Agricultural Trade Liberalization in Mexico: Impact on Border Prices and Farmer's Income by Silvia Prina :: NEUDC 2007 Papers :: Northeast Universities Development Consortium Conference :: Center for International Development at Harvard University (CID)

This paper examines the impact of trade liberalization in agricultural products between Mexico and the U.S. due to NAFTA on the distribution of Mexican farm incomes during the 1990s. By relating NAFTA tariff cuts to border prices of Mexican exports and imports, we are able to examine both benefits to Mexican farmers resulting from higher prices of export goods, as well as losses incurred from greater import competition. Using farm households as the unit of observation allows us to examine the distributive impact of these changes in border prices at a high level of disaggregation, and identify the channels through which trade liberalization impacts relative incomes of farms of differing size. We find that NAFTA-induced tariff reductions decreased the border price of Mexican import goods, most notably corn, and increased the border prices of Mexican export goods such as fruits and vegetables. The rise in fruit and vegetable prices benefited small farmers more than large farmers, while the drop in corn prices hurt large farmers more. These results are consistent with observed cropping patterns: large farms rely more on corn while small farms rely more on fruits and vegetables. We also assess separately the impact on northern, central and southern parts of Mexico. The results are stronger in the central region, consistent with the fact that only this region is characterized both by good land quality and low transportation costs to the border. These findings indicate that trade liberalization increased the level of earning of poor farmers relative to those of large farmers in the central region of Mexico. ∗This paper is a revised version of a chapter of my doctoral dissertation at Boston University. First and foremost I would like to thank Dilip Mookherjee for his continuous guidance and support. I also gratefully acknowledge comments from Iván Fernández-Val, Kevin Lang, Nina Pavcnik, Eric Verhoogen and seminar participants at Boston University. Special thanks to Nava Ashraf and Margaret McMillan for sharing their data, and to Juan Carlos Torres of INEGI for tireless data assistance. †Department of Economics, Weatherhead School of Management, 11119 Bellflower Road, Room 273, Case Western Reserve University, Cleveland, Ohio 44106-7235. Correspondence: [email protected]