Foreign Direct Investment and Agricultural Trade: The U.S.-Mexico Experience

Abstract

S ome critics of NAFTA are concerned that u.s. Foreign Direct Investment (FDI) in Mexico's food and agricultural sector is replacing U.S. exports, and u.s. imports are replacing domestic production, causing a decline in U.S. jobs. But a closer examination of the effects of FDI points to a different story. On balance, U.S. food companies' investments have increased their sales in Mexico, without cutting into U.S. food exportS; and they have stimulated Mexican importS of U.S. agricultural raw materials and semi-processed products like vegetable oil. The drafters of the North America Free Trade Agreement of 1994 (NAFTA) saw trade liberalization as the principal means toward market integration between the United States, Canada, and Mexico. NAFTA indeed fostered rapid growth in trade among its members, including food and agricultural trade. From 1990 to 1998, U.S. exports of processed food to Mexico grew from $1.1 to $2.8 billion, and Mexican processed food exports to the United States grew from $1.0 billion to $2.3 billion. Meanwhile, FDI between the United States, Canada, and Mexico increased even more rapidly, paving the way for a regional food system with more specialization, greater trade, and changing production and consumption patterns. The importance of U.S. FDI in Mexico is evident, considering that the $6 billion in annual processed food sales generated by these investments-nearly all to the Mexican market-overshadows U.S. exports of processed food products to Mexico by more than 2 to 1. FDI is the major way that U.S. food processing firms have entered the Mexican market (figure 1). U.S. investment in Mexico's processed food industry The stock of U.S. investment in Mexico's food processing industry increased from $321 million in 1986 to $5 .0 billion in 1997 (figure 2). The trend began when the Mexican government changed investment rules in the late 1980s. Then the enactment of NAFTA in 1994 spurred Mexican economic growth, leading to increased investor confidence and a synergy between trade and investment. Mexico is now the third largest host for U.S. FDI