After 16 Years Of Compliance, Florida-Mexican Tomato ‘Suspension’ Agreement Gets Challenged By Florida Growers Claiming Dumping Is Occurring: Is This Just Rent-Seeking?
Jim Prevor’s Perishable Pundit, September 6, 2012
The issue of “dumping” in fresh produce has been brought to the fore by the decision of Florida’s tomato growers to request that the U.S. Department of Commerce tear up the “suspension” agreement that established minimum reference prices for Mexican tomatoes sold in the United States.
When the request was made back in June, Reuters reported on the matter this way:
Reggie Brown, executive vice president of the Florida Tomato Exchange, told Reuters U.S. producers want the pact voided so they can file a new anti-dumping complaint against Mexico.
The rare request comes in a dispute that dates back to 1996, when U.S. industry filed a petition accusing Mexican producers of selling in the United States at unfairly low prices.
Brown said the Commerce Department found that Mexican producers were dumping their tomatoes in the United States at nearly 188.5 percent below fair market value.
The department later agreed to suspend action on the petition and negotiate a "suspension" agreement with Mexican producers and exporters that established a minimum reference price for Mexican tomatoes in the United States.
In following years, two more suspension agreements were negotiated to replace the original pact, but the reference price barely changed, Brown said.
In the meantime, U.S. tomato imports from Mexico nearly tripled in value to about $1.8 billion last year.
"Over this entire period U.S. growers have been the victims of gamesmanship and evasive actions by Mexican growers," Jimmy Grainger, president of the Florida Tomato Exchange, said in a statement.
"It's time to end the charade and restore fair prices that reflect market reality," he said.
The U.S. industry feels the best way to do that is to ask to withdraw its original petition and thereby terminate the current suspension agreement, so it can file a new case, Brown said.
The debate has been predictably fierce with most of the arguments against Florida’s position being well expressed in an op-ed in The Wall Street Journal written by Jim Kolbe, a former member of the House of Representatives from Arizona. The piece was titled, The Sunshine State’s Rotten Tomato Fight with Mexico:
In June, a group of Florida tomato growers filed documents with the U.S. government requesting withdrawal from a 1996 antidumping agreement that governs the sale of fresh tomatoes from Mexico. If the Obama administration goes along and kills the 16-year-old agreement, the president may win a few votes in a key swing state. But it would come at the cost of far higher prices for American consumers, the loss of U.S. jobs, and possibly a trade war with Mexico.
Florida growers have been trying to cut off Mexican imports for decades using a variety of actions designed to disrupt trade. The Florida Tomato Exchange, the special-interest group requesting withdrawal from the current agreement, filed several trade cases in the 1990s, including one in 1996 accusing Mexico of "dumping" their tomatoes in the U.S. at below market prices.
To avoid an all-out trade war and the unraveling of the North American Free Trade Agreement, the U.S. government and the Mexican tomato industry entered into an agreement suspending the antidumping investigation. Working within the framework permitted by U.S. law and NAFTA, the Mexican growers agreed to sell tomatoes in the American market above a minimum price calculated by the U.S. Commerce Department. In response, the department dropped the pursuit of punitive tariffs that surely would have increased prices and decreased consumer choice.
That choice is an important one, especially in this economy. The tomato industry in Mexico was started by U.S. investors after World War II for the purpose of providing fresh vegetables to American consumers during the winter. Most Florida tomatoes, however, are a "gas-green" variety — picked green and brought to a ripe "tomato" color with ethylene gas. Preferred by fast-food restaurants only because they can be sliced easily, the tomatoes are hard and fairly tasteless. The Mexican varieties are picked after ripening. American consumers have embraced the flavor and quality of these "vine-ripened" tomatoes and the wide variety Mexico produces.
Tariffs on Mexico's vine-ripened tomatoes would lead to price spikes in the U.S. as well as the loss of thousands of American jobs in the $3 billion fresh-produce industry. Among states hardest hit would be my own home state of Arizona, where most Mexican tomatoes enter the U.S., generating tens of millions in annual income for importers, distributors, warehouses, transportation companies and the like.
For its part, the Mexican government is not likely to sit idly by while the U.S. permits a special-interest group to cripple a Mexican industry that employs 350,000 workers. Mexico is a major export market for many U.S. industries, including agricultural giants such as pork, beef, poultry, grains and vegetable producers. They could be the target for retaliation that might follow from Florida's protectionist efforts.
Scores of businesses from Arizona and other states have expressed their strong opposition to terminating the tomato agreement with Mexico. Arizona Sens. John McCain and Jon Kyl, together with Reps. Jeff Flake, Paul Gosar and Ron Barber, recently sent an open letter to Acting Secretary of Commerce Rebecca M. Blank noting how this would have a "chilling effect" on agricultural trade with Mexico. Our neighbor to the south is the second-most important destination for U.S. exports overall just behind Canada, and a major disruption in agricultural trade is something American businesses can ill-afford.
Outside of the protectionist interests of Florida tomato growers, there is no reason for any of this to happen. The current antidumping agreement has worked well for 16 years. It has been renewed twice and its reference price adjusted when necessary. No violations have ever been found or even alleged.
For 16 years the U.S.-Mexico tomato agreement has fostered the spirit of NAFTA through legal mechanisms that have struck a delicate balance between the interests of U.S. producers and the broader U.S. public interest. As an Arizonan who has witnessed the many benefits provided by NAFTA, I urge the Obama administration to avoid any protectionist measure against Mexico's tomato growers.
All the specific arguments aside, it is hard to get too passionate on either side of this argument because, for better or worse, it is essentially a political power struggle. The reference price in the current suspension agreement is just a political compromise. It is no more the “right price” than the price that might come about if the agreement is renegotiated.
The root of the problem is that the law in this area was not designed with reference to fresh produce and the whole concept of “dumping” is really incoherent when applied to fresh produce.
Dumping is traditionally defined as either selling product for export cheaper than it is sold in the home country or selling product below the cost of production.
Much of the fresh produce grown in Mexico, though, as in other major produce exporting countries, is typically grown for the purpose of export to the US or other markets. So there simply is no domestic market for the vast quantities of, say, Chilean grapes grown in Chile. The product is sold around the world and in each market the product has to sell at the price that market will bear. So to compare prices in the US to prices in Chile or Mexico or South Africa is simply meaningless.
Equally, because these are perishable products, the cost of production is irrelevant to the market price. It is a simple matter of supply and demand.
Indeed, much imported product arrives on a commission sale basis, emphatically establishing that the producers have to accept the market price. This is not product one can warehouse until the price rises over replacement cost.
Still the anti-dumping laws apply to fresh produce and thus give the Florida growers a hammer with which to threaten the Mexicans and, thus, attempt to get a better price.
Economists call this “rent-seeking” which is an attempt to “obtain economic rent by manipulating the social or political environment in which economic activity occur.”
The problem for society, of course, is that much time, effort and money goes into rent-seeking and thus detracts from resources being invested in productive economic activity.
Should we blame the Florida tomato growers for trying to get the best deal for themselves? Should we blame the Mexican producers and those who handle their product for trying to defend their interests?
Of course not, but in this presidential election year, we might start looking at situations such as this, which really represent a society that has lost focus on producing wealth. Instead of fighting to produce the best product at the best price, brilliant people are fighting to have the government set up the rules so they will win. This problem is hardly limited to tomatoes, and it impoverishes us all.