Endogenous Protection In The Mexican Corn And Sorghum Market

Trade relations between the United States (U.S) and Mexico are increasingly interrelated and important ever since the ratification of NAFTA in 1994. With the advent of NAFTA, tariffs on many agricultural products were lowered or are in the process of being lowered. Mexico implements a tariff-rate quota for corn which is to be phased out by 2009. This quota is divided among the various Mexican corn importers with "cupos", which are import permits. Import permits are administrative trade barriers that can be defined as any obstacle that appears and disappears as market conditions change. It is widely recognized in the literature that administrative trade barriers create numerous obstacles to the international exchange of agricultural products. In this paper a conceptual structural model of international marketing margins and trade uncertainty is specified that links the private market to political factors influencing administrative trade barriers. In doing so, this systematically links trade models specified by Gallagher (1998) and others, which characterize private markets under uncertainty but ignore direct influences from political markets, to work by Trefler (1993) and others, which focus on endogenous trade protection. The general objective of this study is to increase the understanding of the impact of institutional aspects on agricultural trade. The specific objectives are to quantify the impact of import permits for white and yellow corn on international marketing margins between the U.S. and Mexico for white corn, yellow corn, and sorghum, as well as approximate the impact of changing political market variables on total welfare. Conceptually understanding the underlying processes and estimating empirical relationships for these objectives leads to important insights into the effect of the Mexican government's policy of allocating corn import permits have on the price and quantity of corn and sorghum. A complete structural model of white corn, yellow corn, and sorghum is specified, wherein import demand equations are generalized to incorporate simultaneous variables of trade protection (Trefler 1993) and then estimated with a simultaneous tobit estimator. The results provide interesting insights into the way that import permits work in Mexico. Interestingly, generalizing the import demand equations to account for trade protection dramatically alters international marketing margins for white corn and sorghum in a manner consistent with findings in Trefler. However, yellow corn appears unaffected. Further, political and industry interests driving trade protection in Mexico are found to influence import demand. For example, political pressure from corn and sorghum producers has a negative affect on the import demand for corn and sorghum. These results are consistent with other conjectures and findings in public choice analysis, which indicate that increases in import penetration will increase lobbying efforts from domestic firms to decrease imports. These results indicate that as grain producers lobby for a decrease in import permit allocations the import demand for these grains decreases, meaning that they have succeeded in their efforts to reduce import competition. In all, these insights provide the means to better understand how subtle trade barriers affect the trade flow between countries.