From iatp@igc.apc.orgSat Jul 8 15:21:48 1995 Date: Fri, 07 Jul 1995 13:05:01 -0700 (PDT) From: IATP To: Recipients of conference Subject: NAFTA & Inter-Am Trade Monitor 7-7- NAFTA & Inter-American Trade Monitor Produced by the Institute for Agriculture and Trade Policy July 7, 1995 Volume 2, Number 20 _____________________________________________________ Headlines: - MEXICO: AGRICULTURAL "TIME BOMB" - END TO CANADA RAIL SUBSIDY AFFECTS U.S., CANADIAN FARMERS - MEXICAN BANK BAILOUT PROCEEDS - OAS MEETING IN HAITI - STRAINS ON MERCOSUR - LATIN AMERICAN TRADE AND INVESTMENT _____________________________________________________ MEXICO: AGRICULTURAL "TIME BOMB" Losses due to the three-year drought centered in northern Mexico total at least 600 million new pesos, and more than 300,000 animals have died. An estimated 12,000 campesinos in Chihuahua have abandoned their land because of the drought and the lack of assistance, migrating to the United States or to larger cities in Mexico. More than a million hectares of agricultural land lie unplanted because of the drought and lack of financing. "In many government offices no one seems to comprehend an evil that just keeps on growing. The risk of larger conflicts is more than obvious," according to La Jornada columnist Herminio Rebollo Pinal. Farmers in two leading agricultural states -- Sonora and Sinaloa -- have already suspended payments to banks. Those farmers with cash on hand would rather use it to plant again next growing season than to pay bank loans, especially when new financing is virtually unavailable. Despite an agreement between the National Association of Agricultural and Livestock with the Mexican Bankers Association to take advantage of special dollar credits and low interest rats for agriculture ("CCC credits"), many bankers are still turning farmers away. Mexican banks have foreclosed on 52,000 hectares in the h. Herminio Rebollo Pinal, "Keeping Them Down on the Farm," EL FINANCIERO, June 12-18, 1995; Matilda Perez, "52 Mil Hectareas Embargadas por los Bancos, Segn El Barzon," LA JORNADA, June 19, 1995; Laura Gomez Flores and Matilda Perez, "700 Mil Hectareas de Riego y 300 Mil de Temporal Quedaran Sin Sembrar," LA JORNADA, June 13, 1995; Francisco Ordugo, Ruben Villapando, and Gustavo Castillo, "Suman Ya 600 Milliones de Nuevos Pesos las Perdidas por la Sequia," LA JORNADA, June 9, 1995. END TO CANADA RAIL SUBSIDY AFFECTS U.S., CANADIAN FARMERS With Canada's 98-year-old rail subsidy ending on August 1, wheat farmers in western Canada face doubled transportation costs and decreased rail services to many farm towns and small grain elevators. The end to the subsidy is required by WTO rules, and implementing legislation was contained in Canadian transportation and budget bills. This summer, farmers are rushing to empty grain storage facilities before the subsidy ends. The removal of the annual grain transportation subsidy of C$560 million is to be eased by a one-time cash compensation to farmers of C$1.6 billion. A transitional rate cap of about C$40 per metric ton, about C$10 more than railroads currently charge, is also in place for at least five years. The long-term impact on Canadian and United States agriculture is uncertain. Patty Smith, a manager at the Saskatchewan Association of Rural Municipalities, predicted that some Canadians will lose their farms, while others will switch to higher-value crops such as oilseeds or will grow grain to feed livestock. The end to the rail subsidy may mean less international competition for U.S. wheat growers as Canadians will no longer be able to afford shipping wheat cross-country to salt-water ports. The U.S. controls one-third of the global wheat market, with Canada in second place with about one-fifth. With Canadian rail transport becoming more expensive, Canadian wheat growers may send more grain to Portland. Oregon or by Mississippi River barge to New Orleans, and may export more across the border to the United States. The Illinois Central railroad and General Mills Inc. both expect to benefit from increased entry of Canadian wheat to the United States, to the detriment of the St. Lawrence Seaway and the port of Vancouver, British Columbia. Cattle and hog farmers in eastern Canada will also suffer from the end of the subsidy, and may look to the United States as the source of feed grains including barley, corn, and wheat in 1995-96. A bi-lateral panel charged with making recommendations to end the bitter U.S.-Canada dispute over wheat subsidies made preliminary recommendations in June, but its final report will not appear until September 11. The preliminary report basically finds both countries unfairly subsidizing wheat exports and recommends that the U.S. eliminate its Export Enhancement Program and that Canada make reforms to the Canadian Wheat Board. John Urquhart and Scott Kilman, "Scrapping of Canadian Wheat Subsidy Could Mean Problems for U.S. Growers," WALL STREET JOURNAL, June 21, 1995; Marc Piche, "Canada May Import Grain to Aid Livestock Industry," JOURNAL OF COMMERCE, June 19, 1995; Leo Ryan, "With Rate Cap Likely to Survive, Canada's Railways Upset," JOURNAL OF COMMERCE, June 20, 1995; Leo Ryan and John Maggs, "US-Canada Panel Urges Broad Changes in Wheat Trade," JOURNAL OF COMMERCE, June 23, 1995. MEXICAN BANK BAILOUT PROCEEDS Mexico's troubled Grupo Financiero Probursa was rescued in a $350 million buyout by Spain's Banco Bilbao Vizcaya, after the Mexican government swallowed $780 billion of Probursa's bad loans. British banks are readying proposals to re-capitalize Banco Union, Banca Cremi and Banpais. United States bankers seem to prefer opening their own subsidiaries, rather than taking advantage of new laws that allow foreigners to buy up to 100 percent of all but Mexico's three largest banks. Maturing dollar-denominated certificates of deposit have put banks at risk, as they lack liquidity to pay off the certificates falling due before October. At the same time, Mexico's economic crisis has resulted in massive defaults on loans and mortgages across the country. Past-due loans have more than doubled since the beginning of the year. The bank crisis in Mexico comes just four years after Mexico sold 18 state-run banks for $13.5 billion. Now at least half of the privatized banks need government bailouts that may total more than $17 billion. Among the bailouts already announced: the government will pay from 50-70 percent of interest on debts contracted by companies that built 43 highways (total: nearly four billion dollars) and will use a billion dollar World Bank loan to purchase other unpayable loans. Real estate foreclosed by banks, including hotels, restaurants, houses, companies, and up to 52,000 hectares of prime agricultural land, will be auctioned in the United States in August. The World Bank loan will be partially funded by cutting previously- approved World Bank loans that have not been fully disbursed. Among the loans likely to be affected: the $368 million Northern Border Environment Project approved as part of NAFTA, $350 million for water supply and sanitation, and $200 million for solid waste management along the U.S. border. Loans for rural development and agriculture may also be tapped. Despite Mexico's own banking problems, about a dozen of Mexico's wealthiest investors and bankers have invested more than $4 billion in the United States and have expressed interest in buying up Venezuela's troubled banks. Eduardo Molina y Vedia, "Government to Bail Out Banking System," INTERPRESS SERVICE, June 19, 1995; Claudia Fernandez, "Buying Up the Banks," EL FINANCIERO, June 12-18, 1995; Alicia Salgado and Georgina Howard, "The British Are Coming," EL FINANCIERO June 12- 18, 1995; Geri Smith and Stanley Reed, "Pulling the Banks From the Rubble," BUSINESS WEEK, 6/12/95; Anthony DePalma, "Mexico Bailing Out Its Weak Banks," NEW YORK TIMES, June 28, 1995; Kevin G. Hall, "Mexico Manages to Avert Banking Sector Collapse," JOURNAL OF COMMERCE, June 16, 1995; Pratap Chatterjee, "World Bank to Bail Out Banks by Cutting Environment, Other Loans," INTERPRESS SERVICE, June 19, 1995. OAS MEETING IN HAITI Meeting in Haiti in early June, the Organization of American States annual General Assembly focused on democracy and free trade. As members congratulated themselves on the restoration of Haiti's elected President Jean-Bertrand Aristide to office, they declined to discuss a proposal for creation of a force to intervene in case of coups. Despite extensive discussion of the re-admission of Cuba to the OAS, the topic was not officially on the agenda and no formal declaration mentioned it, though OAS Secretary General Cesar Gaviria said that Cuba "deserved a chance to rejoin the organization." Cuba was expelled from the OAS in 1962. As U.S. Secretary of State Warren Christopher lauded progress toward hemispheric free trade, Haitian President Aristide expressed hopes that economic integration will benefit all countries and open "doors to an economically better life." Representatives of other OAS countries complained that free trade does not necessarily create fair trade. Guyana's ambassador said that subsidized U.S. rice competes unfairly with Guyanese rice, particularly since the International Monetary Fund has required his country to eliminate all agricultural subsidies. Caribbean banana producers also object to U.S. advocacy oms. Diego Cevallos, "Democracy and Free Trade, Highlights of OAS Meeting," INTERPRESS SERVICE, June 5, 1995; "Aristide Hopes Integration Will Benefit All," INTERPRESS SERVICE, June 8, 1995; Diego Cevallos, "OAS to Prove a 'New Era' Has Been Entered," INTERPRESS SERVICE, June 10, 1995; Yvette Collymore, "Trade Grievances Overshadow OAS Meeting in Haiti," INTERPRESS SERVICE, June 2, 1995; Peter Bate, REUTER, June 5, 1995. STRAINS ON MERCOSUR As Brazil devalued its currency by six percent on June 22, after having announced a plan to severely restrict motor vehicle imports, Mercosur's unity seemed increasingly strained. Brazil is by far the largest member of Mercosur, which also includes Argentina, Paraguay, and Uruguay. The Brazilian devaluation is particularly hard on Argentina, which counts Brazil as its largest trading partner and sends 50 percent of all its exports to Brazil. As a result of the devaluation, the price of Argentine exports to Brazil will rise and the price of Brazilian exports to Argentina will fall. Brazil agreed to a 30-day delay in implementing its auto import quotas. While Argentine auto exports to Brazil account for only 10 percent of Brazil's vehicle purchases, these exports are vital to Argentina, where domestic sales dropped 47 percent in the first few months of 1995. Although Brazil's treatment of auto imports is clearly subject to Mercosur provisions, Mercosur lacks a formal process for resolution of such disputes. Currehan quotas, but is not regulated by the Mercosur agreement. Argentina's economy has fallen deeper into the recession sparked by last year's increased U.S. interest rates and Mexico's crisis. On June 22-23, dozens of people were injured and 200 arrested in demonstrations in the central Cordoba province. The protests began with public employees demanding unpaid back wages and objecting to an emergency law that would cut salaries, increase taxes, and allow the provincial government to pay them in bonds instead of in cash. Uruguayan industrialists also feared that the Brazilian devaluation would have serious consequences, since nearly half of Uruguay's exports go to Mercosur and Brazil is Uruguay's largest trading partner within Mercosur. Uruguayan exports to Brazil rose 102.7 percent during the first four months of 1995, accounting for nearly one-third of its total exports. Brazil suffers from a recent but persistent trade deficit, running a deficit for the seventh consecutive month in May. The total deficit for the January-May period was about $3.5 billion, and Brazil's international reserves fell from $41 to $30 billion. Brazil's minister of industry and commerce has also indicated that tariffs or quotas could be imposed on Brazil's Mercosur partners in the textile, electronics and shoe industries. She noted that while products from Argentine duty-free zones enter Brazil tax-free, products from Brazil's duty-free zone are subject to Argentine tariffs of up to 30 percent. "Argentina and Uruguay Fear 'Caipirinha Effect,'" INTERPRESS SERVICE, June 23, 1995; Mario Osava, "Trade Row Highlights Need for Dispute-Settling Mechanisms," INTERPRESS SERVICE, June 21, 1995; "Argentina: Cordoba Province Explodes in Protests," WEEKLY NEWS UPDATE ON THE AMERICAS, July 2, 1995; Marcela Valente, "Trade Row Reveals the Depths of Argentina's Recession," INTERPRESS SERVICE, June 21, 1995; Mario Osava, "Brazil's Negotiators Could Have Played Their Cards Better," INTERPRESS SERVICE, June 20, 1995; Eugenio O. Valenciano, "Mercosur: Algo Mas Que Automoviles," SUCESOS, June 29, 1995; "La Negociacion Desde Brasil: Sin Trascendidos en la Negociacion Automotriz," SUCESOS, June 29, 1995; "Argentina y Brasil Buscan Acercar Posiciones," SUCESOS, June 29, 1995. Marcelo Montenegro, "Brasil Volvio a Devaluar el Real," SUCESOS, June 29, 1995. LATIN AMERICAN TRADE AND INVESTMENT According to a report by the U.N. Economic Commission for Latin America and the Caribbean (ECLA), the region has become a net importer of capital, with foreign investment growing at an average annual rate of 15 percent from 1987-1994. The inflow was boosted by privatizations, economic integration, and high interest rates offered in Latin America. By 1994, net foreign capital inflows reached $48 billion yearly, with $19 billion of that amount in direct investment. Although the ECLA report characterized the capital flow as positive, it warned of the dangers of "fly-by-night" capital attracted by short-term speculative opportunities and of heavy geographical concentration of investments in Argentina, Brazil, Mexico, and, to a lesser extent, Colombia and Chile. The Latin American Integration Association (ALADI) recently reported that increased imports over the past four years have resulted in a $14.9 billion deficit in 1994, which could be financed only by "the persistent influx of foreign capital." Now that Mexico and Argentina are in recession, regional imports will fall drastically. Intraregional trade has increased, especially between Mercosur nations (Argentina, Brazil, Uruguay, Paraguay) and within the Andean Pact (Bolivia, Colombia, Ecuador, Peru, and Venezuela.) Chile increased agricultural and timber exports to other Latin American countries by 29.6 percent in 1994, compared to 1992, and also increased exports to Asia by 51.8 percent. Chile's agricultural sector reported exports of $1.7 billion in 1994, with its forestry sector adding $1.5 billion. Central American nations have been trying for a few years to put in place a uniform customs code calling for a five percent tariff on raw materials and a 20 percent tariff on processed goods. Now that effort has stalled. First, Costa Rica, faced with a galloping fiscal deficit of more than eight percent of its gross national product, declared an eight percent tariff hike. Then El Salvador has announced unilateral tariff cuts to one percent on raw materials and 15 percent on processed goods. Guatemala said it will also raise tariffs on capital goods and raw materials from five percent to 10 percent. Specific trade disputes, such as Costa Rican barriers to Nicaraguan onions and Nicaraguan retaliation against Costa Rican dairy products or Costa Rican tariffs on Canadian french fries, have caused hard feelings and made trade integration more difficult. Peter Brennan, "Trade Unity Effort Falters in Central America," JOURNAL OF COMMERCE, May 31, 1995; Gustavo Gonzalez, "The Dangers of 'Hot' Capital," INTERPRESS SERVICE, May 24, 1995; Marcelo Jelen, "Trade-Latin America: Imports Predicted to Fall," INTERPRESS SERVICE, May 24, 1995; "Chile: Agricultural Sales to Emerging Markets Shoot Up," INTERPRESS SERVICE, May 29, 1995. _____________________________________________________ RESOURCES/EVENTS _____________________________________________________ "Assessing the Rural Reforms in Mexico, 1992-1995," a research workshop sponsored by the Ejido Reform Research Project of the Center for U.S.-Mexican Studies of the University of California, San Diego. August 25-26, 1995 at University of California, San Diego. For information, contact David Myhre at ejido@weber.ucsd.edu; Ejido Reform Research Project, Center for U.S.-Mexican Studies, University of California, San Diego Dept. 0510, 9500 Gilman Drive, La Jolla, CA 92093-0510. ___________________________________________ Produced by the Institute for Agriculture and Trade Policy, Mark Ritchie, President. Edited by Mary C. Turck. The NAFTA & Inter- American Trade Monitor is available free of charge to Econet and IATPNet subscribers. For information about fax or mail subscriptions, or other IATP publications, contact: The Institute for Agriculture and Trade Policy, 1313 5th Street SE, Suite 303, Minneapolis, MN 55414. Phone: 612-379-5980; fax: 612-379-5982; e-mail: iatp@iatp.org. For information about IATP's contract research services, contact Dale Wiehoff at 612-379-5980, or e-mail: dwiehoff@iatp.org