US-Mexico tomato dispute

Abstract

Purpose – The purpose of this paper is to provide a historical background of the tomato dispute, review the USA trade law and its effect on the tomato trade, discuss the role of the North American Free Trade Agreement and other supply and demand factors on increased tomato imports from Mexico and present a conceptual analysis of the effects of a Suspension Agreement (a form of Voluntary Export Restraint) on the USA and Mexico. In 1996, the USA and Mexico signed the Suspension Agreement which sets a guaranteed minimum price for Mexican tomato imports. Design/methodology/approach – Conceptual analysis graphically illustrates how the Suspension Agreement affects the tomato trade for the USA and Mexico and shows the benefits and losses of consumers and producers in these two countries. Findings – There is no consensus regarding whether Mexico dumps tomatoes onto the US market. However, US trade law favors domestic producers, leading to the signing of the Suspension Agreement. It is shown here that this agreement has substantial welfare effects in both Mexico and the USA. While it was designed to protect US producers, it also aids Mexican consumers and may potentially improve Mexican producer surplus as well. Only US consumers unambiguously suffer a loss. Research limitations/implications – As the theoretical model indicates, the Suspension Agreement’s minimum price does help Floridian farmers but, if the rents are large enough, may also aid Mexican producers. If Mexican producers do gain, then quota rent is shifted from tomato consumers to Mexican producers. On the other hand, US consumers are hurt as well as tomato processing plants because they purchase fresh tomatoes for use as inputs. The higher price minimum after the 2013 agreement will likely intensify the welfare effects, and the addition of different categories with distinct prices is likely to have additional consequences for both welfare and trade distortions. Originality/value – As the USA and Mexico recently signed a new Suspension Agreement, this paper deals with a very timely and contentious trade dispute and contributes to the area of research international trade war. The literature on Suspension Agreements is also expanded by providing welfare analysis of both producers and consumers.

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