Roberta Cook

Dept. of Agricultural Economics

University of California

Davis, California USA

Abstract

The North American Free Trade Agreement (NAFTA) currently being negotiated between the United States, Canada and Mexico will affect U.S.-Mexico horticultural trade. This research examined the potential implications of the NAFTA for the U.S. horticultural sector, via competitive assessments of 12 selected commodities, and structural analysis of Mexico's supply response potential. Mexico was found to have a clear cost advantage (without tariffs and landed at the U.S. border) on 5 of the commodities, a clear cost disadvantage on 4 of the commodities, and a cost advantage of under 10 percent on 6 of the commodities. Given the variation in yields and costs between producers and the partial enterprise budgeting techniques used, differences of less than 10 percent were considered inconclusive. Fruits and vegetables are not homogeneous commodities, meaning that quality, packaging and other marketing factors differentiate products and can be equally important as costs in determining competitiveness. Indeed, both Mexico and the U.S. were found to have gained market share in crops for which they were at a cost disadvantage, and vice versa.

While Mexico has an advantage in lower labor rates, labor is used less efficiently and yields are frequently lower, partially offsetting this advantage. Although horticultural production is labor-intensive, it is also technology- and management-intensive and the U.S. holds the advantage in these areas. Mexico also faces water constraints in several of the newer export-oriented production regions (Baja California and Sonora) that limit expansion potential. Nevertheless, recent Constitutional reforms in Mexico encourage investment in agriculture and may reduce the technology gap that currently exists between Mexico and the U.S., increasing Mexico's competitiveness.

Simultaneously, new seasonal markets for U.S.-grown fruits and vegetables are developing in Mexico as it opens its economy and consumer purchasing power increases. Deciduous fruit exports to Mexico are increasing rapidly, and Mexico tends to have market windows for vegetables in the summer/fall when domestic production is low due to rain. Bilateral trade should expand significantly in the future, however, the seasonal nature of fresh produce production (climate), transportation costs and technology will ensure that substantial complementarity remains between the U.S. and Mexican horticultural sectors.

1. Introduction

The U.S. imported over US$1.4 billion worth of horticultural products from Mexico in 1990, making Mexico the principal foreign supplier to the U.S. market. U.S. horticultural exports to Mexico were $132 million in 1990, equivalent to under 10 percent of horticultural imports from Mexico. However, U.S. horticultural exports to Mexico are up from $47 million in 1986, the year Mexico joined the GATT and began to reduce trade barriers.

Horticultural exports from the U.S. to Mexico and vice versa (i.e., bilateral trade) are expanding due to: 1) increasing demand in both countries for year-round availability of fresh produce; 2) complementary seasonal production deficits (market windows) that create trade opportunities; 3) new export-oriented production regions emerging in Mexico, such as in the Mexicali-San Luis valley, Sonora, Baja California and Tamaulipas; 4) diversification of the horticultural products exported from Mexico; and 5) a reduction in import barriers in the Mexican fruit and vegetable market.

A North American Free Trade Agreement (NAFTA) is currently being negotiated between Canada, Mexico and the U.S. Since bilateral trade is increasing prior to a NAFTA, concern has been raised among certain sectors of both the U.S. and Mexican produce industries about the effects of further trade liberalization. This research explored the potential effects of a NAFTA on the U.S. horticultural sector, emphasizing the California and Florida fresh produce industries. The specific purpose of the research was to provide accurate information on this important issue for use in the on-going policy/negotiation process. Because the agreement was under negotiation during the course of the research, the effects of specific policies could not be analyzed. Instead, the current situation and emerging trends were identified and described, and assessments were made on the expected direction of change under trade liberalization.

2. Material and methods

The competitive positions of the following commodities were analyzed, on a regional and seasonal basis: apples; fresh and processed asparagus; avocados; bell peppers; fresh and frozen broccoli; cucumbers; eggplants; melons; peaches; fresh and frozen strawberries; squash; and fresh tomatoes. These commodities were selected for their relative trade volume and/or potential sensitivity. Mexican fresh avocados are currently prohibited entry into the U.S. for phytosanitary reasons, but were included in the analysis because of their sensitivity in the absence of a phytosanitary restriction. Since the primary policy variable affected by a NAFTA for the remaining commodities would be gradual tariff elimination, the competitive assessments included with and without tariff analyses.

Mexican consumer demand for fruits and vegetables was considered due to its effects on supply response potential (domestic demand competes with product availability for export). Structural factors affecting supply response potential were also considered, such as Mexican land tenure and agricultural investment policies, agricultural research capacity, water availability, and other infrastructure.

Both primary and secondary data were assembled on Mexican production and marketing costs, based on personal grower interviews and industry trade association data, such as from the Confederacion de Asociaciones de Agricultores del Estado de Sinaloa (CAADES), and the Confederacion Nacional de Fruticultores. Cost data for California were derived using the University of California budget generator developed by Klonsky and Livingston, and Florida cost data were derived from the University of Florida budget generator (Smith and Taylor, 1991). All budgets were derived using partial enterprise techniques. Both primary and secondary data were assembled on Mexican acreage, yields and production on a crop, region and season specific basis. These data were compared to the U.S. regions with overlapping shipping seasons. Trend analysis of seasonal market shares was also conducted.

Because of the comprehensive nature of the research project, only general conclusions will be summarized; space limits preclude the presentation of detailed information on each commodity and issue.

3. Results

3.1. Background

In order to assess future effects of a NAFTA, the current magnitude and composition of U.S.-Mexico horticultural trade, as well as seasonal and structural factors, must be understood.

3.1.1. Current horticultural trade

Vegetables represent two-thirds of total U.S. horticultural imports from Mexico. Within the vegetable category most imports are fresh, with frozen vegetables representing about 10 percent and canned products around 5 percent of total value. Total fresh vegetable imports from Mexico were 1063462 metric tons in 1990. Mexico dominates U.S. fresh vegetable imports, accounting for 82 percent of total U.S. fresh vegetable imports from all countries. Tomatoes are the principal fresh vegetable imported from Mexico, representing 17 percent of the volume of U.S. horticultural imports from Mexico in 1990. Fresh deciduous fruits, especially pears and apples and to a lesser extent peaches, nectarines and plums, accounted for over $28 million of U.S. exports to Mexico in 1990. Fresh vegetables such as onions, potatoes, lettuce and tomatoes contributed $19 million.

Marked seasonal patterns characterize current trade, with the majority of imports from Mexico entering the U.S. during the winter, while most U.S. exports to Mexico occur during the summer/fall when Mexican production can be insufficient to meet domestic demand. Seasonal patterns are determined by climate and will be unaffected by a NAFTA.

Clearly, current U.S.-Mexico horticultural trade is already sizable and is dominated by Mexican fresh vegetable exports, rather than processed products or fruit. However, while Mexican horticultural exports are large in absolute terms, they represent only 7 percent of the farmgate value of U.S. horticultural production. The sheer size and obvious proximity to market of the U.S. horticultural industry affords it great protection.

3.1.2. Production seasonality in Mexico and the U.S.

In conducting competitive analyses for fresh fruits and vegetables it is imperative to compare the specific crops and regions with overlapping shipping seasons. While space does not permit a complete description of all the crops, regions and seasons considered, general regional competitive relationships can be highlighted.

The Mexican fruit and vegetable industry is bifurcated into export-dominated production regions and regions serving the domestic market. Only 22000 producers, .5 percent, of Mexican farmers participate in the export sector. Eighty two percent of Mexico's horticultural production is consumed by its own large and growing market of 86 million inhabitants. Hence, Mexico is quite different from Holland, Chile, New Zealand or South Africa, all of which have export-driven horticultural sectors. For reasons which will be elaborated on later, the domestically oriented production regions of Mexico face significant obstacles to the development of export-oriented production.

The principal Mexican fresh vegetable export regions are Sinaloa during the winter, Baja California during the summer/fall, and the Mexicali-San Luis valley (overlapping the Baja California and Sonoran borders and adjacent to California and Arizona) during the fall through spring. Sinaloa competes most directly with Florida, Baja California with California, and the Mexicali-San Luis valley with the California desert region and Arizona. The export-driven frozen vegetable industry is concentrated in central Mexico in the Bajio, competing with the Salinas valley of California. While other regions also compete and new exporting regions are emerging in Mexico, the above simplification helps to focus the discussion.

Mexican summer/fall fresh vegetable production is concentrated in central Mexico but is destined for the domestic market, rather than for export. During the summer and fall Mexico receives rains which can adversely affect quality and volume and the climate is too hot in Sinaloa and Sonora to produce vegetables. Hence, with the exception of limited export volume out of Baja California, U.S. producers are largely protected from competition from Mexico during the summer by climatic factors. California's main production volume (excluding the desert) for many fruits and vegetables is during the summer, making California relatively complementary to Mexico, and best able to supply Mexico's summer/fall market windows.

Over the last decade the California and Mexican fresh produce industries have developed a largely complementary and coordinated relationship to supply the U.S. market on a stable year-round basis (Cook, 1990). Large California grower-shippers produce in various regions of the state throughout the year to extend seasons, supplying their customers through stable, central marketing organizations. Contracting for production in Mexico (and other countries) was a mere extension of this year-round marketing orientation, as well as in some cases a strategy for lowering costs. Consequently, the California and Mexican (export) industries have become increasingly integrated.

In contrast, Florida grower-shippers are not year-round producers and marketers and view Mexico (Sinaloa) as representing a direct competitive threat during their fall through spring season. Hence, in the U.S., the NAFTA controversy focuses most intensely on the Sinaloa-Florida competitive relationship. From the Mexican perspective, growers are most concerned about competition from the Washington and California deciduous fruit industries, which overlap with Mexican shipping seasons and have lower costs and superior quality.

3.1.3. Current tariff structure

While the assumption is that tariff elimination through a NAFTA would give Mexico significant new advantages, the trade-weighted average tariff rate for U.S. horticultural imports from Mexico is only 8 percent. Most crops have unitary tariffs established in the 1930s, hence, inflation has eroded their effective protection. However, certain crops, such as fresh asparagus, frozen broccoli and cauliflower, and melons have high ad valorem tariffs (ranging from 17.5 to 35 percent) and may benefit significantly from tariff reduction. On the other hand, fresh tomatoes, Mexico's key horticultural export, face a low unitary tariff, usually equivalent to under 5 percent of the value and rarely over 10 percent.

An important caveat exists regarding ad valorem tariffs. A duty drawback program is in place which mitigates the protection these tariffs provide. Under this program the U.S. government returns the majority of the duty to U.S. firms that produce and export an equal or larger quantity of a crop than they import. For example, California-based asparagus and melon grower-shippers produce and export from California in one season and import the same crops from Mexico during their off-season, maintaining a year-round marketing presence. These internationally integrated firms can then return a portion or all of the duty drawback to their Mexican suppliers. This suggests that the benefits of duty elimination under a NAFTA may be less than anticipated. However, these benefits are only available to Mexican producers tied in with internationally integrated firms. Duty elimination through a NAFTA would likely open up the export option to more Mexican growers, increasing competition.

The trade-weighted average tariff rate for U.S. horticultural crops entering Mexico is 16 percent. Until Mexico's accession to the GATT it also had licensing restrictions that were highly effective non-tariff trade barriers. The number of agricultural commodities requiring licenses decreased from 320 in 1985 to 57 in 1990. As Mexico has reduced its import licensing requirements, U.S. exports to Mexico have expanded rapidly, suggesting that tariff reduction resulting from a NAFTA should also stimulate sales.

3.2. Costs

3.2.1. Labor

Lower labor rates in Mexico are often cited as a crucial advantage for Mexico. In 1991, field labor in Mexico cost from $4 to $10 per day, depending on the crop and region, compared to about $4 to $6 per hour on average in the U.S. However, while labor rates are substantially lower in Mexico, labor is frequently less productive, due to restrictive work rules, less intensive management and other factors. Harvesting and packing costs are almost always lower in Mexico as a result of the lower wage rates and labor-intensiveness of these tasks. But production operations are often not as labor-intensive as harvesting and packing, as technology has evolved to substitute chemical and mechanical inputs for labor. More intensive production technology and management in the U.S. increases both yields and labor productivity. Hence, Mexican per unit as opposed to per acre pre-harvest production costs are often well within 10 percent of U.S. levels, despite a 6 to 1 advantage in labor rates. Notable exceptions to this are bell peppers, fresh tomatoes and avocados. Mexico then augments its cost advantage at the harvest and packing level, but must face additional costs to land product in the U.S. market, discussed below.

3.2.2. Exporting costs and Mexican cost trends

The imperatives of exporting, including transportation costs to reach the U.S. market and border crossing costs (excluding tariffs) add to Mexican costs, just as they do for any exporter. Transportation costs to the border generally amount to 4 to 8 percent of the value of the product. Border crossing costs will also remain with or without a NAFTA, as the NAFTA does not contemplate opening the borders, unlike the Single European Act. Further, selling costs are usually higher for Mexican than U.S. producers. For example, the average selling cost for an 11.4 kg carton of Florida tomatoes is US$.15 vs. $.84 for Sinaloa tomatoes.

Production costs are increasing much more rapidly for Mexican producers than for U.S. producers. The Mexican government has embarked on a program to drastically reduce or eliminate production subsidies for fertilizer, water, electricity and other agricultural inputs. These programs are being phased in rapidly, contributing to substantially higher costs for Mexican growers since 1990. Mexican growers are also being incorporated into their federal tax regime, making them subject to income taxes for the first time.

The Mexican vegetable export sector is very dependent on U.S. inputs, including certain chemicals, fertilizers, seed varieties, transplants, boxes, plastics, fumigants, farm machinery and drip irrigation materials. These products are more expensive to Mexican growers due to transportation costs to their production sites, border crossing costs and Mexican import duties ranging from 10-20 percent. These duties should eventually be phased out under a NAFTA and local subsidiaries of U.S. input suppliers should become established in Mexican production regions. Hence, over the long run the cost of purchased inputs in Mexico should decrease and become closer to U.S. levels. In the meantime, labor is Mexico's primary cost advantage.

Another factor affecting Mexican competitiveness is the revaluation of the peso relative to the dollar since 1987. The overvalued peso reduces the cost to growers of imported inputs, but since these represent only a portion of total costs, the overall effect is to increase dollar-denominated costs for Mexican exports. The Mexican government is likely to maintain its revaluation policy in the near term, because it is an important component of its inflation control policy and Mexico has considerable foreign currency reserves. Mexico is increasingly relying on food imports, which reached over US$4 billion in 1990, and an overvalued peso decreases the cost of imports.

3.3. Florida-Sinaloa competitiveness

The relative competitiveness of Florida and Sinaloa warrant special attention because of Sinaloa's dominant role in Mexican vegetable exports. Although the Florida-Sinaloa relationship is often characterized as "head to head" competition, Sinaloa is mainly a winter producer, capturing almost all the U.S. market in January and February, while Florida peaks earlier and later, making it more of a fall and spring producer. March represents the most intense month of competition between Sinaloa and Florida. Since these shipping patterns evolved due to natural climatic factors (i.e., the risk of winter freezes in Florida, and fall and spring rains in Sinaloa) they should continue even if a NAFTA is ratified.

Cost comparisons between Sinaloa and Florida indicate that without the current U.S. import duties, landed costs in Nogales, Arizona would generally be lower than Florida for tomatoes, cucumbers, squash and bell peppers, and higher for eggplant. However, only in the case of bell peppers and tomatoes grown in one region of Florida (the Southwest) are the cost differences over 10 percent. Cucumbers are on the margin with 10 percent lower costs, without the duty. With the duties in place, landed Nogales costs are currently similar to and in some cases higher than Florida costs, usually due to lower yields in Sinaloa.

With similar costs f.o.b. Florida and Nogales, transportation costs are a primary factor influencing sales. Sinaloan vegetables generally stay west of the Mississippi River because transportation costs make them uncompetitive in the East. The other principal factor influencing sales is quality. In the case of fresh tomatoes, a marked quality difference is perceived to exist by U.S. buyers. Mexico has traditionally produced vine-ripe tomatoes, perceived to be softer and of less shelf-life than mature green tomatoes grown in Florida. Florida tomatoes consistently receive a price premium relative to Sinaloan tomatoes. The average price premium for Florida tomatoes over Sinaloa tomatoes (per 11.4 kg tomato carton) was US$2 in 1990-91.

In the same year, estimated production and marketing costs (f.o.b. Nogales) for Sinaloa fresh tomatoes totaled $6.53-6.67 with the tariff, depending on the month, and would have equaled $6.15 without the tariff (Cook et al., 1991). Florida f.o.b. costs ranged from $6.18 per carton for spring tomatoes in West Central Florida, to $6.40 in Dade County and $7.25 in Southwest Florida (Smith and Taylor, 1991). Interestingly, the high cost Southwest Florida tomato production region has grown substantially over the last decade. Taylor explains that Southwest Florida follows the majority of its tomato acreage with a second crop, spreading a portion of costs over two crops. Since partial enterprise budgets exclude other production activities, Southwest Florida tomato production costs are likely overstated.

Sinaloa fresh tomato exports to the U.S. peaked in 1986. The winter (December-May) market share for Sinaloan tomatoes was 35 percent in the 1990-91 season, compared to 33 percent in 1981-82 and 40 percent in 1985-86. Florida has maintained its competitiveness over the last decade by improving technology and yields. Fresh tomato yields of export quality averaged 8.3 metric tons per acre in Sinaloa in 1990-91 vs. 15.7 tons in Florida.

Clearly, the cost advantage that Sinaloa would have if the tariff on tomatoes were eliminated immediately, is significantly less than the price premium received by Florida producers relative to their Sinaloa counterparts. Probably more important than tariff elimination to the future relative competitive positions of the Florida and Sinaloa tomato industries, will be the success of Sinaloa in improving quality and yields, discussed in 3.4.

On the other hand, cost comparisons would suggest that Sinaloan cucumbers stand to gain significantly from tariff elimination resulting from a NAFTA. Sinaloa's share of the U.S. winter cucumber market expanded from 46 percent in 1981-82 to 52 percent in 1990-91, even with a relatively high duty in place and an f.o.b. Nogales cost of $8.20 vs. $7.70 f.o.b. Southwest Florida. In contrast, Sinaloan bell peppers, which already have a cost advantage at the border (f.o.b. Nogales $6.96 vs. $8.42 f.o.b. Florida) lost substantial market share over the last decade. It is unclear to what extent elimination of the (approximately) 10 percent duty would affect this trend. The Sinaloa share of the U.S. winter eggplant market grew from 51 percent in 1981-82 to 58 percent in 1990-91, despite 30 percent higher landed U.S. costs than Florida. Since the current duty on eggplants is equivalent to under 5 percent of the Sinaloa cost, its removal would likely have little effect on the marketing forces already in place.

These examples illustrate that costs are only one factor in any competitive arena, with quality and innovative marketing strategies becoming increasingly important considerations.

3.4. Trends in the Sinaloa vegetable industry

Since Sinaloa is the dominant competing region with the U.S. industry, it is important to understand recent trends influencing international competitiveness. While Sinaloa is the largest vegetable export region in Mexico and has traditionally exported the bulk of its production, in recent years Sinaloa's vegetable industry has declined. Total land planted in horticultural crops for export decreased from 56,600 ha in 1987-88 to 46,800 ha in 1990-91. Sinaloa faces a relatively saturated market in the U.S. for its main crops, so low U.S. prices have limited profitability. Profitability has also been reduced by mounting disease problems, in particular viruses, which have lowered yields and increased per unit production costs.

Further, Mexico's population is growing rapidly and improving its diet, consuming more fruits and vegetables, and demanding higher quality. The expanding Mexican market is causing a trade diversion effect. Over half of the fresh tomatoes traditionally grown for export now remain in Mexico. The same trend has occurred in the Baja California tomato export industry.

These trends have combined to reduce foreign investment in Sinaloa vegetable production for export, limiting expansion. However, Sinaloan producers are attempting to improve the reputation and competitiveness of their product. For example, many are adopting Israeli and Dutch tomato varieties which have a reputation for greater firmness and shelf-life. Others are marketing mature green (rather than vine-ripe) tomatoes, either by harvesting staked tomatoes at the mature green stage, or growing mature greens using ground culture. Certain growers are investing in research to determine varieties of tomatoes that are suited to high yielding ground culture production of mature greens under Sinaloan weather, soil and disease conditions. Research on the use of drip irrigation and plastics is also occurring. Water availability is not a problem in Sinaloa as it is in Baja California, hence, drip irrigation is the exception in Sinaloa, while it is the norm in Baja. However, drip irrigation enhances the control of nutrients to the plant, reduces excessive soil moisture, and may provide other advantages which increase yields and quality sufficient to cover its high cost.

The difficulty that Sinaloa will continue to face, with or without a NAFTA, is that its climate and soil type are different than both Florida and California. For example, Sinaloa has heavy, poorly drained soils while Florida and California tend to have sandy soils. Neither California nor Florida technology is perfectly suited to Sinaloa, frequently giving lower yields under Sinaloan conditions. Yet a paucity of public or private sector research and development under local conditions has made Sinaloa dependent on U.S. technology. Lower yields were not considered a problem when producers received significant subsidies, paid minimal taxes, and at times benefitted from an undervalued peso. Now that none of these conditions are true, grower funding of research has increased substantially. Research and development is likely to represent an important new cost for the Sinaloa industry, but it is probably necessary to improve their long term productivity and competitiveness. Technology, rather than land or water, represents the most important constraint to the expansion of the Sinaloa export sector.

3.5. Expansion potential in other production regions

While U.S. demand for the principal fruits and vegetables appears to have stabilized during the recession, consumer demand for a greater variety of fruits and vegetables is still increasing. This is partly due to expanding ethnic segments, increased health awareness, and greater consumer interest in and awareness of "exotic" fruits and vegetables. This demand is stimulating increased Mexican exports to supply these niche markets. For example, Mexican exports of chayote, jicama, mangoes, baby vegetables, herbs, prickly pears, nopalitos, tamarind, etc. have expanded substantially over the last decade.

U.S. demand for a greater variety and extended seasonal availability of fruits and vegetables has stimulated the development of new export regions and exporters. This diversification trend has reduced the relative importance of Sinaloa in Mexico's horticultural export sector; Sinaloa's share declined from 61 percent of total export volume in 1978 to 47 percent in 1990. During the 1980s, Baja California, the Mexicali-San Luis valley, other areas of the state of Sonora, the Bajio, and Tamaulipas expanded exports. Other areas of Mexico expanded as well, but many of these exports are complementary to U.S. seasons or represent crops which do not directly compete with U.S. production. Limited space precludes significant discussion of all these areas, however, some general comments on expansion potential are in order.

Baja California grew from negligible fresh tomato exports at the start of the 1980s to a peak of 134240 metric tons in 1989. Yields increased dramatically over the decade as technology employed in the California south coast production region was transferred to the coastal region of Baja, centered around the San Quintin valley. The similarity in growing conditions (between coastal Baja and coastal California), in conjunction with California investment--attracted by a substantial production cost advantage--facilitated rapid development of the export sector. But coastal Baja is dependent on ground water for irrigation and water availability is limited. The rapid expansion of the export sector drew down the aquifer, caused salt water intrusion and expansion halted in 1989.

Although winter rains in 1991 and 1992 improved both water quality and availability, the long term water problem precludes Baja from becoming a significant competitive threat to California, with or without a NAFTA. Baja has also lost much of its cost advantage relative to coastal California because of the factors described earlier. The prevailing trend in Baja is intensification of production methods, using more advanced technology to generate greater production with less land and thereby less water.

The Mexicali-San Luis valley is adjacent to the Imperial valley of California and Arizona; combined they represent a large desert production region with essentially the same climate and growing conditions. This means that U.S. desert technology is perfectly adapted to the Mexicali-San Luis valley and yields are similar on both sides of the border. However, because they have the same fall through spring production season, the only reason to produce in Mexico is lower costs.

Numerous U.S. desert growers have experimented with production in the Mexicali-San Luis valley in recent years. Clear cost advantages have been demonstrated for fresh asparagus, green onions and radishes. All of these crops require bunching at harvest, a very labor-intensive operation. The primary cost advantage to producing these crops in Mexico is at the harvest/packing level, rather than at the production level. Substantial portions of the area planted to these crops have already shifted across the border. For example, the Mexicali-San Luis valley has a total of 3664 ha in asparagus, compared to 2038 ha in the California desert. Area dedicated to asparagus production in the Imperial valley declined by 50 percent after 1988, as it shifted to Mexico.

However, other less labor-intensive crops, such as broccoli, cauliflower, melons, carrots, and lettuce, have largely remained in the U.S. Expansion of vegetable production in the Mexicali-San Luis valley has been somewhat impeded by water availability and difficulty in accessing land meeting both water and soil requirements, adequate packing shed facilities, and proximity to the necessary highways. Greater management problems and risk are also frequently cited by growers as a hazard of operating in Mexico.

While water will remain an obstacle to expansion, the ability of the Mexicali-San Luis valley to produce all of the vegetables with high ad valorem tariffs, tends to indicate that it has growth potential under a NAFTA. The effects of this expansion will be largely limited to the California and Arizona desert region, because other California regions ship later and end earlier than the desert.

Central Mexico does not appear to have the same potential for expansion under a NAFTA. Production there is dominated by "ejidatarios" (peasant farmers on communal land) producing low quality products for the domestic market, without standardized packs, grades or pre-cooling. The small size and low technological level of these producers markedly reduces their international competitiveness. Their physical location (over 800 miles from the U.S. border) means high shipping costs to reach the U.S. market, and since they produce in the summer/fall they overlap with low cost, efficient production regions in the U.S. Product quality is frequently impaired by rain and diseases and production of many crops has been insufficient to meet Mexican demand, let alone export demand. The low productivity of the central Mexican vegetable production industry (with the exception of the export-oriented frozen vegetable sector) is the major factor driving summer/fall exports of California fresh vegetables to Mexico.

To help modernize its agriculture, Mexico recently modified its Constitution and other regulations to privatize the "ejidos" and permit corporate and foreign investment in agriculture. These changes pave the way for larger and more efficient operations. Although it is difficult to predict the investment response, it is likely to be oriented toward production for Mexico's rapidly growing domestic market.

4. Discussion

The combination of a revalued peso, decreasing production subsidies, increasing taxation, greater disease and yield problems, and stabilizing demand in the U.S. market, has impaired the profit-ability and competitiveness of the Mexican horticultural export sector.

Tariff elimination through a NAFTA would help Mexico to increase its competitiveness in the U.S. market. Of the crops analyzed, the most sensitive for the U.S. are fresh asparagus, melons, cucumbers, avocados and frozen vegetables. However, if tariffs are reduced very gradually over 10 to 20 years (as currently proposed), growers will have time to make adjustments and the potential adverse effects may be relatively small. While the above crops may lose, the U.S. deciduous fruit sector will gain. If Mexico's economic policies succeed in generating growth in consumer income, the Mexican summer market for California vegetables may someday become significant.

The internal structural changes recently achieved in the Mexican land tenure system and agricultural investment policy, may be equally as important as a NAFTA in influencing future competitive relationships. These changes are part of a larger package of meaningful improvements to Mexico's trade and investment climate, already occurring without a NAFTA. As trade is liberalized and market knowledge increases on both sides, entrepreneurs will identify more and more trading opportunities. While most firms may remain locally focused, innovative firms, frequently California-based, can be expected to further integrate operations on both sides of the border. This trend has already begun and generally involves expanding two-way complementary trade, rather than displacing California production. Some Sinaloa and Baja firms are also adopting a more bilateral trading strategy. For example, the largest Sinaloa winter tomato exporters have begun to import California tomatoes during the summer, becoming year-round suppliers to Mexican chain stores.

A descriptive, policy-oriented study of this type raises numerous issues for future applied research. Research is needed to describe the structure of the Mexican fruit and vegetable market and identify market opportunities for U.S. firms attempting to penetrate this new market. Additional research is also needed on the size of the trade diversion effect expected from growth in the Mexican market for fruits and vegetables. Future research should examine the potential for increased competition from Mexico's newest exporting regions, especially Sonora and Tamaulipas. Tamaulipas competes with Texas and was beyond the scope of this study. The very new fall and spring melon production emerging in the Hermosillo area of Sonora is of particular interest, as well as Sonoran fresh asparagus, grapes and citrus. Future research should explore the potential impact of Cuba on the U.S. winter fresh vegetable market. Florida may be more adversely affected by the inevitable opening of the Cuban economy than by a NAFTA; Sinaloa is also very concerned about this eventuality. Mexico's dynamic capital market should be analyzed, as the availability and cost of capital will have an important effect on supply response in the horticultural sector.

A final consideration relates to regulatory concerns. If urbanization pressures and environmental, water and labor regulations become too excessive in California and Florida, production in Mexico will expand much more rapidly than predicted.

Acknowledgements

Funding for this research is gratefully acknowledged to the American Farm Bureau Research Foundation in Park Ridge, Illinois. This study was a team effort. The other authors are shown in the citation below and this paper is based on the research of all the authors.

References

Cook, R., 1990. Evolving vegetable trading relationships: the case of Mexico and California. J.Food Distribution Res. 21:31-45.

Cook, R., Benito, C., Matson, J., Moulton, K., Runsten, K., Shwedel, K., and Taylor, T., 1991. Implications of the North American Free Trade Agreement (NAFTA) for the U.S. horticultural sector. In: NAFTA effects on agriculture, vol. IV, fruit and vegetable issues. American Farm Bureau Research Foundation, Park Ridge, Illinois. 1991:1-475.

Smith, S.A. and Taylor, T., June 1991. Production costs for selected vegetables in Florida, 1990-91. Food and Resource Economics Department, University of Florida, Econ. Info. Rep. EC 91-2.