Reprinted from the Journul offorestry, Vol. 95, No. 7, July 1997. Not for further reproduction.

T h e E f f e c t s o f

NAFTA E x p a n s i o n o n

By Jeffrey I? Prestemon

26 July 1997

W hen Mexico began liberal-izing its domestic marketand foreign trade a decade

ago, the US government hoped US ex-porters would gain easier access to thenation’s third most important foreignmarket, after Japan and Canada. Hav-ing just completed a free trade accordwith Canada, US trade officials soughtto solidify changes in Mexico and cwcourage further economic reform bynegotiating the North American FreeTrade Agreement (NAFTA). Similareconomic and political motivations arebehind current US government interestin adding other countries to NAFTA orestablishing XI Americas-wide freetrade area. Latin American leaders havethemselves expressed a desire to create aregional free trade area by 2005.

If new countries join NAFTA or ifhemispheric free trade is accomplishedin another way, among the new signa-tories might be relatively large produc-ers and consumers of forest products-a prospect that should draw the atten-tion of US forest products manufac-turers and consumers. Some (Zobeland Kellison 1984; Anonymous 19%)have suggested that growth in the for-est sectors of Latin American countriesmight raise competitive pressures on

North American forest products pro-ducers. Others have simply indicatedthe region’s potential for substantiallyincreased forest products output (e.g.,Nah~lz 1988; J&tvez et al. 1989a).

No research, however, has beenpublished on how NAFTA expansionto include other major forest productsproducers would affect competition.Given the current structure of trade inthe Americas and the existing COII-

straints to trade in forest products be-tween the United States and the othercountries, how would expansion ofNAFTA change the situation?

Existing TradeThe United States, Canada, and

Mexico have long had much closereconomic ties with each other thanwith any other nation in Latin Amer-ica and the Caribbean, for the simplereason that the three North Americancountries share borders and have rela-tively large economies. The Canada-US accord and NAFTA further ce-mented these economic links. Al-though trade between NAFTA coun-

tries and the other Latin American-Caribbean countries has expanded at arate similar to world trade expansion,significant trade barriers still exist.

The Lat in American-Caribbeancountries are neither primary marketsfor US exports nor major sources ofimports. For example, not countingMexico, the region as a whole ac-counted for less merchandise tradethan Mexico alone in 1994: Mexico’sshare was 10 percent of merchandiseexports and 7 percent of merchandiseimports, and the remaining countries’shares were 8 percent and G percent,respectively (IMF 1995). The USeconomy is so much larger than thoseof the other countries, however, thattrade dependence is correspondinglylarge. Practically every country southof our border counts the United Statesas a primary destination for exports ofmerchandise and the most importantsource of imports.

‘Ii-ade in forest products betweenthe United States and the Latin Amer-ican-Caribbean countr ies fol lowsclosely the pattern of overall merchan-dise trade, but imports of forest prod-ucts are declining relative to exports offorest products. South America hasbeen a net forest products exporters i n c e 197~) cf;R, I). In 1964 S o u t hAmerican nations exported $229 mil-lion in forest products and imported

U S F o r e s t P r o d u c t s E x p o r t s

$560 million (I 980 constant dollars),for net impor ts worth $331 mil l ion(FAO 1965). In 19’93 South Americanexports were $2,084 million and im-ports were $987 million (1980 con-stant dol lars) , making net export,-$1,097 million. This $1.43 billionturnaround from net importer to netexporter correlated with rapid growthin wood-processing capacity and withexpansion of indigenous and planta-tion forests, especially in Brazil andChile (FAO 1995; Cubbage et al.1996). But Caribbean countries con-tinue to import wood products, anddespite South America’s rising net ex-ports, the real value of forest productsimports in South America has grownby two thirds since 1965.

‘l‘h c pattern of forest products tradebetween the United States and theLatin Alnericali~Caribbearl countriesreflects the composite of geographicaland economic differences amongt h e m . Yk/irhkf> I shows that only theCaribbean purchases substantialamounts of wood products, most inthe form of southern pine lumber andplywood. Excluding Mexico, the re-gion actually sold more wood products

to the United States in 1994 than itpurchased. But trade is still limitedc o m p a r e d w i t h t r a d e a m o n g t h eUnited States, Canada, and Mexico.Transportation costs help limit NorthAmerican trade with South America,since wood products have a low price-to-transport cost rat io (Jklvez Caa-maiio 1988), and thus the region as awhole accounts for less than 2 percentof a11 wood products exports.

Market pulp and wastepaper ex-ports from the United States to the re-gion end up mostly in South America.‘l‘hcse countries have substantia! pa-permaking capacity but have specificwood fiber needs that are met throughimports from North America (tlzblr 2,p. 28). Uut exports to the region arestill less than 5 percent of total exportsof US market pulp and wastepaper.

Compared with wood and fiber,paper and paperboard exports to the re-gion are more important to US produc-ers. Major trade ties in paper and pa-perboard (t&e 3, p. 28) primarily re-flect size of economies. The countriesmost important to US paper exportersin the region are in Central America,followed by Andean countries, South-

Figure I. Net exports of forest products (millions of constant dollars) from SouthAmerica, 1964-l 993. SOURCE: FAO (I 965,1976,1986,1995).

Table 1. Value of US trade inwood products, 1994, in thou-sands of dollars.

Country Imports Exports

Southern ConeArgentina $ 303 $ 566Brazil 136,110Chile 121,187Paraguay 1,938Uruguay 525

Total 260,063

AndesBolivia 31,315Colombia 275Ecuador 4,876Peru 8,239Venezuela 331

Total 45,036

Central AmericaBelize 666Costa Rica 600El Salvador 0Guatemala 2,793Honduras 8,251Panama 322

Total 11,966

CaribbeanAntigua 0Barbados 0Dominica 0Dominican Republic 0Jamaica 149Saint Lucia 0Trinidad and Tobago 61

Total 210

Latin American-Caribbeanregion 317,275

NAFTACanada 6,283,872

33597157669

2,517

2151,944

1313,2691,770

7,329

110I,608

531907103

1,541

4,6904,690

3,2128,2791,057

47,36324,786

3,2257,010

94,932

109,468

804,244Mexico 180,785 226,227~ ___

Total 6,464,657 1,030,471

Ail othercountries 288,080 4,413,752

World total $7,070,012 $5,553,691

SOURCE : United Nations (I 996).

Journal of Forestry 27

Table 2. Value of US trade in pulpand wastepaper, 1994, in thou-sands of dollars.Country Imports Exports

Southern ConeArgent ina $ 0 $ 26,962

26,2002,820

01,488

57,470

Brazil 256,498Chile 16,883Paraguay 0Uruguay 0

Total 273,381

AndesBolivia 0Colombia 0Ecuador 0Peru 0Venezuela 0

Total D

Central AmericaBelize 0Costa Rica 0El Salvador 0Guatemala 0Honduras 0Panama 0

Total 7

CaribbeanAntigua 0Barbados 0Dominica 0Dominican Republic 0Jamaica 0Saint Lucia 0Trinidad and Tobago 0

Total X

Latin American-Caribbeanregion 273,381

NAFTACanada 2,102,242Mexico 2,509

Total 2,104,751

65012,4262,6881,063

65,831

82,658

03,5412,5582,342

7943,249

12,484

0609

0288246

02,068

3,211

155,823

357,299386.944

744,243

All othercountries 75,045 2,892,896

World total $2,453,177 $3,792,962

SOURCE: United Nations (1996). SOURCE: United Nations (1996).

ern Cone countries, and the Caribbean. countries, particularly in theThe Latin American-Caribbean coun- Car ibbean (UN 1996) . E,xpandingtries import more US paper and paper- NAFTA to include these and otherboard than Mexico and nearly 15 per- countries would effect changes incent of our export production. Canadian exports.

Canadian exports to the region arenearly as great as those from theUnited States. Canada is a more in-portant supplier of exports to Brazil(US$l 17 m i l l i o n i n 1 9 9 4 ) a n dV e n e z u e l a (US$34 million) and isnearly as important for several other

Tariffs Today and Tomorrow‘I‘he current import tariffs charged

by potential NAFTA members on USforest products (trrhle 4) reflect broadregional and recent trade liberalizationand contrast with the protectionist

Table 3. Value of US trade inpaper and paperboard, 1994, inthousands of dollars.Country Imports Exports

Southern ConeArgentina $ 2,114 $ 32,508Brazil 91,738Chile 4,064Paraguay 0Uruguay 1,106

Total 99,022

AndesBolivia 0Colombia 3,439Ecuador 0Peru 0Venezuela 16,541

Total 19,980

Central AmericaBelize 0Costa Rica 0El Salvador 0Guatemala 0Honduras 0Panama 119

Total 119

CaribbeanAntigua 0Barbados 0Dominica 0Dominican Republic 0Jamaica 0Saint Lucia 0Trinidad and Tobago 0

Total -k

Latin American-Caribbeanregion 119,121

NARA

86,87542,658

1651 , 4 1 9

163,625

49169,81180,47423,232

2 8 , 7 2 9

202,737

99093,89332,49451,19836,39248.660

262,637

3303,213

93543,24622,2273,110

10,640

83,701

712,700

Canada 6,216,660 1,277,323Mexico 67,701 587,119___ -

Total 6,284,361 1,864,442

All othercountries 2,062,847 2,830,133

=Work-l total $8,466,329 $5‘407,275

policies of the 1360s and 1970s. Acrossthe region, Chile was among the firstto reduce tariffs, beginning in the mid-1970s. Most other countries have re-duced barriers to imports from bothwithin and outside the region in thelast 10 years. By 1393 most countrieshad average tariff levels below 20 per-cent on their US forest products im-ports (US ITC 1992). Joining NAFTAwould require reducing the remainingtariffs to zero over some specified pe-riod. In fact, some countries, notablyJamaica, have recently eliminated in-port tariffs on major US forest prod-ucts, including lumber and plywood.Tariff reductions would increase USexports to the region in proportion tothe size of the tariff currently collectedby the importing country. The UnitedStates, in contrast, usually applies smallor no charges on forest products im-ports (US ITC 1996), so changes inUS imports from these countrieswould probably be small.

One issue for US forest productsproducers is potential competitionwith Chile. Although Chilean produc-tion costs are low (Jelvez et al. 1989b;Cubbage et al. 1996), Chile and theUnited States now barely compete inNorth and South American forestproducts markets. The primary mar-kets of contention between them areAsia and western Europe (FAO 1995).The more important sources of im-ports to the United States are Canadaand Mexico. In 1993 Canada ac-counted for 80 percent of the totalvalue of US forest products imports,whereas Chile accounted for less than1 percent (FAO 1995). Currently,Chile applies 11 percent tariffs on allforest products imports. Thus, whilethe Chilean forest products industry isin a state of rapid industrial growth(JClvez et al. 1989a), tariff reductionson imports might moderate Chileanexport growth.

Although many countries in the re-gion import only small amounts ofmost categories of forest products fromthe United States, further tariff reduc-tions from NAFTA expansion might beviewed as a way to preserve or limit re-ductions in market shares rather than

28 July 1997

Table 4.1993 imports of US forest products, by selected Latin American-Caribbean countries, current tariffs,other charges, and effects of tariff elimination on these imports.

CountryImport

quantity’

Import value’(thousandsof dollars)

Soufhern pine lumber(cubic meters)AntiguaBarbadosDominican RepublicJamaicaSaint LuciaTrinidad and Tobago

Southern pine plywood(cubic meters)AntiguaDominican RepublicJamaicaSaint LuciaTrinidad and Tobago

Waste and scrap paper(metric tons)BrazilColombiaCosta RicaGuatemalaf-iondurasVenezuela

Coniferous sulfate pulp(metric tons)ArgentinaBrazilColombiaCosta RicaEcuadorTrinidad and TobagoVenezuela

Hardwood sulfate poip(metric tons)

BrazilVenezuela

Dissolving puips(metric tons)Brazil

Newsprint(metric tons)ArgentinaBrazilChileColombiaCosta RicaEcuadorEl SalvadorGuatemalaPanamaPeruVenezuela

6,894 $ 1,804 15% 5.5% 5% 10% 19%20,658 6,078 20 0 6 13 26

165,737 35,405 15 9.5 5 9 1968,781 16,668 0 15 0 0 0

7,220 1,897 15 2 5 10 2015,950 3,427 0 15 0 0 0

2,683 1,006 15 5.5 4 8 1715,114 4,349 20 9.5 5 11 217,556 2,602 0 15 0 0 06,807 2,057 15 2 4 9 174,749 2,912 0 15 0 0 0

22,267 1,244 4 0 1 3 517,443 2,614 15 10 4 8 1610,164 1,994 9 1 3 5 1112,640 1,762 10 11 3 5 112,331 1,338 5 8.5 1 3 6

177,539 21,114 5 12.5 1 3 6

32,969 17,694 15 0 5 10 1914,835 6,559 4 0 I 3 611,827 6,308 5 IO 2 3 65,051 2,422 9 I 3 6 121,848 1,020 5 10 2 3 62,489 1,421 0 15 0 0 0

38,460 17,480 20 12.5 6 11 22

4,666 1,388 4 029,953 9,740 0 12.5

20

40

6,634 5,650 4 0 2 4

17,814 6,493 15 03,618 2,048 6 03,087 2,625 11 09,444 4,651 5 102,735 1,266 5 17,426 3,614 0 1

11,468 5,332 1 137,495 3,281 5 11

10,250 5,483 10 IO9,261 4,550 15 189,021 3,925 15 12.5

10

1

42311001334

9 384 167 293 133 140 01 33 136 248 338 34

-

Low Medium HighOther import elasticitv3 elasticity 3 elasticity 3

charoe? chanae- change changeTariff 2

‘United States Department of Commerce (1994).‘Individual country tariff schedules. Sources are available from the author.31mport demand elasticities were obtained from Buongiorno (1978), Hassan and Wisdom (1983), Prestemon and Buongiorno (1993, 1996), and aschosen by the author.

Journal of Forcstrv 29

increase them (Baldwin 1993). Thismay be particularly important as LatinAmerican-Caribbean nations continueto lower trade barriers among thern-selves through their own free trade ac-cords. The Uruguay round of tariff re-ductions under the General Agreementon Tariffs and Trade will also reducetrade barriers more within the region

30 July 1997

than between it and the United States(Barbier 1995), which might place fur-ther downward pressure on the UnitedStates’ marker shares in those countries.

Estimating the EffectsTo est imate how expansion of

NAFTA could influence trade in spe-cific North American forest prod-

ucts, in addition to the estimates oncertain sectors (e.g., ValdCs 1995), aneconomic model of forest productsmarkets (Olechowski 1987) was usedto calculate the effects on US exportscaused by perceived changes in pricesof products from the United States.Although US export prices wouldnot be expected to change signift-cantly under increased demand be-cause these countries consume suchsmall shares, the pr ices that con-sumers of these imports would paywould go down because of the tariffreductions @g. 2).

By definition, this technique doesnot account for the possibility that im-port demand might also shift or ex-plain how other changes in US orLatin American-Caribbean economiesmight cause further movements ofboth supply and demand. It does,however, provide a first approximationof the net effects of NAFTA tariff re-ductions on most of the forest prod-ucts currently exported. The estima-tion procedure required data on the cx-isting quantities of the most importantforest products exported to each coun-try, existing tariffs and other chargesapplied by each country on each cate-gory of forest product analyzed, and arange of estimates regarding the re-sponsiveness of forest products importdemands to changes in import prices(t1zhle 4).

The economic model estimates thenet effects of reducing ad valorem tar-iff; on six of the most important cate-gories of forest products imported intothese countries from the United Statesin 1993. To be analyzed, exports toeach country in each category had tohave exceeded $1 million that year. In1393 these products included southernpine lumber, southern pine plywood,coniferous and hardwood bleached sul-fate pulp, dissolving grades of woodpulp, scrap and wastepaper and paper-board, and newsprint. Other forestproducts imported from rhe UnitedStates were, country by country andproduct by product, not as economi-cally significant, although in aggregatethey may have summed to significantlevels.

Results and DiscussionTable 4 describes the effects of elim-

inating the tariffs. The predictions oftrade changes were based on a range ofelasticities of import demand to pricechanges for these products. Assumingmedium-level sensitivities to pricechanges through tariff elimination, thecountries would increase their importsof these selected products from theUnited States by less than 6 percent,totaling approximately $13 million.

The increases in US forest productsexports would be relatively small be-cause of the limited importance ofthese countries as importers, but theincreases would vary by country andproduct and depend on price sensitiv-ity of import demand and on the cur-rent tariff applied to imports from theUnited States. Potential effects ofNAFTA not explicitly modeled in thisanalysis included (1) changes in outputof forest products consumers, (2) econ-omywide effects of NAFTA accession,(3) subst i tut ion within expansioncountries between domestic and im-ported US forest products, includingcompetition between softwood andhardwood pulps, and (4) effects ofNAFTA enlargement on trade amongthe expansion countries.

NAFTA-induced output changescould be influential in driving importdemands. For example, if the subjectcountries’ imports of bleached conifer-ous sulfate pulp were as strongly sensi-t ive to domest ic paper output asPrestemon and Buongiorno (196) es-timated for Mexico, then import quan-tities could increase by 5 percent foreach 1 percent of NAFTA-inducedpaper output increase. Applying thisresponse level to the coniferous sulfatepulp imports of th e primary importers,if output in those countries were to ex-pand by 5 percent as a result of joiningNAFTA, demand for the US productwould increase by an additional 25percent, or about $13 million.

NAFTA membership could alsoforce currency realignments. Exchangerates depend on, among other things,the level of production, investment,and consumption in each economy.Increased demand for imports caused

by lower tariffs would put downwardpressure on the domestic currency,thereby dampening the effects of tariffreductions. Similarly, increased foreigninvestment would probably be par-tially channeled to some exporting in-dustries, increasing domestic produc-tion and leading to long-run decline inthe exchange rate. On the other hand,higher foreign investment wouldstrengthen the domestic currency,thereby driving up import demand stillfurther. Clearly, many forces would in-teract to determine the new exchangerate equilibrium, s o t h e final post-NAFTA currency equilibrium is im-possible to predict.

Finally, the resulting rises in de-mand for forest products by major im-porters (especially in South America)after tariff reductions could be partiallymet by other NAFTA members, espe-cially Canada. Although countries donot produce identical two-by-fours orthe same grade of bleached sulfatepulp, many producing countries makeproducts that are somewhat substi-tutable for US products. Initial pre-dicted increases, indicated in table 4 ,might therefore be too high, particu-larly for newsprint and pulp, where UScompetition with Canada is substan-tial. But the degree of substitutabilityamong suppliers is an empirical ques-tion that remains unanswered by thisresearch.

Although the broader effects oftrade integration (output changes, cur-rency realignments, substitution) areunknown, this research provides in-sights into the order of magnitude ofeffects that tariff reductions wouldhave on purchases of US forest prod-ucts that are already exported to LatinAmerican-Caribbean countries. Re-sults show that US exporters wouldgain only a few million dollars in extraexports from an expanded NAFTA,even one that included every LatinAmerican and Caribbean country. AndUS export increases would be smallcompared with existing trade withCanada and Mexico.

Viewed from the perspective of theLatin American-Caribbean countries(and individual supplying firms from

Price

I I

MT 4 Import quantity

Figure Z.The equilibrium import de-mand,with and without an import tar-iff (f) applied to the imported forestproduct under perfectly elastic foreignsupply (SF). Here, P, is the price perunit paid by importers when a tariff ischarged, and PF is the price paid whenno tariff is charged.The response byimporters from an elimination of thetariff is to import more product, mov-ing from Mrto MF’ The elimination ofthe tariff is modeled as a movementalong the import demand curve,from

point A to point B.

the United States), however, accessionwould be more important because theagreement would increase domesticcompetition between imported USproducts and regional substitutes. Thisincreased competition would havelosers and gainers. The principal losersfrom NAFTA membership would beproducers of lumber and plywood inthe Dominican Republic; makers ofsulfate pulp in Venezuela, Argentina,Colombia, and Brazil; and producersof newsprint in much of the region.The gainers from free trade would beconsumers of these products, includingthe construction industries of theCaribbean and the printing and pub-lishing industries of Central and SouthAmerica. m

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/efiey i? Prestemon is economist, USDAForest Service, Forest Sciences Laboratory,Southern Research Station, 3041 Corn-wallis Road, Research Ziangle Pa’ark, NC27709.

32 July 1997