NAFTA 2.0 gets complicated.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

With the fifth round of NAFTA negotiations scheduled to begin next week, Mexico finds itself facing a very uncertain future. The free trade agreement upon which its entire national economic model was built is now looking precariously fragile. Ildefonso Guajardo, Mexico’s economy minister, told the Mexican Congress last week that the way things stand, an end to NAFTA “cannot sanely be ruled out.”

In such an event, the resulting economic pain for Mexico could be considerable, according to calculations from Banco Santander. It forecasts a 15% drop in exports and a 16% fall in imports if the US declared a full trade war rather than reverting to World Trade Organization tariff rules. Moody’s Investors Service estimates Mexico’s economy could shrink as much as 4%.

The biggest problem for Mexico’s economy is the sheer scale of its dependence on trade with the US: 81% of its exports go to the U.S., and about half of its imports come from there. Mexico is so deeply integrated into US supply chains, particularly manufacturing production that the IMF describes Mexican and American industrial production as “co-integrated.” Increases in American economic output are transmitted one-for-one to Mexican output.

Now, with the future of NAFTA increasingly in doubt, Mexico has begun diversifying its import and export markets away from the U.S., as we warned would happen in January.

Mexico bought 100,800 tonnes of yellow corn from Brazil in September and 41,000 tonnes from Argentina — a drop in the ocean compared to the 10.5 million tonnes bought from the US. But as the FT reports, by October this year, it had bought 11% more of the commodity from the two South American countries than in all of 2016.

“It’s important because it shows Mexico has other countries where it can substitute grain imports,” said Juan Carlos Anaya, director-general of CGMA, a consultancy.

More to the point, many of the staple food products Mexico has grown to depend on from the U.S. could be produced just as easily in-house, including sugar, corn (which is native to Mexico), rice, and beans. Growing ranks of academics, practitioners and consumer groups are calling for such a step.

In the last 22 years since NAFTA was launched, Mexico has become unhealthily dependent on heavily subsidized food imports from the US. The UN Food and Agriculture Organization (FAO) estimates that the threshold at which a country becomes what it calls “food-vulnerable” is when as much as 25% of its food supply comes from abroad. In 2016 Mexico imported 46% of all its food. And it important about 37% of its food from the US, worth some $17 billion to US food producers.

It buys a third of the corn it consumes from the US, worth some $2.3 billion last year; between 30-50% of its beans; and up to 80% of its rice, according to data provided by the Secretariat of Agriculture, Livestock, Rural Development, Fisheries and Food (Sagarpa). In return, Mexico exports to the U.S. tomatoes, chili peppers, avocado, coffee, grapes, strawberries, water melon, and so on.

But it’s the staple crops that matter the most — and they are almost all moving in one direction: southward.

In a study on the role of American agribusiness in the Mexican economy, the Woodrow Wilson Center found that U.S. exports of eight basic agricultural staples (corn, soy, wheat, cotton, rice, beef, pork and chicken) have seen huge increases — as much as 700% — since NAFTA. As the study’s director, Timothy A. Wise, points out, all of the products receive in one form or another significant financial support from the US government.

Mexican farm leader Victor Suarez Carrera has argued for a new agricultural revolution — without GMOs. Although GMO corn is illegal to farm in Mexico, a study by the National Autonomous University of Mexico has found that about 90% of tortillas in Mexico were contaminated with genetically engineered corn, about 30% of which contained residues of the alleged carcinogen glyphosate. This is a major problem in a country where corn provides half of all calories and a third of proteins.

The dark irony is that if Mexico were to sign the NAFTA 2.0 agreement, not only would its acute dependence on food imports likely increase, the government would also probably have to open the door to full GMO cultivation — something consumer groups, producer associations and social activists have been fighting against for years, with a little help from incorruptible judges like Marroquín Zaleta.

In June, the U.S. Biotech Crops Alliance asked the US Trade Representative to include a NAFTA 2.0 chapter on agricultural biotechnology. That chapter’s proposed provision for a Mutual Recognition Agreement (MRA) would require Mexico and Canada to accept as valid for importing and growing biotech products the FDA “no issues” letter and similarly non-regulatory decision letters from the US Department of Agriculture. Also covered under the proposed MRA would be any grain and horticulture crops engineered by “new techniques”, which the U.S. government has decided not to regulate.

Some Mexican producer associations and social movements have responded by calling on the Mexican government to either exempt agriculture from NAFTA 2.0 or withdraw from the agreement altogether.

There’s little hope of either happening, since the Mexican government’s priority is to preserve the current economic model — i.e, providing dirt-cheap labor assembling consumer products for the world’s biggest market while Mexico’s economy, at the exclusive service of transnational corporations, home-grown oligarchs [“Slimlandia”: Mexico in the Grip of Oligarchs], corrupt politicians, and drug lords, continues to splutter in the slow lane. Concerns like safeguarding Mexico’s 7000 years of indigenous maize cultivation or bolstering the country’s capacity to feed itself are mere bargaining chips on the negotiating table. By Don Quijones.

That wages have remained so low for so long in Mexico is not by accident; it’s by design. Read… NAFTA Effect: Global Manufacturers Bet on Dirt-Cheap Mexico