What the Mexico-EU Free Trade Agreement Means for U.S. Trade

By James Butterworth

In March, Mexico and the European Union (EU) signed a free trade agreement (FTA) for agricultural products that began to take effect on July 1, 2000.

Given the importance of U.S.-Mexico agricultural trade, what impact is the FTA likely to have?

Categorical Concessions

In part, the answer to that question can be determined by examining Mexico’s tariff concessions to various categories of EU agricultural, fish and forest products.

Of the 1,287 products covered by the FTA, approximately 43 percent are now free from tariffs. However, 125 of these products (9.7 percent) already entered duty-free, so only 33 percent have actually had tariffs eliminated by the new agreement.

On the other end of the spectrum, 25 percent of all the products are on a "wait list": they will not receive any tariff reductions unless Mexico and the EU can come to an agreement about them. But the FTA does stipulate that within 3 years, the parties must consider steps toward further liberalization of trade in these products, too.

The base rates for reductions are those that were in effect on July 1, 1998. This methodology will not adversely impact U.S. exporters, because the FTA tariffs never fall below those assessed on like U.S. products.

Nevertheless, this methodology must be taken into account for a complete understanding of the FTA’s implications. On average, it results in an immediate 21-percent de facto reduction for those products that are not subject to immediate tariff elimination or that are on the "wait list." Approximately 26 percent of products covered by the FTA benefit from this reduction.

Most of the commodities of greatest commercial interest to the United States have been placed on the wait list. These include grains (wheat, corn, rice, sorghum, barley, oats and rye); grain products and most preparations made of them; meats and offals (beef, pork and poultry); dairy products (dry and fluid milk, butter, cheeses, whey, yogurt and casein); animal fats; and feeder steers.

Soybeans, the number one U.S. agricultural export to Mexico, will have tariffs set at 89 percent of the previous base rate now (dropping to zero by year 8 of the agreement) during August 1-January 31. They enter duty-free the rest of the year.

Soybean, sunflowerseed, canola, sesame and corn oil began with tariffs set at 100 percent of the base rate, but will enter duty-free by year 10 of the FTA.

Mexico made generous concessions in reducing its tariffs on unmanufactured tobacco. The base rate for wrapping tobacco, which had been 67 percent, has been eliminated. Cigarettes, however, are not subject to any reduction.

It was also generous in its tariffs on fresh fruits, vegetables and preparations made from them. Most of these products had base tariffs ranging from 10 to 20 percent; they now enter duty-free. Important exceptions include potatoes, apples, dry beans, peaches, apricots, pears, plums and cherries.

The base rate on most fruit and vegetable preparations had been 20 percent. Under the FTA, 64 percent of these products (including frozen orange juice) now enter duty-free; 18 percent have tariffs set at 75 percent of the previous base rates, which will drop to zero by year 3; and the remaining 18 percent will not receive any tariff reductions. Products in this group include canned peaches, prepared potatoes, canned tomatoes, grape juice, jams and jellies.

Beer, which started with a base rate of 20 percent, will now enter duty-free. Most wines, with base rates of 20 percent, will have tariffs eliminated by year 7 or 8 of the FTA.

Turning to animal feeds, most oilseed meals, which had base rates of 15 percent, will have tariffs phased out by year 8. Preparations for balanced rations and milk replacers have been placed on the wait list.

Cotton and cotton wastes began the FTA with a base rate of 10 percent. Tariffs on most of these products will be eliminated by year 8.

NAFTA Comparisons

To evaluate the FTA’s probable effects on U.S. agricultural trade, it’s necessary to compare these concessions with those Mexico accorded the United States under the North American Free Trade Agreement (NAFTA).

Most of the commodities of greatest export interest to the United States in the Mexican market are not slated for any tariff cuts without further negotiation. Since it’s unlikely that these products will be subject to tariff reductions before Jan. 1, 2003 (when most NAFTA tariffs will be lifted), the FTA gives the EU no advantage over the United States for these products–with some important exceptions. Under NAFTA, tariffs on corn, milk powder and dry beans will stay in force until the beginning of 2008.

Of primary concern are the 94 products for which Mexico granted the EU duty-free access, while U.S. counterparts still face tariffs. Fruits, vegetables and preparations made from them account for nearly half of these products–and these are some of our best sellers in the Mexican market. Other items of concern are tobacco, wool, animal hair and miscellaneous food preparations.

Also of concern are those products for which tariffs will be eliminated by year 3 of the FTA, but remain subject to tariffs under NAFTA. However, by 2002, the final year that tariffs on most products will be charged under NAFTA, the FTA rates still will exceed NAFTA rates.

Nearly all U.S. products will enter Mexico duty-free before FTA tariff reductions could threaten them. Even those U.S. products that will not be fully liberalized until Jan. 1, 2008–corn, milk powder and dry beans–cannot have their tariffs reduced without further negotiation.

Taking all these factors into consideration, most U.S. agricultural exports to Mexico will be subject to lower tariffs than like products from the EU.

James Butterworth is the agricultural attaché with the U.S. Embassy in Mexico City, Mexico. Tel.: (011-52-5) 525-6743; Fax: (011-52-5) 208-2115; E-mail: Butterworth@FASMexico_PO

Last modified: Thursday, October 14, 2004 PM