.8 6,133.1 GDP deflactor 11.0 6.8 Inflation rate Dic. / Dic. 8.9 6.5 Nominal exchange rate 1/ Average 9.5 10.1 Interest rates (Cetes 28 days) Nominal Average % 15.2 12.4 Real % 6.8 6.2 Current Account Million dollars 18,958.5 22,848.0 % of GDP 3.3 3.8 Public Balance % of GDP 0.93 0.5 Support Variables: e/ Estimated data. 1/ Because the exchange rate regime is of free float ng, this numbers are neither goals nor predictions of the exchange rate; this data was used as reference for budget purposes. SOURCE: General Criteria of Economic Policy for 2001, SHCP. MACROECONOMIC SCENARIO 2000-2001 • Mexico’s and the U.S. economies will slow down in year 2001. Differentials in inflation and interest rates have been diminishing but remain relatively high.

10. 9.0 6.0 3.0 Real Annual % Change 0.0 1994 1995 1996 1997 1998 1999 -3.0 -6.0 -9.0 National GDP Agricultural GDP NATIONAL AND AGRICULTURAL GDP • Agricultural GDP shows a more stable pattern than national GDP. • Average rate of growth of agricultural GDP during the period 1990 – 1998 was 1.7 percent, 1.3 percentage points lower than national GDP. • GDP for the food and beverages industry grew at an average rate of 3.4 percent over the period 1990 – 1998.

11. MAIN AGRICULTURAL PRODUCTION BY GROUP OF PRODUCTS 1990-1999 (Thousand Tons.) 40,000 Grain & Oilseeds ARG 0.8% 35,000 30,000 25,000 20,000 Fruits ARG 2.6% 15,000 Vegetables ARG 4.7% 10,000 5,000 - 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 p/ Vegetables MAIN LIVESTOCK PRODUCTION BY GROUP OF PRODUCTS Grains and oilseeds Fruits (Thousand Tons.) 2,500.0 Beef ARG 2.6% Pork Meat ARG 3.0% 2,000.0 Poultry Meat ARG 9.5% 1,500.0 1,000.0 500.0 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 p/ Beef Pork meat Poultry meat STRENGTH OF REST OF THE ECONOMY

12. THE ROLE OF GOVERNMENT • PSE´s figures of OECD for maize are higher in Mexico than in the US. Nevertheless, in 1998 total transfers as a percentage of agricultural GDP were on average 55.6 percent in OECD countries and 25.8 percent in Mexico. • To some extent, Mexico has gradually phased out tariffs and phased in direct payments. As the phase out of tariffs in the context of NAFTA keeps on track, one might anticipate further pressures on the budget to compensate producers. SUPPORT PRODUCER EQUIVALENT (percent) Mexico USA CROP 1997 1998 1999p/ 1997 1998 1999p/ Maize 30 31 39 14 27 30 Wheat 15 30 36 25 39 46 Rice 3 6 20 10 15 26 Other grains 21 23 32 23 40 40 Source: Agricultural Policies in OECD Countries. Monitoring and Evaluation. 2000 p/ preliminary

13. Distribution of Fiscal Transfers to the Agricultural Sector Direct income Production support enhancement 37.1% 42.8 Others Infrastructure TOTAL CREDITS BY COMMERCIAL AND DEVELOPMENTS BANKS TO THE AGRICULTURAL SECTOR 6.7% 13.5% Source: Public Account 1990-1997; for 1998, SHCP estimated data. December 1995 - September 2000 40,000 ARG 35,000 Dec 1995-1999 (14.4%) 30,000 25,000 Real Millions pesos 1994 20,000 15,000 10,000 5,000 0 Dic. 1995 Dic. 1996 Dic. 1997 Dic. 1998 Dic. 1999 Sep. 2000 Source: Economic Indicators, Banxico. THE CURRENT POLICY MIX • On average for the 1997-98 period, support oriented to foster production was 42.8 per cent, direct income support 37.1 per cent, and development of infrastructure 13.5 per cent. • The credit to agriculture has decreased steadily.

14. RURAL POPULATION STRUCTURE BY REGION • 43.9 percent of rural population lives in communities of less than 500 inhabitants, and 68.6% in communities of less than 1,000 inhabitants. 12.3 % 7.4 % 2.8 % 15.1 % 17.0 % 2.6 % 21.5 % 21.3 %

15. AGRICULTURAL LABOR FORCE (number of persons) 1991 1993 1995 1996 1997 1998 10,469,013 9,717,247 9,160,828 10,427,954 9,838,318 AGRICULTURAL LABOR FORCE 9,845,020 4,750,568 4,074,350 3,734,966 4,002,194 3,879,013 PRODUCERS 4,318,053 5,718,445 5,642,897 5,425,862 6,425,760 5,959,305 WORKERS 5,526,967 Source: National Emplo yment Survey, Ministry of Employment and Social Security (STPS). AGRICULTURAL LABOR FORCE • The agricultural labor force amounts to 9.8 millions, of which 3.8 millions are producers and 5.9 millions are workers. 60 percent of all workers do not receive payments (mostly family work).

16. MAIN INCOME SOURCES FOR RURAL COMMUNITIES WITH LESS THAN 2,500 INHABITANTS, 1999 Other incomes 19% Work remunerations Payments in kind 36% 2% Self-consumption 5% Other current income 1% Property income 1% Transfers 12% Business income Monetary Income 24% Source: INEGI. Non Monetary Income INCOME SOURCES OF THE RURAL SECTOR INCOME SOURCES OF RURAL FAMILIES BY LAND SIZE (%) • The greater the farm size, the farm income is greater. • In farms smaller than 5 hectares, farm income accounts for 34.8 – 50 percent of total. • Almost 70 percent of all farms have less than five hectares. 3.4 100% 15.7 16.2 16.9 20.0 90% 24.3 80% 70% 28.5 35.8 60% 49.6 Income Sources 57.8 50% 40% 72.3 30% 55.3 47.3 20% 34.7 22.2 10% 0% 0-2 2-5 5-10 10-18 >18 Land size (ha) Mexico - US migration Farm income Non farm income • The greater the farm size, the farm income is greater. • In farms smaller than 5 hectares, farm income accounts for 34.8 – 50 percent of total. • Almost 70 percent of all farms have less than five hectares.

17. INCOME SOURCES OF THE RURAL SECTOR • Of total working agricultural population, 41% gets no income, and 88 percent gets two minimum wages or less. A minimum wage amounts around 3 USD per day. WORKING AGRICULTURAL POPULATION BY INCOME LEVEL , 1998 3,000,000 45.0% 41.7% 40.0% 2,500,000 35.0% 29.2% 2,000,000 30.0% 25.0% Number of persons 1,500,000 17.8% 20.0% 1,000,000 15.0% 10.0% 500,000 4.0% 3.3% 2.6% 5.0% 1.0% 0.4% 0 0.0% Without income < 1 MW 1 - 2MW 2 - 3MW 3 - 5MW 5 - 10MW > 10 MW Not specified Source: National Employment Survey, 1998, STPS. NW= Minimum Wage.