Cheap Avocados, the Super Bowl XLIX, and Regulatory Reforms

Friday, February 20, 2015
Authors: 
Patrick McLaughlin

If you missed this commercial in the Super Bowl, it's official: Mexican avocados are on national television. But they could have stayed on the bench, but for the Free Trade Agreement with North America (TLC) and some actions by the Inspection Service Animal and Plant United States Department of Agriculture (APHIS, for its acronym in English), who eliminated trade barriers that had been present for decades. It is clear that these actions increased the welfare of American consumers, avocado growers in Mexico, and football fans in the country.

However, is a shame that this regulatory reform occurred only after NAFTA forced to do: federal regulatory agencies - as APHIS- are free to review and amend regulations, if changing its own rules will benefit consumers. This is as simple as reviewing the problem that the regulation seeks to correct. Does the problem still exists? Is there any evidence that the regulation it is solving? If the answer to either of these questions is no, it's time to change the rules.

In this case, regulating trade between Mexico avocado and the United States began in 1914. The argument for these trade barriers resided in controlling pests, although actors with special interests also played an important role. Based on the FTA in 1994, Mexican avocado growers naturally wanted to export their product to the United States. Despite the protests of farmers in California, trade barriers avocado were phased out. In 1997, avocados of selected Mexican producers were approved for sale in 31 states between October 15 and April 15, because it is less likely that pests survive the cold winter.

The Mexican government asked the Department of Agriculture to allow the importation of Mexican avocados permanently to the 50 states. At the same time, not coincidentally, the Mexican government enacted trade barriers for imports of maize from the United States. APHIS published a study on pest risk 2004 concluding that removing the barriers would not pose a risk, thus initiating the process of regulatory change. That same year, APHIS allowed export throughout the year to all states of the Mexican avocado from places where inspectors of the Department of Agriculture had a presence, although the producers of California, Hawaii and Florida had two-year grace period before the Mexican avocados were allowed in their markets.

Forecasts drastically underestimated the benefits of these changes. In the 2004 APHIS predicted avocado consumption would increase 9 percent due to these changes. However, rose consumption 147.1 percent in the last decade. APHIS also predicted that California producers suffer a loss 7.3 percent in sales. However, sales of California avocados increased 18.4 percent during the same period. The increase in demand for avocados benefit all producers, as consumers developed a taste for the product.

The initial prognosis for lower prices avocado was also wrong. APHIS predicted that prices would fall 20.6 percent. The reality is that avocado prices have remained relatively constant with very small fluctuations from year to year. Again, the law of supply and demand works. Remove barriers to trade dramatically increased the supply of Mexican avocados. Simultaneously, consumers increased their demand. If barriers had been kept – ie the offer we would have increased- This increase in demand would have caused an increase in prices. Regulatory reform helped neutralize the possible price increases.

Data Source: Hass Avocado Board

While US consumers have enjoyed relatively lower prices, Mexican farmers have also benefited. APHIS predicted that imports of Mexican avocados would increase 260 percent. However over the last decade consumption grew Mexican avocados 1377 percent. At the same time, there have been no major cases of pests associated with avocado since these restrictions were eliminated.

As a result, sales continue to rise and millions of American consumers are benefited. If more regulatory agencies consider reviewing the evidence and the results of its rules, could create similar benefits for other products and markets.

An Avocado Success Story

Monday, February 16, 2015
Authors: 
Patrick McLaughlin

You probably don't think about free trade when you dip a chip into some guacamole or bite into an avocado seasoned with just a little lemon juice and salt. But maybe you should. The avocado has become more common — and central to many Americans diets — due to flexible trade agreements and regulations. And in that story is a larger lesson for our economy.

Avocado consumption per person has risen nearly tenfold over the last four decades. But it could have easily remained a marginal fruit for Americans had it not been for the North American Free Trade Agreement of 1994 and some moves by the U.S. Agriculture Department's Animal and Plant Health Inspection Service that dismantled decades-old trade barriers. Today, it's clear that these actions increased the well-being of American consumers and Mexican avocado farmers.

It's a shame that this regulatory reform occurred only after NAFTA forced action. Federal regulatory agencies can always re-examine whether changing their own rules would help the public. This can be as simple as re-examining the problem that the regulation is supposed to fix. Does the problem still exist? Is there evidence that the regulation is alleviating it? If the answer to either of those is no, then it's time to modify the regulation.

In this case, the regulation of U.S.-Mexican avocado trade began in 1914. Pest control was the rationale for erecting these barriers to trade — although special interests likely played a role too. Following the passage of NAFTA in 1994, Mexican avocado farmers naturally wanted to export to the United States.

Despite protests by Californian producers, reform of U.S.-Mexican avocado trade barriers gradually proceeded. First, in 1997, avocados from select Mexican municipalities were approved for sale in 31 states between Oct. 15 and April 15, ostensibly because fruit flies are less likely to survive during colder months.

The Mexican government then requested that the Agriculture Department's inspection service allow year-round avocado importation to all 50 states. Not coincidentally, the Mexican government began erecting barriers to corn imports from the United States.

The inspection service published a pest risk assessment in 2004 concluding that removing the existing trade barriers wouldn't pose a pest threat, paving the way for further regulatory reform. Subsequently, the service allowed year-round export to all states of avocados from approved Mexican municipalities where U.S. Agriculture Department inspectors are present — although domestic producers in Florida, California and Hawaii had two years to adjust before the Mexican avocados were let into their markets.

Forecasts at the time drastically understated the actual benefits of this rule. In 2004, the inspection agency predicted that avocado consumption would rise 9 percent due to these changes. In fact, consumption has risen by 147.1 percent in the last decade. The service also predicted that Californian producers would suffer a 7.3 percent decline in sales. In fact, sales of Californian avocados rose 18.4 percent during the same time. Increased demand for avocados helped, as domestic consumers developed a taste for guacamole and as the health benefits of avocados were more widely realized.

The expected reduction in avocado prices was also off the mark. The inspection service predicted prices for American consumers would fall by 20.6 percent. In fact, avocado prices have remained relatively constant. Again, the forces of supply and demand are at play.

The removal of trade barriers dramatically increased the supply of Mexican avocados. Yet simultaneously, consumers demanded more and more of the fruit. Had the pre-2004 status quo remained — that is, had supply not increased — the increased demand for avocados would have caused prices to increase. Regulatory reform helped neutralize the price increases that higher demand alone would have caused.

While American consumers enjoyed more avocados at relatively inexpensive prices, Mexican farmers also benefitted. The inspection agency first estimated that Mexican avocado imports would increase by 260 percent, but during the last decade consumption of Mexican avocados rose by 1,377 percent. Moreover, there have been no notable cases of avocado-related pest infestation since the 2004 reform.

Because of these regulatory reforms, sales continue to rise, prices remain relatively low, and millions of people are better off. Over the next few years, broader free trade partnerships with Asian countries and with the European Union will likely arise. Will we have to wait for those partnerships to force agencies to re-examine the justification and results of their regulations in order to achieve similar benefits? We shouldn't have to.