By Thomas L. Vollrath

Many economists have observed that world trade has become increasingly regionalized. Intra-NAFTA agricultural trade has enjoyed explosive growth, expanding annually from $11 billion in 1992 to $18 billion in 1999.

There have also been shifts in the composition of U.S., Canadian, and Mexican agricultural exports. Historically, primary bulk commodities have loomed large, but this dominance has been substantially reduced in recent years. Trade in bulk agricultural declined from 71 percent of total trade in the mid-1970s to about 37 percent in the late 1990s, while trade in processed agricultural commodities has become much more important.

The major objective of NAFTA was to free up the market system. The focus, therefore, was not restricted to the elimination of trade barriers in commodity/product markets. It also included efforts to reduce impediments to cross-border investments. For this reason, NAFTA established provisions that provided equal treatment to domestic and foreign investors. These provisions induced additional foreign direct investments (FDI).

FDI is a powerful force of change. Generally, it provides the recipient country (or company) with a source of relatively scarce resources which, when combined with relatively abundant factor inputs, increases output and productivity. It transfers cutting edge technology embodied in capital and managerial knowledge. Moreover, it represents a lasting commitment, in sharp contrast to shortrun capital flows, to the economies of the capital-recipient partners.

The inception of NAFTA coincides with significant growth of U.S. FDI in the processed food industries in contiguous neighboring countries, though it should be pointed out that growth in U.S. processed-foods FDI and exports to Mexico took off in the late 1980s prior to the formation of NAFTA.

There has been remarkable growth in the importance of the United States as a market for Canadian goods. The recent decline in the reliance of Mexican agricultural exporters on the U.S. market is also striking. This reliance reached a peak in 1990 when 85 percent of Mexican agricultural exports were sent to the United States. The 10 percentage point decline in the overall importance of the U.S. market within the last decade may not be an unhealthy development, given risks associated with not having a diversified foreign customer base.

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