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NAFTA and South Dakota - a five year analysis.

Back in August 1992, (the late) Governor George Mickelson called NAFTA (North American Free Trade Agreement) "tremendous news for South Dakota exporters," predicting that "it will likely make Mexico our third or fourth largest trading partner." As of last year, at least according to federal data, our closest Latin American neighbor has become South Dakota's second most important export market, accounting for almost $60 million worth of goods and commodities. (See tables 1 and 2.) The nation which remains the Mt. Rushmore state's most important foreign trading partner is Canada, purchasing indeed more than three times (above $195 million) as many South Dakota exports as did Mexico. (See tables 1 and 3.)

It should be noted that NAFTA, which became effective at the beginning of 1994, was preceded by the U.S. - Canada Free Trade Agreement (FTA) which had gone into effect in 1989 and which obviously had boosted trade between these NAFTA member nations. Trade between the U.S. and Mexico had also experienced prior growth due to the Maquiladoras Agreement of 1964. Under this agreement, U.S. parts and components could be exported to Mexican plants (many of which were owned by U.S. firms) located in a corridor along the U.S. border without being subject to any Mexican import duties. The resulting finished products were permitted to enter the U.S. with only the added value (in the form of low cost Mexican labor) being subject to U.S. import duties. It should be pointed out that the Maquiladoras program was so successful that it not only brought thousands of new plants to Mexico, but also created its second most important source of foreign exchange (mainly in the form of U.S. dollars).

Trade

How important is the NAFTA market to South Dakota? The Canadian market by itself is responsible for almost twice the South Dakota exports which went to all of the fifteen member nations of the European Union (formerly known as European Community) in 1998. It should also be noted that more than 100 South Dakota firms export to Canada while at least 50 firms export to Mexico. In terms of manufactured goods, industrial machinery and computer equipment are the most important exports to both Canada and Mexico. And while for obvious reasons most firms decline to release their sales figures, it is known that both Gateway in North Sioux City and Hutchinson Technology in Sioux Falls are responsible for at least some of these exports.
Table 1

South Dakota's Top 20
Export Markets in 1998

Country Name Dollars Exported

Canada $195,376,983

Mexico 59,523,161
United Kingdom 29,383,308
Germany 26,257,781
Ireland 21,205,455
Japan 19,235,247
Thailand 17,731,068
Malaysia 14,807,537
Hong kong 14,653,136
China (Taiwan) 9,458,146
Netherlands 6,899,170
Australia 5,752,819
Singapore 5,062,673

France 4,745,724
China (Mainland) 4,487,831
Italy 3,964,840
Venezuela 3,091,214
Brazil 2,300,392
Israel 1,916,762
Bermuda 1,909,336

Source: Massachusetts Institute for Social & Economic Research
(MISER), University of Massachusetts, Amherst.


A firm which has made no secret of its exports to Canada is Daktronics of Brookings. In addition to supplying Olympic and winter games throughout the world, it is right now involved in two large projects in Winnipeg, the capital of Manitoba, for the upcoming Pan American Games there. At the same time it is also installing a large baseball scoring and video display system for the Winnipeg Goldeyes minor league baseball team. Another South Dakota firm well known for its international involvement is Trail King of Mitchell. Back in 1995 it exported close to $3.5 million worth of equipment to Canada. Sales to our neighbor to the north have declined for the Mitchell firm since that time above all due to the lower value of the Canadian dollar. Trail King has also been exporting to Mexico and indeed maintains a small facility in that country employing about 22 people. A relatively newcomer to South Dakota, Polaris Industries, has reported annual Canadian exports of up to $30 million out of its Vermillion facility. However, it also supplies the Mexican market, but obviously not with its well known snowmobiles.

It is perhaps of interest to also take note of the fact that major foreign companies operating in South Dakota are also on record for exporting to both Canada and Mexico. One of these is CR Industries of Springfield, a subsidiary of the world famous SKF Ball Bearing firm of Sweden. It produces automotive, industrial and agricultural sealing devices and employs more than 200 people. Another is Behr Heat Transfer Systems in Canton. A member of the German Behr Group, it manufactures mainly cooling and ventilation systems for the automotive markets throughout NAFTA, employing more than 300 people in the Canton area. CCL Label Company, a Canadian enterprise, with a staff of about 430 in Sioux Falls, reported exports of about $2 million to Canada and $4.5 million to all of Latin America. The Mexican share was not available.

In regard to agricultural exports, it is quite difficult to analyze how South Dakota is performing. Most commodities are traded by large multinational corporations such as Cargill of Minneapolis and Mitsui of Seattle, which are not required to keep track of which state's grain is exported to which country. The export data provided by the U.S. Department of Agriculture is based on each state's total production. This means that if South Dakota would produce 10 percent of the total U.S. wheat, it would also be credited with ten percent of the total U.S. wheat exports. Nevertheless, there is some evidence that South Dakota grain exports to Mexico have indeed been increasing. At least the Vermillion branch manager of Cargill, Mr. Paul Geraets, did not seem surprised when called by this researcher. As proof he reported that he was getting ready to ship a third train load of grain to Mexico very soon. It is the third train load of the season! DuWayne Bauman, Merchandising Manager at the new South Dakota Soybean Processors in Volga went so far as to claim that by now Canada represented 40 percent of his plant's soybean meal market.

It is also known that several South Dakota meat processors export to both Canada and Mexico. Jim Mitchell of Federal Beef South in Rapid City reported weekly shipments to Canada of over 40,000 pounds and up to twice as much to Mexico. Roy Anderson of Cimpl Meats (Yankton) reported that while shipments to Canada had declined due to high value of the U.S. dollar, shipments to Mexico continue to be strong. Joel Stevenson, the international sales manager of John Morrell pointed out that NAFTA had indeed [TABULAR DATA FOR TABLE 2 OMITTED] boosted sales to Mexico with up to five truck loads going there every week from both the Sioux Falls and Sioux City (Iowa) plants, mainly in the form of variety meats. He too suggested that the high U.S. dollar value made it more difficult to sell in Canada, but that weekly shipments continued to take place. He pointed out that it was no secret than ten percent of everything his firm produces is being exported throughout the world.

For the United States as a whole, agricultural exports to the nation's NAFTA partners has increased between 1993 (the year before NAFTA came into being) and 1998 more than twice as much (8.1 percent annually) compared to the rest of the world (3.8 percent). Grains and feeds exports have increased the most (10.4 percent annually), followed by oilseeds and products (9.6 percent annually). Animal and animal products exports grew by 6.3 percent a year over the same time period. However, as the United States Department of Agriculture has also pointed out, a number of NAFTA agricultural imports have increased as well. These include animals and animal products (4.9 percent annually) and grains, products and feeds (11.1 percent annually). But considering that the U.S. and Canada share a long border, it should not come as a surprise that what Canada might export in the western part to both the U.S. and Mexico, might be imported in the eastern part of Canada from the United States. And as has been seen in the case of South Dakota, while several firms import live animals from Canada, they do export some of the processed meat to the same country.

Investments

Since the establishment of NAFTA in 1994 there is only one instance in which South Dakota jobs apparently were transferred to another NAFTA nation. On April 24, 1998 the Associated Press reported that Sheldahl of Aberdeen was going to move its dashboard circuitry division to Mexico to be closer to its customers (automobile manufacturers). Forty percent of its workforce of 150 was going to be eliminated in Aberdeen.

As was mentioned earlier, Trail King of Mitchell does maintain a facility, employing 22, in Mexico. Midcom (based in Watertown) maintains a plant in Ciudad, Sonora (Mexico), where it employs "roughly 400 direct laborers, and 25 indirects" according to the firm's Mexican operations manager Thomas Remley. He also pointed out that a second manufacturing facility at Nogales (near the border) has been closed [TABULAR DATA FOR TABLE 3 OMITTED] as of March 1998. Another Watertown firm, Minnesota Rubber, and an unnamed firm in Yankton are also known to have plants in Mexico.

On the other hand, as can be seen from the investment list, there are a fair number of Canadian investments located in South Dakota. There are no known Mexican investments in the Mt. Rushmore state.

It should be noted that a much greater loss or export of area jobs took place prior to the establishment of NAFTA. In May of 1988 for example, the small community of Erwin lost 100 of its 104 jobs there when Maxi-Switch Company shifted its operation to Mexico. In July of 1979 Zenith closed its Sioux City (Iowa) plant in a similar move, eliminating about 1,500 jobs, many of which were held by South Dakotans. Most likely the Maquiladoras Agreement of 1964 made this measure attractive for these firms.

Tourism

Although tourism is not part of the NAFTA Agreement, it should be noted that Canada has always been the most important source of foreign tourists for South Dakota. In 1997 107,700 Canadians were reported to have visited South Dakota, spending an estimated $17 million in the state. Last year South Dakota spent $77,000 in Canada in the hope of attracting even more visitors from the north. Nevertheless, due to the unfavorable exchange rate, the number of Canadians visiting South-Dakota has sharply declined according to Bill Honerkamp of the Black Hills, Badlands and Lake Association. The Mt. Rushmore state does not appear to be an important destination for Mexican tourists.

Analysis and Conclusions

Perhaps the first question which most observers of South Dakota's role in NAFTA would tend to raise would deal with the 1998 South Dakota/Canada Trade War under which the state's governor tried to prevent the import of Canadian meat and grain. Stopping trucks at the North Dakota border resulted in headlines both in Canada and throughout the United States. To be sure, there were plenty of South Dakota farmers who voiced their support for this measure. After all, they were experiencing record low prices for both livestock and many grains. However, at the same time, questions were raised whether the banning of Canadian agricultural imports would do much to solve the U.S. farm crisis. And while at the present time the Canadians might enjoy an agricultural trade surplus with the United States, they have faced deficits in the past. In addition, as was mentioned earlier, the value of the Canadian dollar has experienced a considerable decline, making exporting to the United States that much more attractive. Canadian farmers also pointed out that due to political pressure from the United Sates transport subsidies to ocean ports had to be eliminated. This too made it more attractive to ship their products to the much closer markets right across the borders in the United States.

It should be pointed out that it is known that at least one South Dakota agricultural export was hurt by the trade war. DuWayne Bauman of South Dakota Soybean Processors in Volga reported about loss of business as Canadian purchasers switched to Minnesota suppliers. And it should be rather obvious that meat processors such as Federal Beef South in Rapid City and John Morrell & Co. in Sioux Falls would take a dim view of having a governor tell them where they can purchase their livestock. It could make South Dakota a less attractive location for other agricultural "value added" firms. But even future manufacturers, such as Sweden's SKF and Germany's Behr Group, both of which have plants here right now supplying the NAFTA market, would not want to be located in a state which closes its borders every so often, and perhaps especially during election years (as was suggested by several executives this researcher talked to).

Has NAFTA made a significant difference to the economy of South Dakota? It does not appear so. Most of the trade restrictions between Canada and the United States had already been reduced or eliminated under the U.S.-Canada Free Trade Agreement of 1989. And it is important to keep in mind that even at that time South Dakota farming interests tried to keep Canadian agricultural products out of the state. Indeed as far back as 1985, South Dakota's governor banned the import of Canadian pigs, ostensibly for health reasons.

NAFTA does seem to have boosted South Dakota's exports to Mexico significantly during the past two years. But it seems too early to come to any lasting conclusions. There are some suggestions that exports to Mexico might have declined more in 1995, after the Mexican Peso virtually collapsed, if it would not have been for the NAFTA Agreement.

But in general, South Dakota's international involvement appears to be growing due to the increasing globalization observed throughout the world. This has become a fact of life from the smallest farm to the largest city.

South Dakota Firms with Canadian Affiliations

Aberdeen

Aberdeen Machine Tool, Inc. Osthus Funeral Home

Deadwood/Lead

Brohm Mining Co. Golden Reward LAC Minerals (USA) Inc. Richmond Hill Mine Terry Peak Wharf Resources

Humboldt

N-rich Plant Food, Inc.

Madison

PPD USA, Inc.

Mobridge

Real-Tuff, Inc.

North Sioux City

Interbake Food, Inc.

Rapid City Emergicare Hi-Qual Manufacturing

Sioux Falls

CCL Label, Modern Press Pure Plant Food

North Eastern South Dakota

Soo Line (Canadian Pacific)

Statewide

Hardees

Above information compiled by author.

The author wishes to acknowledge, and express his appreciation for assistance provided by the South Dakota International Business Institute, the Montana State University Trade Research Center and the United States Department of Agriculture.

About the author: Benno Wymar is professor of economics at the School of Business, University of South Dakota, and has been teaching and writing about South Dakota and International Economics for more than 30 years.
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Copyright 1999 Gale, Cengage Learning. All rights reserved.

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Title Annotation:North American Free Trade Agreement
Author:Wymar, Benno
Publication:South Dakota Business Review
Date:Jun 1, 1999
Words:2525
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