North America: One Market, Big Payoffs, Many Challenges

Measures taken by the United States, Canada, and Mexico to integrate the North American food and fiber system have paid large dividends—lower prices and a wider variety of foods, increased real income, and easier access to each other’s markets.

A unified North American market transmits more accurate price signals across national borders, information that better reflects continental supply and demand. With better information, farmers specialize in production activities in which they are comparatively proficient, consumers pay lower prices, and societies benefit from technological innovations and economies of scale. The lure of such payoffs explains the genesis of the World Trade Organization, the European Union, and many regional trade agreements.

The interconnectedness of the three national markets is evident. U.S. agricultural exports to Canada and Mexico are five times greater than U.S. exports to the rest of the world. In addition, U.S. food processing firms are outsourcing more of their production in Canada and Mexico via strategic alliances, joint ventures, and foreign direct investment.

Payoffs from integration include:

• Under the North American Free Trade Agreement, many tariffs have been lowered or eliminated, widening access to all three markets. As a result, incomes increased in all three countries because producers were able to more fully respond to continental differences in tastes and preferences and to make better use of available resources in North America.
• Mexican farmers have gained more export access to U.S. and Canadian markets for fruits and vegetables. And American and Canadian farmers are meeting Mexico’s relatively high demand for staple commodities, such as corn and oilseeds.
• Cross-border investment in processing facilities has lowered production costs, enabling food suppliers to more effectively satisfy consumer demand for convenience foods by offering a wider variety of low-priced products.

Though increased trade has clearly resulted in benefits to society, institutional obstacles continue to segment national markets, limiting the gains from trade. For example, nonuniform inspection, grading, and labeling standards raise production costs for meat in the U.S., Canada, and Mexico. North American agricultural markets also stand to gain from universal commercial laws, common antitrust and regulatory procedures, and better coordination of domestic farm, marketing, and macroeconomic policies.