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The Effect of NAFTA on Soybean Trade Between the US and Mexico
Introduction
US and Mexico have a long history of trading. Especially in 1994, the US, Mexico, and Canada signed the NAFTA which open a new trade age for those three countries. It was created to eliminate tariff barriers to agriculture, manufacturing, and services which directly affected more than 365 million people (North American Free Trade Agreement 2020). The US as a big agricultural country, its agricultural exports to Mexico about $17.8 billion in 2016, which is about 13% of the U.S total agricultural exports to the world (U.S. Agriculture Exports to Mexico2017).Soybean is the top number two agricultural goods which US export to Mexico (U.S. Agriculture Exports to Mexico2017). NAFTA, which began in 1994, has led to an increasing in the international trade value of soybeans between the US and Mexico.
This paper will examine the empirical validity of the comparative advantage from the effects of NAFTA on total trade value, yield, prices and wages in the soybean industry between the US and Mexico. Ultimately, my goal is to find whether NAFTA led to an increase or decrease in welfare for both countries.I expect to see Mexico has acomparative advantage in the production of soybean which resultsin the implementation of NAFTA contribute to increasing the trade value, production, employee wage, and decrease soybean price in the soybean industry of Mexico after 1994.
To test my hypothesis, I will give a short summary of previous research on the US and Mexico trade on the comparative advantage hypothesis firstly and show how my research question similar or different from them. Then, I will develop the comparative advantage theory that I used and explain the prediction variables that I am going to test in the empirical section. After that I will discuss the data resources, giving a summary of the sample statistics, and present the empirical result. In the end, conclude the results from my analysis and give some comments.
Related Literature
There are many tests for discussing the effects of NAFTA according to the comparative advantage theory.
An early empirical test wasImpacts of NAFTA on U.S.-Mexico Agricultural Trade by Dale Colyer are trying to find how NAFTA impacts the trade between U.S. and Mexico in both total agriculture products and for several important commodities trade between two counties by focusing on variables prices, exchange rate, and per capita income. The conclusion is that U.S.-Mexican agricultural trade has continued to grow at rates similar to those in the decade or so preceding the implementation of the NAFTA. The regression analysis conducted did not provide enough evidence to say the increase in US-Mexico agriculture trade was due to the implementation of NAFTA. The similar point with my paper is that we all try to see whether or not the NAFTA affect the US-Mexico export trade with a regression model, this article is trying to see a lot of different kinds of agriculture commodities but mine only focus on soybean. (Colyer 2001)
Later studies NAFTA Contributes to Growth in U.S. Soybean Exports to Mexico by Alan Hallman found that the growth rate of the USA soybean exports to Mexico has slowed from 16% in the first four years when NAFTA signed to 5.4% over 1999 to 2004. The conclusion is that despite an economic slowdown, crushing capacity continues to grow, boding well for U.S. soybean exports to Mexico.This paper only talks about the influence of soybean between these two countries, and the graphical analysis part is a very good example that I can use for my paper. (Hallman 2004)
Last research paper by Jacob Bunge, U.S. Exports to Mexico Fall as Uncertainty Over NAFTA Lingers. The author found that in the first four months of 2017, Mexican imports of U.S. soybean meal dropped 15%, chicken 11%, and corn 6%.The trade dataindicates that Mexico is starting to follow through on aspirations to buy food from a wider range of countries, and reduce reliance on the U.S.And while U.S. sales of some crops and meat to Mexico have slowed, the country is buying more U.S. beef and eggs. Although there are alternatives, U.S. farmers and agribusinesses still have the capability to quickly deliver grain and meat to Mexico at cheap rates, and South American competitors, which rely on oceangoing vessels, could find that hard to replicate.The similar point with my paper is that we all do trade between theUS and Mexico based on NAFTA, and it shows the soybean trade between these two countries is connected tightly. The different point is the author also talked about other commodities, such as beef and eggs. (Bunge 2017)
Data
Data that I will cover is from 1988 to 2012 which is pre-NAFTA and post NAFTA period. The data include US-Mexico soybean export trade value, Mexico-US export trade value, GDP per capita in the US, GDP per capita for Mexico, soybean yield for us, soybean yield for Mexico, US producer price, Mexico producer price, US agriculture employee wage and Mexico agriculture employee wage. All those data come from the UN Commodity Trade Statistics Database, FAOSTAT, World Bank Open Data, and Bureau of Labor Statistics. Table 1 is my summary of all the variables which include the mean, median, and standard deviation of each variable. I have to clarify the units for every variable here. The Exp_Mex (export from Mexico to the US) and Exp-US (export from the US to Mexico) both are the current dollar value. The Wage_Mex and Wage_US both are currently US dollar per year. The PP_Mex and PP_US both are currentlyUS dollar per ton. Yield_Mex and Yield_ US both are tons.
Table 1: Summary Statistics: Exports of Soybean Between US and Mexico
| (1) | (2) | (3) | (4) | |
| VARIABLES | N | Mean | Median | Standard Deviation |
| Exp_Mex
Exp_US Wage_Mex Wage_US PP_Mex PP_US Yield_Mex Yield _US |
25
25 25 25 25 25 25 25 |
467845.8
8.60e+08 2.53e+09 4.89e+10 312.348 262.7604 16687.52 25697
|
126190
7.92e+08 2.66e+09 4.82e+10 281.5 235 16366 26164 |
1147748
4.64e+08 1.26e+09 1.31e+10 94.48612 97.01177 2869.234 2818.956 |
| Rel. Prod. Mexico | 25 | 3.108295 | 1.178355 | 1.812387 |
| Rel. Prod. US | 25 | 0.7454804 | 0.520643 | 0.1509675 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Theory
The theory that I will use in my paper is the comparative advantage. Comparative advantage states that when a country produces a good and service for lower opportunity cost, this country may prefer to export those goods in the free market.With the Implement of NAFTA, the country with the comparative advantage will export more soybean and produce more on that good, which would also lead to greater production, higher wage level, decrease price level for that particular good. Using the soybean production divided by GDP per capita in both countries and then the ratio will be the productivity of the soybean industry, the higher productivity means that country has a comparative advantage on the soybean industry. The result (3.108295) indicates Mexico has the comparative advantage for soybean, I expected to see with the introduction of NAFTA, the soybean production, the wage of soybean, and soybean price will increase in Mexico.
Methodology
To empirically examine the impact of NAFTA on the trade of good X between the US and Mexico, I estimate the following equation:
where denotes the outcome variable of interest. The outcome variables I will consider are exports of soybean from the US to Mexico, and imports of soybean to the US from Mexico, the yield of soybean in Mexico, the yield of soybean in the US, soybean price in Mexico, soybean price in the US, wage level in Mexico, wage level in the US. In the above equation, Year is a linear time trend, and NAFTA is a dummy variable equal to one after the introduction of NAFTA in 1994. The coefficient gives the impact of the introduction of NAFTA on the outcome variable . If , then we have evidence that NAFTA increased variable Y following the introduction of NAFTA.
Results
The first outcome variables that I do is soybean export value from Mexico to the US, So the regression equation will be, Table 2 presents the estimation results of estimating equation. The coefficient on NAFTA in column (1) of Table 2, indicates that after the introduction of NAFTA, the soybean export value from Mexico to the US was 68.8 percent higher each year than if NAFTA had not occurred. However, the size of the change in export values is not statistically significant which indicates the introduction of NAFTA did not increase the export value of soybean from Mexico to the US. The comparative advantage theory does not hold.
Table 2: Regression Results: Log_Exp_Mex Measured in US Dollars
| (1) | |
| VARIABLES | Log_Exp_Mex |
| Year | 0.02424 |
| (0.06618) | |
| NAFTA | 0.6885 |
| (1.3803) | |
| Constant | -37.3143 |
| (131.6007) | |
| Observations | 25 |
| R-squared | 0.0773 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
The second outcome variables that I do is soybean export value from the US to Mexico, So the regression equation will be, Table 3 presents the estimation results of estimating equation. The coefficient on NAFTA in column (1) of Table 3 indicates that after the introduction of NAFTA, the soybean export value from the US to Mexico was 26.2 percent higher each year. However, the size of the change in export values is statically significant since the p value (0.08) is smaller than 0.1. This result indicates that the introduction of NAFTA did increase the export value of soybean from the US to Mexico.
Table 3: Regression Results: Log_Exp_US Measured in US Dollars
| (1) | |
| VARIABLES | Log_Exp_US |
| Year | 0.0608 |
| (0.0075) | |
| NAFTA | 0.2666 |
| (0.1426) | |
| Constant | -101.4807 |
| (14.9620) | |
| Observations | 25 |
| R-squared | 0.8886 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
The third outcome variables that I do is the wage level of agriculture industry in Mexico. So the regression equation will be, Table 4 presents the estimation results of estimating equation. The coefficient on NAFTA in column (1) of Table 4 indicates after the introduction of NFTA, the agriculture industry wage in Mexico increase 39 percent each year than if NAFTA had not occurred. And the size of the change in wage is statically significant since the p value (0.018) smaller than 0.05. This result indicates that the introduction on NAFTA did increase the agriculture industry wage of Mexico which supports the comparative advantage theory.
Table 4: Regression Results: Log_Wage_Mex Measured in US Dollars
| (1) | |
| VARIABLES | Log_Wage_Mex |
| Year | 0.0621 |
| (0.0082) | |
| NAFTA | 0.3905 |
| (0.1535) | |
| Constant | -102.9292 |
| (16.39374) | |
| Observations | 25 |
| R-squared | 0.9276 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
The fourth outcome variables that I do the is wage level of agriculture industry in theUS. So the regression equation will be, Table 5 presents the estimation results of estimating equation. The coefficient on NAFTA in column (1) of Table 5 indicates after the introduction of NAFTA, the agriculture industry wage in US decrease 0.5 percent each year. And the size of the change in wage is not statically significant. This result indicates that the introduction of NAFTA did not decrease the agriculture industry wage of the US which support the comparative advantage.
Table 5: Regression Results: Log_Wage_US Measured in US Dollars
| (1) | |
| VARIABLES | Log_Wage_US |
| Year | 0.0345 |
| (0.0038) | |
| NAFTA | -0.0057 |
| (0.0335) | |
| Constant | -44.40358 |
| (7.5345) | |
| Observations | 25 |
| R-squared | 0.9474 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
The fifth outcome variable that I do is soybean price in Mexico. So the regression equation will be, Table 6 presents the estimation results of estimating equation. The coefficient on NAFTA in column (1) of Table 6 indicates after the introduction of NFTA, the producer and consumer price in Mexico decrees 210 dollars per ton. And the size of the change in price is statically significant since the p value is 0. This result indicates that the introduction on NAFTA did decrease the soybean producer and consumer price in Mexico which did support the comparative advantage theory.
Table 6: Regression Results: PP_Mexico Measured in US Dollars
| (1) | |
| VARIABLES | PP_Mex |
| Year | 12.7598 |
| (3.1915) | |
| NAFTA | -210.5013 |
| (45.1122) | |
| Constant | -25047.38 |
| (6352.246) | |
| Observations | 25 |
| R-squared | 0.5018 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
The sixth outcome variables that I do is soybean price in the US. So the regression equation will be, Table 7 presents the estimation results of estimating equation. The coefficient on NAFTA in column (1) of Table 7 indicates after the introduction of NAFTA, the producer and consumer price in US decreases127 dollars per ton. And the size of the change in price is statically significant since the p value (0.007) which is smaller than 0.05. This result indicates that the introduction on NAFTA did decrease the soybean producer and consumer price in the US which supports the comparative advantage.
Table 7: Regression Results: PP_US Measured in US Dollars
| (1) | |
| VARIABLES | PP_US |
| Year | 14.36719 |
| (3.1469) | |
| NAFTA | -127.0506 |
| (43.1256) | |
| Constant | -28375.06 |
| (6265.496) | |
| Observations | 25 |
| R-squared | 0.5926 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
The seventh outcome variables that I do is soybean yield in Mexico. So the regression equation will be, Table 8 presents the estimation results of estimating equation. The coefficient on NAFTA in column (1) of Table 8 indicates after the introduction of NFTA, the Soybean Yield in Mexico decrees 25 percent than if NAFTA had not occurred. And the size of the change in Mexico soybean yield is statically significant since the p value (0.021) which is smaller than 0.05. This result indicates that the introduction on NAFTA did decrease the soybean yield in Mexico which did not support the comparative advantage theory. There are a lot of external reasons can decrease the yield such as drought, less labor force, less population.
Table 8: Regression Results: Log_Yield_Mex Measured in Tons
| (1) | |
| VARIABLES | Log_Yield_Mex |
| Year | 0.0026 |
| (0.0081) | |
| NAFTA | -0.2541 |
| (0.1019) | |
| Constant | 4.6680 |
| (16.1435) | |
| Observations | 25 |
| R-squared | 0.2943 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
The last outcome variables that I do is soybean yield in the US. So the regression equation will be, Table 9 presents the estimation results of estimating equation. The coefficient on NAFTA in column (1) of Table 9 indicates after the introduction of NAFTA, the Soybean Yield in the US increase 8.9 percent than if NAFTA had not occurred. And the size of the change in yield is statically significant since the p value (0.094) which is smaller than 0.1. This result indicates that the introduction on NAFTA did increase the soybean yield in US.
Table 9: Regression Results: Log_Yield_US Measured in Tons
| (1) | |
| VARIABLES | Log_Yield_US |
| Year | 0.0081 |
| (0.0026) | |
| NAFTA | 0.0897 |
| (0.0512) | |
| Constant | -6.1992 |
| (5.2987) | |
| Observations | 25 |
| R-squared | 0.6387 |
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Conclusion
This paper provides an analysis of the comparative advantage theory of soybean trade between the US and Mexico with NAFTA. The previous research shows the comparative advantage theory hold or not hold mainly depends on the trading goods and trading regions. My result shows the comparative advantage theory did not hold in soybean export between the US and Mexico case with NAFTA. There are many reasons going on in these economies that led to the trade policy having less of an impact than what I anticipated. The yield estimate in Mexico reduced due to extreme dryness by nearly half (Ureta 2019). The other reason could be the domestic demand of soybean increase in Mexico, for example there are more cattle, pigs that require more soybeans domestically, then the export value from Mexico to the US will not be increase. Another reason could be the exchange rate for US dollar increased which can cause the export value decrease. But my result also suggests that we can conclude the NAFTA promote the welfare of consumer in Mexico. With the implementation of the NAFTA, Mexico domestic price decreases which means the consumer can buy soybean at a lower domestic price.
Reference
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