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Friend or Foe?
Cross-border Trade in Arizona and Sonora

When the North American Free Trade Agreement (NAFTA) was implemented in 1994, it lowered import taxes, tariffs, and quotas between the United States and Mexico. But the agreement may also have raised concerns for agribusinesses in regions along the border. Would the freer trade regulations create new opportunities or intensify competition?

To answer this "friend or foe" question, AREC faculty Russell Tronstad and Satheesh Aradhyula are studying agribusiness in Arizona and Sonora. A 1997 survey of agribusiness leaders in the two neighboring states shows that the region is becoming more global, with enhanced opportunities for cross-border expansion.

"The idea was to see if perceptions were different on both sides of the border," Aradhyula says. The survey was part of the Strategic Economics Development Vision for the Arizona-Sonora Region, a binational project working to improve the region's position in the global economy.

The researchers worked closely with advisory committees in both states to develop survey questions and identify agribusiness leaders to participate in the study. "An effort was made to obtain a wide representation of the agribusiness industry in terms of both geographic location and commodity distribution," Tronstad explains.

An eight-page survey was sent to Arizona agribusiness leaders in the crop, livestock, food processing, and finance/marketing sectors. In Sonora, research staff from Centro de Investigacion en Alimentacion y Desarollo in Hermosillo and El Colegio de la Frontera Norte in Nogales conducted personal interviews. A total of 188 Arizona and Sonora individuals participated in the study.

Results from the survey show many businesses in the region already have cross-border links. In the crop sector, Sonora imports a wide range of agricultural inputs from Arizona, such as seed, equipment, machinery, and services. At the same time, Sonora exports fresh produce and a substantial labor force to Arizona, particularly Yuma.

These links are complementary, Tronstad notes, not competitive--both states benefit from the interaction. For example, Sonora exports feeder cattle to Arizona to take advantage of lower feed prices, while Arizona has a cost advantage in sending grain fed meat products back to Sonora.

Regionalized growing seasons also provide opportunities for cross-border business ventures. Some crops, such as watermelons, can be grown at different times in each state. "If we can produce early on and they produce later in the year, we have complementary production," Tronstad says. This allows some businesses to provide a year-round supply, while also reducing risks from disasters that may affect only one part of the region, such as weather or market shifts.

A majority of study participants expected trade to become more important in their future business dealings. Virtually all of the Arizona respondents indicated that Sonora and the rest of Mexico provide an expanding market for their business. Of the Sonora participants, 70 percent thought Arizona provides an expanding market, while 82 percent considered the rest of the United States a potential market for their business.

For the most part, participants did not view businesses in the other state as competition. The exception was Arizona crop producers, with 39 percent indicating Sonora is a business competitor. According to Tronstad, this is due to overlaps in the growing seasons for crops such as fresh grapes, citrus, and labor-intensive vegetables.

Both states may feel more pressure from the rest of the country. Approximately half of the Sonora crop and livestock participants felt competition from the rest of the United States. Tronstad notes that Arizona operations face stiff competition from states with established agribusiness sectors, such as California and Texas.

Another objective of the study was to identify areas that would enhance the global competitive position of the region. Participants were asked to evaluate varying ideas for strengthening the region's agribusiness industry.

Both Arizona and Sonora participants agreed that streamlining border crossings was the most important issue. "Delays and red tape at the border have been costly for agribusinesses moving perishable products and live cattle across the border," Tronstad says. Customs was the most common agency cited as causing costly delays.

Another mutual concern was the need for uniform standards and grading. Participants from both states believed that a USDA type of inspection and certification process is necessary for U.S. consumers to accept products from Mexico.

Improving Sonora's transportation and communication networks was another vital issue. "Capital investment for improving Sonora's transportation infrastructure and cooling facilities is necessary for Arizona-Sonora agribusiness to grow over the long run," Tronstad says.

Legal issues, such as contract enforcement and property ownership rights, were of concern to Arizona agribusinesses. "Loan default is a serious problem in Sonora," Tronstad explains. "Legal procedures are needed so that rights of ownership and property liens can be settled in a fair and timely manner."

A voluntary dispute settlement framework would alleviate many concerns and risks related to payment and other conflicts, Tronstad says. Currently, Sonora businesses shipping produce to the United States have protections under the Perishable Agricultural Commodities Act, but there is no equivalent for U.S. shippers sending produce to Mexico.

Establishment of a bilingual regional agricultural agency was ranked favorably by both sides. This type of agency could provide voluntary trade licenses and also disseminate information regarding current agriculture regulations. Individuals would lose their bond money and good standing with the agency if they did not fulfill all contracts made under established guidelines.

Tronstad and Aradhyula believe the survey results have raised awareness about problems in the region. They also feel cross-border trade would be enhanced by implementing the ideas highlighted by the survey. "I think the studies have pointed out some key areas that lawmakers can work on," Aradhyula says.

Full implementation of NAFTA will likely have an impact on the region, as well. Over 70 percent of the participants believe trade will be important to their business in the next five years, while 48 percent of Arizona and 69 percent of Sonora participants believe NAFTA will have a positive impact on profits.

"I think NAFTA is going to be a vehicle to overcome some of the issues that were identified," Tronstad says. "NAFTA is building more confidence in the ability to trade between two countries."

The researchers are conducting a follow-up study that quantifies factors influencing cross-border trade. "This study does not explain why some farms are doing business with Sonora and why others are not," Aradhyula says. "We want to go one step further. What could policy-makers do to develop cross-border links?"

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