Editor’s note: The following was written by Ian Sheldon, Seungki Lee and Chris Zoller with the Ohio State University for the University of Illinois farmdoc daily website April 7.
The recent announcement by the Office of the U.S. Trade Representative that it was requesting technical consultations with Mexico under the Sanitary and Phytosanitary Measures Chapter of the United States- Mexico-Canada Agreement (USMCA), is the latest step in the ongoing dispute over Mexican efforts to ban imports of genetically modified corn.
The dispute has its origins in a decree issued by Mexico President Andrés Manuel López Obrador on Dec. 31, 2020, calling for GM corn for human consumption to be phased out by the end of January 2024.
Not surprisingly, given Mexico is the second-largest export market for U.S. corn totaling $4.792 billion in 2022, with about 17 million metric tons of yellow corn crossing the border annually, the original decree ratcheted up trade tensions between the two countries. Following U.S. pressure, Mexico scrapped the 2024 deadline banning GM corn for animal feed and industrial use on Feb.13 of this year, a while retaining the ban on its use for human consumption.
Despite these changes, the recent move by USTR is essentially the first step in the process by which the USMCA dispute settlement mechanism is triggered, once other efforts/mechanisms to resolve the issue have failed — specifically, in its response to a letter from USTR, Mexico did not “… allay U.S. concerns with Mexico’s measures concerning [genetically engineered] GE corn. …Therefore, the United States does not consider that further use of other mechanisms would resolve the matter,” Ambassador Katherine Tai, USTR, said March 6.
Like the World Trade Organization, USMCA has a defined legal process by which trade disputes involving its member countries are to be settled. Once other procedures have been exhausted, technical consultations are the first stage of the process, with USTR appealing to Chapter 9 of the USMCA addressing SPS measures, “… These measures may adversely affect U.S. trade with Mexico and appear to be inconsistent with Mexico’s commitments under the Sanitary and Phytosanitary (SPS) Measures chapter of USMCA,” the USTR stated.
Substantively, USTR is arguing that in seeking to implement its regime on GM corn imports, Mexico is violating its commitment to ensure any SPS measures are “based on relevant scientific principles” (Article 9.6.6(b)) and an “approval procedure that requires a risk assessment” (Article 9.6.4 (a)). Therefore, the United States and Mexico should meet with “the aim of resolving the matter cooperatively” (Article 9.19.3).
If this fails, under Chapter 31 of the USMCA concerning dispute settlement, the United States can seek establishment of an independent panel to investigate and rule on Mexico’s measures relating to GM corn, which, once constituted, would be expected to present its initial report within 150 days.
After a further period of 60 days, allowing for country comments and finalization of the report, the report would be made public.
Assuming the panel rules against Mexico, resolution of the dispute should then occur within 45 days, with Mexico either removing its GM corn measures, providing compensation to the United States, or provision of some other remedy.
If Mexico fails to implement the panel ruling, the United States would be allowed to suspend trade benefits with Mexico equivalent to the damage caused by the latter’s GM corn measures, most likely in the form of a tariff(s) against specific Mexican products.
In thinking about how a USMCA panel might rule, it is important to note the chapter on SPS measures draws heavily on the approach applied in the WTO’s own SPS Agreement, the definitions contained in the latter being incorporated into the USMCA chapter on SPS measures. Therefore, while the United States is not expected to file a complaint against Mexico under WTO rules, it seems reasonable to argue the 2006 WTO ruling in favor of the United States against the European Union’s regulation of GM crops would likely influence any USMCA ruling.
The WTO panel found the safeguard measures implemented by six EU member states against the import of specific GM crops were not based on a risk assessment as required under the WTO’s SPS Agreement.
In other words, a USMCA panel is very likely to find for the United States against Mexico on the grounds that Mexico has not applied scientific principles and appropriate risk assessment in seeking to ban the import of GM corn.
Implications for the U.S. corn
The direct economic impact of not resolving this dispute on the U.S. corn market would likely vary across U.S. states, depending on the proportion of their exports going to Mexico. In particular, given the small proportion of white corn in U.S. corn exports to Mexico, many states can be expected to see a limited effect of the dispute in the short term.
However, the top six states in corn exports to Mexico — Illinois, Louisiana, Iowa, Kansas, Nebraska and Missouri — would likely be influenced considerably by this event.
The heterogeneity in Mexico’s corn import share between U.S. states lends support to this prediction. For instance, over the last two years, Mexico accounted for more than 70% of corn exports from Illinois, compared to only 2% of corn from Ohio (another major corn-producing state but not in the top six corn exporting states to Mexico) being exported to Mexico.
In the longer term, two broader factors could result in substantial indirect impacts on U.S. farmers. First, there would likely be a “ripple” effect as additional supplies are diverted to the domestic market, driving down corn prices. As a result, U.S. corn farmers would likely see increased risk of a squeeze on their margins.
Second, and more broadly, if this dispute is not resolved in favor of the United States, it would introduce considerable regulatory uncertainty, with the potential of undermining the stable operation of commodity markets. This could increase the cost of any risk management measures such as hedging and options, placing further financial strain on U.S. grain producers.
The dispute between the United States and Mexico over the latter country’s proposed ban on imports of GM corn for human consumption has reached the point where the United States has made an initial step towards seeking a panel ruling through the dispute settlement mechanism of USMCA. If a panel investigation goes ahead, our expectation is that it will rule in favor of the United States.
Crucially, ending the dispute matters to U.S. farmers from states that have significant corn exports to Mexico, as well as to other farmers whose margins would likely come under significant pressure if the ban is enforced. This is also a major test for the SPS Chapter of USMCA to which the United States, Mexico and Canada have all signed up.
