North American Integration in Agri-Food

An Expert's View about Food , Beverages and Tobacco in Canada

Posted on: 30 Mar 2010

North American Integration is Important Increased trade and foreign investment between Canada, the US and Mexico has transformed the agri-food sector in all three countries. For some products, the significance of international borders has declined to such an extent that one North American market can be said to exist. Integration expands market size, increasing economic opportunities for both producers and consumers.

RESEARCH BULLETIN: International Policy Analysis March 2004 North American Integration in Agri-Food by Darcie Doan North American Integration is KEY FACTS Important Increased trade and foreign investment ? North American trade flows are between Canada, the US and Mexico has determined more by economic transformed the agri-food sector in all three growth and exchange rate than countries. For some products, the trade policy significance of international borders has declined to such an extent that one North ? Both domestic farm policy American market can be said to exist. changes and trade agreements can have trade-boosting effects Integration expands market size, increasing ? Integration is asymmetrical: economic opportunities for both producers Canada and Mexico depend more and consumers. However, it also generates on the North American market new risks. The discovery of BSE has than does the United States resulted in very costly disruptions to what had been one of the most integrated ? Agri-food trade within North industries on the continent. America is growing much faster than is North American agri-food Integration forces policymakers to consider trade with the rest of the world both the effects their decisions will have on other countries, as well as the impact that ? Increased regional agri-food trade other governments? decisions will have at is being driven by trade in high- home. As the economic linkages between value products Canada, the US and Mexico increase, the ? Foreign direct investment (FDI) in range of policies with the potential to affect food processing is greater than NAFTA partners expands dramatically. trade in processed food and is an There are now very few agri-food policy increasingly important aspect of changes that have strictly domestic effects. integration What Do We Know About ? Regulatory differences, trade disputes and food safety concerns Integration? continue to impede further This bulletin presents highlights from recent integration of the sector economic research into integration in the North American agri-food sector. It also suggests several questions that could form the basis for future research studies. RESEARCH BULLETIN: International Policy Analysis March 2004 Macroeconomics & Policy Drive Trade Patterns Increasingly Integration North American in Orientation Economic growth and exchange rates are Canada?s trade with North America is the factors that have the greatest effect on growing faster than trade with the rest of trade flows. Nevertheless, research has the world. The same is also true for the US shown that policy changes are also an and Mexico. important driver of economic integration in a a ia ric lt re a ri-F the North American agri-food sector. Canadian Agriculture and Agri-Food rts, - Exports, 1990-2002 30 30 Trade agreements have resulted in lower 25 tariffs, a more favourable investment 25 climate and changes to domestic agricultural 20 North America 20 North America (Value-Added) pol (Value-Added)icy. For example: 15 15 North America North America (Bulk) 10 ? Mexico?s accession to the GATT in the (Bulk) 10 Rest-of- orld Rest-of-World mid-1980?s was accompanied by (Value-Added) (Value-Added) 5 5 Rest-of- orld Rest-of-World significant reforms to Mexican farm (Bulk) (Bulk) 0 0 policy ? reforms that resulted in greater 1990 1992 1994 1996 1998 2000 2002 1990 1992 1994 1996 1998 2000 2002 Mexico-US integration. Growth in regional trade is being driven by ? The Uruguay Round Agreement on an increase in trade of high value products. Agriculture (1995) contained disciplines In the case of Mexico, export growth is on export subsidies that influenced driven by fresh produce and horticultural Canada?s decision to abandon its system products, while Canada and the US are of grain transportation subsidies. This trading relatively more processed food and policy change led to increasing intermediate goods integration between Canada and the US. ? The Canada-US Free Trade Agreement Integration is Asymmetrical (1989) and the North American Free Trade Agreement (1994) both provided a Mexico and Canada display a greater boost to trade flows in the region. dependence on the North American market NAFTA also had a favourable effect on as a destination for their exports than does agri-food investment in Mexico. the US. Almost all (84%) of Mexican and two-thirds of Canadian agri-food exports are The private sector seized the new destined for the North American market opportunities created through economic (see chart on page 3). While the share of US growth and trade liberalization, and the exports going to Canada or Mexico is on the result has been a rapid increase in trade and increase, it is still less than a third of total investment flows in the North American agri-food exports. Some northern border agri-food sector over the past twenty years. states depend heavily upon trade with Canada, but overall, the US has a more diversified set of buyers for their exports. 2 Billions $ Billions $ RESEARCH BULLETIN: International Policy Analysis March 2004 Given the importance of brand reputation No r t h A me r ic a n S ha r e o f A griculture to food companies, most choose to have and Agri-Food Exports majority ownership of their foreign affiliates (1990, 1995, 2001) in order to retain strict control over food 84 84 90 quality and marketing. 80 1990 66 70 1995 60 Most FDI in the food processing industry is 51 2001 50 for the purpose of serving the host market. 41 40 Only a small proportion of foreign affiliate 29 30 sales are exported. 17 17 20 10 istri ti f ales f - e 0 Distribution of Sales of US-owned Canada US Mexico* Foreig ffiliates, Foreign Affiliates, 1996 Sou 3rce: Statistics Canada 2.5 3 2.5 100 100% 8.9 8.9 *1990 Data for Mexico is unavailable 2.1 90 2.1 90% 21.6 21.6 1.8 1.8 80 80% 70 70% Studies of price co-movements are another 60 60% way of measuring integration. These studies 50 50% 94.9 94.9 89.3 89.3 also reveal asymmetries in the pattern of 40 40% 75.9 75.9 30 integration, insofar as Canadian commodity 30% 20 20% prices are more responsive to shocks 10 10% originating in the US than vice-versa. This is 0 0% not surprising, given the relative size of the The orld Canada exico The World Canada Mexico US and Canadian markets, we would expect ost Country est-of- orld S Host Country Rest-of-World US the US to be the price-maker. Asymmetrical patterns of integration pose US food companies pursue a slightly special challenges for Canada and Mexico, different strategy for their investments in who rely on an open border with the US. Canada compared to those in Mexico or For its part, the US is better able to cope other countries. Only 3% of sales by US- with the consequences of a border closure owned foreign affiliates in Mexico are to its immediate north or south. exported back to the US (see chart above). In contrast, almost 9% of sales by US- FDI Plays Important Role owned foreign affiliates in Canada are exported back to the US. This is due to the Integration is not only about trade. Many fact that Canadian plants frequently food companies choose to serve foreign compete with US plants for product markets through FDI. In North America, mandates, and may win the right to a sales by foreign-owned food companies are particular product line for both Canadian two to three times larger than total trade in and US markets. processed food. Sales by foreign affiliates of US firms in Canada were over $US 12.5 Multinational food firms engage in billion in 1998, compared to only $US 5.3 significant levels of intra-firm trade ? an billion in processed food exports to Canada. indication that links in the supply chain are 3 Percent of total exports Percent of sales Percent of sales RESEARCH BULLETIN: International Policy Analysis March 2004 located on opposite sides of the border. ? Which sectors are most vulnerable to These highly integrated firms depend upon supply-chain disruption resulting from an open border for the operation of their border effects? businesses. Answers to these questions would provide The motivation for FDI is the same as that policymakers with a better understanding of for any new business venture: profit the effects that integration has had on the potential. Firms consider investing abroad if structure, conduct and performance of the the market potential is large enough and the sector. It would also provide an indication of costs low enough to generate profit from the kind of gains and structural changes the operations of a foreign affiliate. that can be expected with further integration. Government policy has an indirect impact on investment decisions, insofar as it affects The Future of North American the costs and the risks of doing business in a foreign country. Because multinational Integration firms are making a long-term commitment to the foreign market, they are particularly Trade and investment continue to be concerned with policy changes that affect hampered by regulatory differences, trade the costs of doing business or disrupt their disputes, tariffs, subsidies and food safety supply chains. concerns. While there are benefits to be reaped from Impact of Integration on pursuing further integration, there are also Performance significant economic risks and political hurdles on this path. While there is some evidence that integration has expanded consumer choice Policymakers need a better understanding and improved the economic efficiency of the of integration in order to ensure that the sector, there has been no systematic study sector is able to reap its benefits while of the impact of integration on economic mitigating its risks. performance. Some of the key questions could shape future research in this area For further information, contact include: Darcie Doan at (613)715-5256. ? How has integration affected productivity growth in the agri-food sector of each of the three countries? ? How is the trend towards continent-wide consolidation and rationalization affecting competition in specific agri-food industries? 4
Posted: 30 March 2010

See more from Food , Beverages and Tobacco in Canada

Expert Views    
Retail Food Sector Report - Canada 2012   By Foreign Agricultural Service
An Overview of the Canadian Agriculture and Agri-Food System   By Agriculture and Agri-Food Canada
Hot Tips    
Canada Food and Agricultural Import Regulations and Standards   By Foreign Agricultural Service
Canada Grain and Feed   By Foreign Agricultural Service
Canada Food Exporter Guide Annual Report 2009   By Foreign Agricultural Service