Distorting Markets in the Name of Free Trade

By Timothy Wise

For the last three months, business pages and farm media in the United States have been sounding the alarms about the Mexican government’s announced phaseout of imports of genetically modified (GM) corn. Mexican President Andrés Manuel López Obrador first reported the move in a December 2020 presidential decree, which immediately banned the cultivation of GM corn in Mexico and mandated the phaseout of GM corn imports and the importation and use of the herbicide glyphosate by January 31, 2024.

Mainstream U.S. farm organizations reacted immediately, calling on U.S. government officials to invoke the new biotechnology provisions in the newly revised U.S.-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement in July 2020. But the most recent alarm bells were prompted by an economic modeling study from consulting firm World Perspectives, Inc. (WPI) that claims to show catastrophic impacts of Mexico’s looming GM corn ban on U.S. and Canadian farmers and on Mexico’s own food security.

The media dutifully reported the story, with alarmist headlines and dire warnings to U.S. officials to stop Mexico from enacting the ban. “Mexico Threatens a Trade War with the U.S. and Canada,” read a Wall Street Journal headline. The Hill warned “Mexico moves closer to a devastating policy for US agricultural exports.” Farm-state legislators cited the study and demanded the U.S. government sue Mexico for trade violations.

Largely unreported was the fact that the original modeling was commissioned by CropLife International, the agrochemical industry trade association. And the March 2022 study was updated to reflect market turbulence caused by the Russia-Ukraine war on behalf of a self-described “coalition of leading food and agriculture industry stakeholders in both Mexico and the United States.” Those “stakeholders” include CropLife and comprise a Who’s Who of agribusiness interests in the U.S. and Mexico, all of whom have a strong economic interest in opposing Mexico’s proposed restrictions on GM corn.¹

The purpose of this study is to analyze the methodology and assumptions in the industry-sponsored modeling to determine whether researchers have inflated the estimates of the negative impacts of the proposed GM corn ban. Indeed, we find that the researchers overestimate the costs of the ban in both the U.S. and Mexico by:

• treating the January 2024 GM corn ban as sudden, even though it had been announced three years earlier;
• treating the ban’s deadline and scope as inflexible, even though the Mexican government has announced it will phase in the ban on feed corn;
• underestimating U.S. producers’ ability and willingness to respond to increasing demand for non-GM corn;
• ignoring the Mexican government’s funded effort to decrease import dependence by increasing its own corn production;
• overestimating the yield advantages of GM over non-GM corn;
• imputing high costs associated with segregating non-GM from GM corn in international supply chains.

Taken together, these flaws call into question the high cost estimates in the industry-sponsored modeling. Many U.S. corn producers have indicated a willingness and ability to increase production of non-GM corn. Given Mexico’s clear signal that it wants to buy non-GM corn and its willingness to procure it from U.S. farmers, the specter of a trade dispute is uncalled for. There is no discriminatory action against U.S. producers, just against GM corn from any country. A close textual reading of the USMCA’s biotechnology provisions by IATP’s former senior attorney documents that Mexico has the right to enact such a restriction based on legitimate science-based concerns about human health and the environment. U.S. farmers would be better served by taking the advance notice of Mexico’s interest in procuring non-GM corn and preparing to supply this important market for U.S. farm goods. In the process, they would also be giving U.S. consumers something market surveys indicate they desire: greater choice in the marketplace to purchase non-GM food products.

Background

The Mexican government’s stated reason for the presidential decree phasing out GM corn and glyphosate was to protect both the environment and public health. The environmental concerns relate to biodiversity loss and potential contamination of native corn varieties by pollen from GM corn. The health issues relate to glyphosate being a “probable human carcinogen,” according to the World Health Organization’s cancer institute, and to outstanding questions about the safety of GM corn, particularly since most is engineered to tolerate glyphosate applications. Traces of both transgenes from GM corn and glyphosate have been found in tortillas and other common corn-based staple foods in Mexico. In issuing the presidential decree, President López Obrador cited the country’s recognition of the precautionary principle, which asserts a higher standard of proof for product safety than is commonly used in the U.S.

The prohibition on the cultivation of GM corn was immediate, formalizing a suspension of permits for GM corn trials that had been ordered by Mexican courts in 2013 and affirmed by its Supreme Court last year. The decree also mandated that corn used in relatively unprocessed forms for direct human consumption, such as tortillas, not contain GM varieties. The phaseout of glyphosate and GM corn imports was issued with a three-year deadline for full enforcement in January 2024. The glyphosate phaseout is ongoing, with Mexico reporting a 50% decrease in the importation and use of the herbicide. The phaseout period is being employed by Mexico to develop safer alternatives to glyphosate, a process that is indeed generating less toxic forms of weed-control.

The announced phaseout of GM corn imports has thus far produced resistance rather than market development in the U.S. In part, that was due to a lack of clarity on the part of the Mexican government regarding the scope of the ban. One section of the government has stated that the ban would be all-encompassing, while another, led by Mexico’s Secretary of Agriculture, has sought to reassure U.S. officials that the ban applies only to corn for direct human consumption in low-processed foods such as corn dough (“masa”) and tortillas — generally white corn. But the ban would not extend to yellow dent corn, which is used primarily as animal feed and as a raw material for industrial products. Some 95% or more of U.S. corn exported to Mexico is yellow corn, nearly all of it GM corn. White corn exports have risen in the last two decades. There are conflicting reports about how much white corn the U.S. exports to Mexico and how much of that comes from GM varieties.

While such uncertainty over the scope of the restrictions may have delayed U.S. farmers’ efforts to increase non-GM corn production, President López Obrador recently clarified his government’s position. Mexico would stop allowing imports of GM corn for direct human consumption in January 2024, as announced. That action that would affect the relatively small number of U.S. farmers growing GM white corn, though they would still be permitted to export their corn for use in processed foods, animal feed and industrial uses. On GM yellow corn, he clarified that he would extend the deadline for the import phaseout to 2025, pending a joint review and a more thorough scientific assessment of the risks to human health and the environment of GM corn used in livestock and other sectors.

Though some uncertainty remains about the future of GM yellow corn exports to Mexico, the market signals from the government declaration are now quite clear. Mexico will not allow GM corn to be used in the production of minimally processed foods for direct human consumption, such as tortillas and tamales, from the U.S. or any other nation. Demand will increase for non-GM white corn, and at least for now, U.S. exports of GM white corn will be permitted but not allowed to be used in the “corn-tortilla chain.” And Mexico clearly prefers to buy non-GM yellow corn, with any outright ban postponed beyond the original January 2024 deadline but with reviews planned to consider further restrictions. In the meantime, Mexico will continue its efforts to increase production of non-GM white and yellow corn, which Mexican government officials state they hope will reduce the need for imported corn by half by 2024.

Damage estimates on growth hormones

As its sponsors hoped, the WPI modeling produced alarming economic damage estimates for the U.S.:

This study finds that the sudden shift to non-GM corn imports by Mexico would cause non-GM corn prices to increase sharply, peaking at 42 percent above baseline values. Conversely, GM corn prices would fall 10 percent over three years following the ban and these price changes would fundamentally alter crop acreage and the U.S. grain handling system. As the shock ripples through the U.S. economy, this study finds that GDP would contract by $30.55 billion, and $73.89 billion in economic output would be lost.

They were even more dramatic for Mexico, according to WPI researchers:

Over the 10-year forecast period, higher non-GM corn prices mean Mexico would pay $9.73 billion more to import corn than it would otherwise, an increase of 19 percent over baseline forecasts. Additionally, tortilla prices would increase sharply, peaking at 30 percent above baseline forecasts and averaging 16 percent higher over 10 years. Additionally, the Mexican livestock sector would see feed costs increase by 13.7 percent, on average, which would cause the industry to contract by 1.2 percent annually. The total impacts of added costs for consumers, costs to import grain, and the contraction in the livestock sector mean that a policy banning GM corn would cost Mexico’s economy 56,958 jobs annually, create a contraction in GDP of $11.72 billion and reduce economic output by $19.39 billion over 10 years.

While Mexico’s actions are intended to reduce potential harm to human health and the environment, the Crop Life-sponsored study is designed to magnify the social and economic harm from Mexico’s proposed GM corn ban. To achieve this, WPI modelers used a set of unrealistic assumptions about Mexico’s policies and the real farm economy. In their modeling, these operated like growth hormones genetically engineered to inflate estimates of economic damage. More realistic assumptions would dramatically reduce the estimates of economic disruption, price increases, lost output and rising food insecurity in Mexico. Here, we examine only the most questionable inflationary assumptions.

False Assumption #1: The ban will cover all GM corn imports. As noted, the Mexican government’s recent clarifications about the implementation of the phaseout of GM corn make clear that they do not now cover all GM corn imports. The government confirms that the phaseout is certain for GM white corn for direct human consumption, a small segment of U.S. production estimated at less than 5% of U.S. exports to Mexico. If even half of U.S. white corn production is GM corn, the impacts will be commensurately small, and those U.S. exports would still be permitted for uses outside the corn-tortilla chain. The clarification on yellow corn imports leaves open the possibility that Mexico will indeed ban GM yellow corn imports, but it undercuts one of the central assumptions in the industry model they will be prohibited in January 2024. That is relevant to the second flawed assumption.

False Assumption #2: Mexico’s ban on GM corn imports will take effect, without warning, in January 2024 and farmers and traders will have to scramble to adjust. WPI modelers remarkably treat the ban, long foretold, as a completely unanticipated economic shock. There are two key flaws in this assumption. First, farmers are getting plenty of warning. The decree was announced three years before the January 2024 deadline, and now that deadline is being extended for some varieties of corn. It does indeed take time for agricultural markets to adjust to changes in demand. More non-GM seeds need to be produced, for example, and traders need to establish segregated supply chains to ensure purity of non-GM content. But with clear market signals, markets adjust. That’s what markets do.

Second, we now know the January 2024 ban will not include GM yellow corn, even if it may thereafter. To the extent the ban will not initially affect the vast majority of U.S. corn exports, there is even more time to make that adjustment. There is every reason to believe the Mexican government would not enact a total ban even in 2025 but would phase in restrictions over time. Why? Because the economic shock might be too large, and markets need time to adjust.

This assumption is a key growth hormone in WPI’s economic model, which estimates costs over a 10-year period following the ban. Consider one of the key graphs in the model, which shows 50-60% price increases for non-GM corn in the first three years of the ban (Years 0, 1, 2).