U.S.- Mexico Cotton Trade Under Nafta

U.S.- Mexico Cotton Trade under NAFTA

Accounting for nearly 12% of U.S. total cotton exports in 2016, Mexico is an important market for U.S. cotton production. Simultaneously, as all the time, U.S. market is the critical supplier of cotton to Mexico, which even accounts for almost 71% of Mexico cotton imports in 2016. Actually, the United States authentically exporting a great number of cotton to Mexico began after NAFTA signed. U.S.- Mexico cotton plays an important role in the international trades of two countries. In this paper, I want to focus on the cotton trade between U.S. and Mexico under NAFTA.

First of all, I would like to briefly introduce the NAFTA, known as North American Free Trade Agreement. It is an agreement signed by Canada, United States and Mexico to eliminate tariffs progressively and all duties and quantitative restrictions, was enforced from January 1994.

NAFTA has a significant effect on U.S.-Mexico cotton trade. The data (from UN Comtrade Database) indicates that the cotton trade between two countries increased after NAFTA. This paper will focus on the exports from U.S. to Mexico of cotton and explore the roles that NAFTA play in the changes. I will focus on U.S. cotton exports, but not carefully discuss the changes of U.S. and Mexico cotton trade before NAFTA as well as cotton import of the United States since these two number is too small compared to the large amount of U.S. cotton exports. The trend of United States net exports to Mexico is a little bit complicated. It increased dramatically from 1985 to 2000, but fluctuated to decline from 2000 to 2009, then peaking in 2011, and declining afterwards. In this paper, I will analyze the economic and political reasons behind the fluctuated increase of the United States net exports to Mexico after NAFTA, and how NAFTA effects the changes.

Moreover, NAFTA eliminate tariffs and reduced trade barriers. The paper will show that it will increase the amount of cotton trade between U.S. and Mexico, according with the rapid increase from 1991 to 2000. On the other hand, the decline from 2000 to 2009 is mainly due to the poor performance of American cotton production and it also accounts for the current decline. this paper will explain the trend by introducing the theory of comparative advantage and explain the reason why the decline is mainly due to the decrease of U.S. cotton production.

 It is necessary to explain the theory of comparative advantage and how it can be used in the paper. Comparative advantage is what a country produces for the lower opportunity cost. First, which country has the comparative advantage should be found. Then, the country with comparative advantage is going to specialization of cotton, thus, this country will have trade surplus on cotton than the other country. Thus, comparative advantage is used to talk about the changes, however, there are some declines due to economic environment changes, which is not included in the comparative advantage.

From economic side, we analyze it by comparison advantage. The United States is rich in natural resources and agricultural land to produce cotton, has high-technology agricultural production and greater investment in agriculture compared to Mexico. It means that USA has a lower opportunity cost to produce cotton. Thus, USA is believed to be the country with comparative advantage. Therefore, the United States is considered to be the specialization country in cotton production. It is obvious from the data since Mexico is totally dependent on U.S. cotton export. The specialization makes U.S. produce more cotton and get more net export sales from the trade, thus, the GDP of the United States is increased.

From political side, the changes of U.S. and Mexico cotton trade is mainly due to the changes of tariffs policy. Mexico levied a 10% tariff on U.S. cotton before 1994 and Mexico phased out this tariff gradually. For example, in 2001, the duty equaled 3 percent. Under NAFTA, Mexico and the United States have eliminated all tariffs and quantitative restrictions on agricultural goods. It is meaningful in eliminating the trade barriers between two countries. Under this condition, U.S. and Mexico trade freely under NAFTA.

The theory of comparative advantage will be used in the paper to study the main trend of U.S.-Mexico cotton trade changes. USA is considered as the country with comparative advantage. Therefore, USA will produce cotton and Mexico will import cotton from U.S. Before analyzing the data, setting up possible hypothesis is necessary. Under the comparative advantage, when a country enjoys lower opportunity cost and the two countries started to trade, there are a few changes corresponding to relative variables that can be tested whether it meets the hypothesis under the theory. After putting forward these assumptions, this paper will check the data to find whether the data meets these assumptions. This model can be used is only under the condition that it meets the assumption and can explain the main trend of the changes.

In this paper, it includes four factors to study the changes. Firstly, the net exports from U.S. to Mexico of cotton changed. Under the comparative advantage, the net exports from U.S. to Mexico should increase compared to the net exports before NAFTA due to the specialization. Secondly, the production in cotton changes of two countries after NAFTA signed. The cotton production in U.S. should increase and the cotton production in Mexico also accounting for specialization. Thirdly, the changes of labor cost of both countries. The labor cost of cotton industry should increase in the United States and should decrease in Mexico because of the relationship between supply and demand. Fourthly, the gross domestic product changes in both countries. the GDP of the United States should be increased due to the increased net export from U.S. to Mexico.

After collecting data of net exports, production, minimum wages and GDP, I get the corresponding result of the hypothesis.

Firstly, I want to talk about the changes of net exports by comparing the imports and exports of cotton before and after NAFTA of both countries. Before NAFTA, Mexico was an important producer and exporter of cotton and have excessive net exports than U.S. However, it changed after NAFTA. From the data below, it is clearly that the net exports from U.S. to Mexico experienced an immediate and dramatic increase after the implementation of NAFTA. This immediate and dramatic increase matches the assumption in the theorem of comparative advantage. The United States supplied at least half of Mexican cotton consumption since 1995 due to the good quantity of U.S. cotton, the location of mills, and the nature of the new and efficient equipment in the mills. Gradually, the United States became the sole import supplier of Mexico. After the dramatic growth immediately after NAFTA, it fluctuated since 2000. In fact, there are some specific macroeconomic phenomenon to explain it. The decline of U.S. cotton export to Mexico from 2000 to 2009 is mainly due to the poor performance of American cotton production by the floundering economy, especially the 2009 great recession. Meanwhile, the decline of U.S. cotton export to Mexico from 2011 till now is because of the reduced acreage, giving way of other profitable agricultural products like corn. Thus, the deviation is acceptable.