Who Benefited More from the North American Free Trade Agreement: Small or Large Farmers? Evidence from Mexico

• Date: 01 August 2013
• Author: Silvia Prina
• Published date: 01 August 2013
• DOI: http://doi.org/10.1111/rode.12053

Who Benef‌ited More from the North American Free

Trade Agreement: Small or Large Farmers?

Evidence from Mexico

Silvia Prina*

Abstract

This paper measures the impact of increasing trade openness between Mexico and the USA resulting from

the North American Free Trade Agreement (NAFTA) on the income of small versus large farmers in

Mexico. Benef‌its resulting from higher prices of export goods as well as losses incurred from greater import

competition are considered. First, relating NAFTA cuts in trade restrictions to border prices of Mexican

exports and imports, it is found that NAFTA-induced tariff reductions decreased the border price of corn,

Mexico’s main agricultural import, and increased the border prices of tomatoes and melons, Mexico’s main

agricultural exports. Then, it is shown that the rise in fruit and vegetable prices benef‌ited small farmers

more than large farmers; while the drop in corn prices hurt large farmers more. Finally, the results from the

regional-level analysis suggests that the effects are stronger in the central states than in the northern and

southern states.

1. Introduction

Since the early 1990s, many countries have undergone signif‌icant trade liberalization.

Changes in a country’s exposure to international trade can generate substantial distri-

butional conf‌lict. Most studies on the distributional effects of trade liberalization have

focused on the labor market, using wages and skill premia as measures. However,

trade openness may also affect inequality through household production and con-

sumption. As highlighted by Rosenzweig (1988), household production is particularly

relevant in developing countries, where many individuals are not employed in the

formal market for wages, but, instead, work in their household business or on their

family farm.

This paper looks at the North American Free Trade Agreement (NAFTA) to study

the impact of trade liberalization on the distribution of farm incomes through house-

hold production. The date of 1 January 2008 marked the culmination of NAFTA’s

14-year transition to free trade between Mexico, the USA, and Canada. NAFTA

originated distributional concerns, above all in the agricultural sector. Agriculture

contributes about 10% to Mexico’s gross domestic product (GDP) and 22% of the

labor force is employed in this sector.

Ex ante is unclear how NAFTA would affect the distribution of farm incomes

via the production channel. On the one hand, a reduction of trade restrictions for

* Prina: Case Western Reserve University, Weatherhead School of Management, 11119 Bellf‌lower Road,

Room 273, Cleveland, OH 44106, USA. Tel: +1-216-368-0208; Fax: +1-216-368-5093; E-mail: silvia.prina@

case.edu. The author would like to thank Dilip Mookherjee for his continuous guidance and support.

Special thanks to Nava Ashraf and Margaret McMillan for sharing their data, and to Juan Carlos Torres of

the Instituto Nacional de Estadística y Geografía for tireless data assistance.

Review of Development Economics, 17(3), 594–608, 2013

DOI:10.1111/rode.12053

© 2013 John Wiley & Sons Ltd