Price and trade relationships in the Mexico-U.S. fresh tomato market

Abstract

Tomato trade between the U.S. and Mexico has grown significantly during the past decade. Although the tariff reductions accorded under NAFTA may explain part of this increase, there are other supply and demand factors that affect trade flows. Similarly, increased consolidation and major structural change in the U.S. produce marketing channels took place over the last decade. This study examines the behavior of the U.S. fresh tomato market for imports during 1990's under three approaches. First, a descriptive analysis of the current situation and trends of the U.S.-Mexico fresh tomato market is developed. Second, through an U.S.-Mexico tomato trade model, with special focus on the interdependence between trading costs and volume of Mexican imports, the significance of the economic factors that affect trade flows is examined. Third, through an extended parity bounds model that follows the work of Barrett and Li, tests for market integration and market equilibrium between Mexican and American markets as well as between regional domestic markets are conducted. Findings show that the trading sector and its behavior are playing a key role in the competitiveness of this market and that industrial organization trends, together with trends in the U.S.-Mexico marketing sector, may be more influential than tariff reductions in explaining the increased trade flows. Similarly, findings show that although markets present a propensity towards high tradability, there exists some potential for claims of inefficient or overly competitive behavior. The more complex the marketing channels between producer and wholesaler (as indicated by distance, international jurisdictional boundaries or structure of market channels), the more likely that markets operate suboptimally.