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The impact of the U.S.-Mexico Free Trade Agreement on Texas cotton producers.

The Free Trade Agreement (FTA)--a proposal to eliminate most tariffs, duties, quotas, and nontariff trade barriers on trade between the United States and Mexico--would certainly affect the already sizable (about $5 billion in 1990) agricultural trade between the two countries. Mexico primarily imports dairy products, cattle, seed, meat, and grain from the United States and exports fresh vegetables, fruit, and feeder and stocker cattle. If the FTA passes, U.S. grain, corn, soybeans, and some fruit tree producers will benefit, while fresh vegetable and fruit producers, especially in Texas, could lose.(1)

But what about U.S., and specifically Texas, cotton? The FTA poses two concerns for domestic producers: 1) imported Mexican cotton could replace U.S. cotton on the U.S. market, and 2) imported Mexican textiles containing mostly foreign-grown cotton could displace American textiles containing mostly U.S. cotton on the U.S. market. Of these two concerns, the second is the more worrisome.

It seems doubtful that raw Mexican cotton will be able to penetrate the U.S. market. Although the cost of production in Mexico is about 40-80 percent of the Texas cost, the United States, with plentiful water resources, more diversified climates, better transportation infrastructure, and lower marketing and transportation costs has, overall, a more favorable situation.(2) Also, the prospect of raw Mexican cotton outperforming U.S. cotton in the U.S. market seems unlikely given that the United States outcompetes Mexico on the world's market. The United States remains the world's largest cotton exporter, accounting for 26 percent of all cotton exports, while Mexico accounts for less than 1 percent.(3)

On the other hand, the concern that changes in textile trade brought on by the FTA will reduce domestic demand for U.S. cotton seems valid. While U.S. cotton may be competitive on the world market, textiles manufactured in the United States are not. In 1990 the U.S. textile trade deficit was a record $23 billion.(4) U.S. textile imports contains, on average, about 20 percent U.S. cotton. Thus, as textile imports increase from Mexico, U.S. cotton would be displaced by foreign-grown cotton.

There seems to be a fairly broad consensus that the U.S. textile industry will be hurt by the FTA. Low Mexican wages, one tenth to one twentieth of American wages, and lax environmental standards give Mexican firms a competitive edge, making it likely that Mexican textiles will increase their penetration of the U.S. market. On the other hand, Mexicans probably will not be able to afford imported U.S. textiles for some time, so there is little prospect of the Mexican market compensating U.S. textile manufacturers, at least in the short run. Of the $333 million worth of U.S. textiles that Mexico imported in 1991, 94 percent was simply shipped to Mexico for assembly and then reimported to the United States.

Although the FTA may hurt cotton producers insofar as U.S. textiles are hurt, several factors may mitigate the damage to U.S. and Texas cotton ro wers. First, U.S. trade representatives argue that the FTA will make it economical for U.S. apparel firms to locate assembly plants in Mexico. Fabric will continue to be milled in the United States, which will keep U.S. textile mills competitive and the demand for U.S. cotton high. Second, because maquiladoras already provide U.S. manufacturers a free trade zone, the FTA will probably not prompt a sizable exodus of U.S. textile firms wanting to take advantage of cheap Mexican labor. Any capital-intensive textile industry resulting from the agreement will probably be a joint venture between U.S. and Mexican firms. Finally, Texas will be relatively insulated from the effects of reduced demand by U.S. mills because about 55 percent of cotton grown in the state is exported abroad.

So while U.S. textile manufacturers may have reason to be concerned about the FTA, it is unlikely that the agreement will severely disrupt the demand for Texas cotton. According to several sources, the FTA should not have much of a direct effect on U.S. and Texas cotton. --Mina Mohammadioun Senior Economist Bureau of Business Research, Jerry Olson Economist Olson Research, and Allen Blackman Former Research Associate Bureau of Business Research


1. Detailed discussion is presented in Mohammadioun, Olson, and Blackman, "The Impact of Trade Liberalization on Texas Cotton Producers," Working Paper 1992-2, Bureau of Business Research, University of Texas at Austin.

2. Meritt J. Taylor, The U.S.-Mexico Free Trade Agreement: Issues and Implications for the U.S. and Texas Cotton Industry (Texas A&M University: Texas Agricultural Market Research CEnter Report No. IM-6-91, 1991).

3. Edward H. Glade, "International Trade Flows of U.S. and Competing Cotton, 1986-87," Beltwide Cotton Conference Proceedings, 1988.

4. "Imports Continue at a High Level While U.S. Textile Apparel Shipments Drop," Cotton Digest International, February 1991, p. 18.

Texas Business Review is published six times a year (February, April, June, August, October, and December) by the Bureau of Business Research, Graduate School of Business, University of Texas at Austin. Texas Business Review is distributed free upon request.

The Bureau of Business Research serves as a primary source for economic and demographic data on the state of Texas. An integral part of UT Austin's Graduate School of Business, the Bureau is located on the sixth floor of the College of Business Administration building.


By the time this issue reaches you, the Natural Fibers Fact Book/1992 will be available from the Bureau. The first in a series of annual releases by the Natural Fibers Research and Information Center (NFRIC), the book contains 72 pages of current and historical statistics on Texas natural fibers production, quality, end uses, and trade. Data appear in tables as well as charts in this edition, which is $15 plus tax. For those preferring electronic access to statistics, NFRIC offers the same information, plus additional macroeconomic data, online (Natural Fibers Computerized Database/$75 per year). As an additional service, NFRIC now offers articles on current developments in the natural fibers industry through the Natural Fibers Electronic Newsletter ($35 for a year's subscription). For details, call (512) 471-1616 or write to the Bureau.
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Author:Mohammadioun, Mina; Olson, Jerry; Blackman, Allen
Publication:Texas Business Review
Article Type:Industry Overview
Date:Jun 1, 1992
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