When Kansas and Colorado have a quarrel over the water in the Arkansas River, they don’t call out the National Guard in each state and declare war over it. They bring a suit in the Supreme Court of the United States and abide by the decision. There isn’t a reason in the world why we can’t do that internationally.
— Harry Truman, 1945
Harry Truman was right on a lot of things. Unfortunately Harry Truman was wrong on this. There are lots of reasons that different countries and the traders in different countries are unable or unwilling to submit their disputes to some kind of binding judgment— notably a lack of faith in any particular institution and a lack of ability to enforce judgments.
With all the rage being about things ‘local,’ we might as well think about global trade as something that begins close to home— specifically with the North American Free Trade Agreement — NAFTA — and thus trade between Canada, the US and Mexico.
The vision of a unified market sometimes runs into resistance from specific players who win or lose based on various trade rules. That is what the current dispute between Florida and Mexican tomato industries represents.
Sometimes, though, we fall short of the vision because we lack the institutions to facilitate trade. Within the US, we have a reasonably clear set of rules, relatively inexpensive procedures for resolving disputes, acceptably respected experts, such as inspectors, to make factual statements and the ability to deny licenses and enforce judgments. Much of this process is established via USDA inspectors and the rules of the Perishable Agricultural Commodities Act or PACA.
The lack of such institutions for international trade reduces the volume of trade because it increases transaction costs. If you feel when you sell to a particular country that you will have difficulty getting paid and that it will be difficult or impossible to enforce your rights via the existing legal structure, then you will either refuse to trade or demand large profits to compensate for these difficulties. This reduces the volume of trade and means that society does not get the benefits inherent to trade.
So those who seek to minimize transactions costs do God’s work.
The challenges are formidable. First, you need an agreed-upon set of rules — when can things be rejected, what is the penalty for delivering product that does not meet contract terms, etc. Second, you need an agreed-upon referee of the facts — akin to a USDA inspector, but this must be someone acceptable to all sides of the transaction. Third, you need a referee mechanism, such as a court or PACA-complaint process. Fourth, you need a way to enforce any decisions made, such as the ability to rescind a license with that having the real effect of putting someone out of business. Finally, you have to do all this at an acceptably low cost — so that these resolution techniques are actually viable options for traders.
It is not easy. But a concerted effort has been made. The Fruit & Vegetable Dispute Resolution Corporation is specifically designed to address these issues among NAFTA countries. Some progress has been made, but much needs to be done.
An important focus at The New York Produce Show and Conference is to reach out to the great centers of learning of the region and help those institutions fulfill their missions to disseminate knowledge. Cornell University is a Charter Member of the event’s University Exchange Program, by which we pay to bring students and faculty to New York to interact with the industry so we can learn from each other.
When we learned that Miguel Gómez had done important research in this area, we quickly invited him to do a presentation at the Global Trade Symposium, an event co-located with The New York Produce Show and Conference. Thrilled that he accepted, we quickly asked Pundit Investigatorand Special Projects Editor Mira Slott to find out more:
Ruth and William Morgan Assistant Professor
Dyson School of Applied Economics and Management
Ithaca, New York
Q: It is exciting that you are coming back to share your latest research at the upcoming New York Produce Show and Conference. You captivated attendees at the inaugural show, brandishing a new hypothesis of ‘local’ based on performance of local and mainstream supply chains; and then again in 2011, broaching development of an East Coast broccoli industry. This year, in addition to moderating a panel on December 5th, you will be presenting at the Second Annual Global Trade Symposium. The Symposium program last year won stellar reviews. What will your talk encompass this year?
A: Recently, I completed an analysis for the USDA Agriculture Marketing Service (AMS), working with Bob Keeney, who just stepped down as AMS Deputy Administrator, about the origins and evolution of the Fruit & Vegetable Dispute Resolution Corporation (FVDRC). I will discuss the findings and the challenges ahead to develop a truly NAFTA-wide transparent and efficient dispute resolution mechanism. Following my presentation, I will moderate a panel discussion, which will include Bob Keeney and several other participants addressing both how to minimize risk while trading within NAFTA today and the way dispute resolution within NAFTA should evolve in the years to come.
Q: What sparked the study?
A: The FVDRC is a private entity. Its mission is to harmonize trade standards to avoid or resolve disputes in a timely and cost effective manner. The Agriculture Marketing Service of USDA commissioned this study to me through a Cornell cooperative agreement. The objective was to document the origins and evolution of the Dispute Resolution Corp. (DRC) from 1996 when discussions started for its creation until 2011.
[Editor’s note: you can read the full final report here.]
A: This is important because private resolution is unique. In most of the world, with most products, disputes must be resolved via expensive litigation — the idea behind the DRC was to reduce transaction risks by reducing the cost, increasing the expertise and certainly dispute resolution. DRC’s history hasn’t been documented before. We wanted to explore actions that transpired and lessons to be learned for government and industry.
Everything started when NAFTA was signed in 1994, which has had tremendous implications for trade between Canada, the U.S. and Mexico. One of the most profound changes relates to agriculture and, in particular, the fruit and vegetable trade, a segment where trading really picked up after NAFTA.
Q: Have you tracked trade movement and annual growth rates in imports and exports between countries to provide greater perspective on this transformation?
A: Yes. We are able to assess trade export value for each country by charting numbers provided by USDA’s Foreign Agriculture Service; exports from U.S. to Mexico and Canada, exports from Canada to the U.S. and Mexico and exports from Mexico to Canada and the U.S. The numbers are incredible — in some instances growing by five times since 1994. Trade in general, both imports and exports, has been wonderful because the fruit and vegetable markets in North America are becoming fully integrated in terms of prices and flows of product. This transformation has featured a rapid increase in trade, but also a lot of trans-border investments in fresh and processed fruit and vegetable capacity.
Q: What is the downside? Have government infrastructures and import/export systems been able to keep pace with this growth?
A: As trade increases, we are negotiating more, and problems intensify because we are trading products that are perishable. The quality of a tomato shipped in Mexico may be very different to the quality of the same tomato when it arrives to the Montréal terminal market in Canada. Quality can deteriorate during transit. So as trade increased, it also increased potential for commercial disputes on product quality, payment, timely reimbursement, delivery, maybe a breech of contract, and other related issues.
Without a system to thwart commercial disputes, the increased trade stimulated by NAFTA could be reversed, defeating all the progress that has been made. Companies will start avoiding exports if they are worried about not getting paid. It creates mistrust. There is a need to have a mechanism to resolve disputes in a transparent and effective way.
Q: Haven’t there been significant differences within and between countries for facilitating resolutions and seeking legal recourse? For example, in the U.S., doesn’t PACA already create mechanisms for companies to address trading problems?
A: If we go back to 1996 and 1997, when fruit and vegetable trade started to pick up in these regions, each country had very different systems to resolve disputes. In the U.S., we have PACA, which has been very successful in resolving disputes in the United States for many, many years.
Then there was the Canadian Board of Arbitration, the regulatory system in Canada that proved to be very ineffective in resolving payment issues. In Mexico, there was basically an absence of a formal system, no dispute settlement mechanism. Problems were either not resolved or handled between the companies. Mexico didn’t have an inspection capacity either. It didn’t have any structure for an inspection service; it was basically non-existent.
Q: It sounds like the stage was set for a cross-border mechanism to alleviate trading problems. Did the impetus for FVDRC stem from issues emanating within Canada and Mexico?
A: The concern was that U.S. exporters to Mexico wouldn’t get protection as they did with PACA, and U.S. companies weren’t protected selling to Canadian buyers. The Canadian regulatory system was a mess. Both buyers and sellers weren’t protected. It went both ways. In the U.S. now, sellers are protected by PACA if there is a dispute.
If you are a Mexican exporter selling to a U.S. company, the Mexican exporter is protected through PACA and so is a Canadian exporter. It’s always been like that.
So you have variant systems in the three countries, and it becomes obvious to anticipate more trade disputes. The produce industry in the three countries, as well as their governments, began to envision a unified system that would avoid or resolve disputes. That is how the Fruit and Vegetable Dispute Resolution Corporation was formed.
Q: Wouldn’t the internal systematic and structural issues within Canada and Mexico create major obstacles? Could you discuss the evolutionary process?
A: I want to emphasize the key role of the produce industry, particularly in the U.S. and Canada, in creation of the FVDRC. Canada was desperately in need of reforming its system. Leaders saw they had a rotten system. This FVDRC would not only help them with trade issues but also help with their domestic issues. For the U.S, there was general agreement PACA had been successful for years, so why reinvent the wheel? There was consensus to extend the PACA model. The U.S. needed protection when exporting to Canada and Mexico.
Q: You point to Canada and the U.S. pushing the initiative. What was Mexico’s position at this time?
A: For Mexico it was different. The motivation for the Mexican produce industry was not that clear. Most exports were to the U.S., and companies were already protected by PACA. At that time, there was very little direct export from Mexico to Canada. Product was sold first to the U.S. and then resold to Canada. In Mexico, there was no inspection system, no resolution structure. Within Mexico, companies resolved disputes internally. There wasn’t motivation for involvement. This is still an issue today.
It’s voluntary to become a member of the DRC, and Mexico still has very few members. If you want to be protected you pay an annual fee. The fee is around $600, which is very reasonable when you compare the potential consequences of not being protected during a dispute. [Editor’s note: See membership composition here.]
Q: Wouldn’t that interest change as Mexican companies increase trade with Canada?
A: There is more trade today and more direct exports and direct relationships with retailers in Canada now, but in Mexico, the business culture is different. Companies are not used to using formal mediation to solve disputes. It’s an issue of business culture and lack of infrastructure inspection services. The businesses don’t have the inspection system set up. It’s more complicated because they have to change their infrastructure.
Q: Are there actions being taken to do that?
A: In DRC’s creation, the U.S. and Canadian produce industries and governments focused on mechanisms that eliminated trade irritants and disputes. The business model was based on the PACA system and moved ahead with two main purposes. It was expected to solve domestic disputes within Canada, and second to encourage institutional development and infrastructure for dispute resolution in Mexico.
Q: Transforming a country’s infrastructure and cultural mores seems quite a costly and challenging endeavor. What specific measures, financial investments and resources have been allotted to implement a meaningful change?
A: There were concerted efforts. USDA agencies went to Mexico to show how PACA worked and provide technical assistance from 1996 through 1999. The U.S. and Canadian governments, as well as the produce industry, did a lot to try to develop that infrastructure and improve inspection systems. The U.S. and Canadian governments both provided financial support and personnel. Many U.S. companies got involved in training. Yet, problems still remain.
Q: Do you see those efforts as futile? Where do we go from here? When you make your presentation at the New York Produce Show and Conference, will you be able to leave attendees with some proactive steps to move the process forward?
A: I’ll summarize some of the achievements and failures, and look to the developments and future. After documenting the origins, I did a complete report on the accomplishments and hurdles that need to be overcome.
Q: I imagine the solutions must consider many players within the entire supply chain… How does that work?
A: The DRC has been developed in a multifaceted way. It involves many players including growers, wholesalers, transport companies, and retailers. DRC is valuable to certain, but not all, produce sectors. Some are very happy and some are not. The happiest of all are Canadians.
A: Because Canadians have realized the most salient success with DRC. It is better for the produce trade within Canada. DRC also resolved domestic programs in Canada. In Canada, you are required to have a license like PACA through the Canadian Food Inspection Agency or through a DRC membership. Most Canadian companies chose DRC because it provides a cost effective and timely resolution of commercial disputes. They have a nice system very similar to what PACA does here.
Canadian firms embraced DRC because it resembled the PACA system. In addition, the Canadian government took an aggressive stand in working very closely with all members of the supply chain from the smallest fruit and vegetable growers to the largest companies to keep DRC strong. It realized the necessity of catering to members to provide value.
All the groups within the supply chain have access to the same services with parallel protections of PACA.
Q: Who’s not happy?
A: The ones that are not very happy are those very interested in exporting to Mexico. The Mexican government still doesn’t require a license. DRC membership is not mandatory in Mexico, and therefore exporters to Mexico are not protected. Even though the USDA and Canada spent a lot of money trying to build infrastructure, it has not paid off.
There are a small number of Mexican firms that are DRC members. In 2011, the DRC had over 1,300 members, and from Mexico there were only 23. U.S. membership accounts for about 360, while Canada makes up the large majority with approximately 1,000 members. It’s their sweet spot.
If a U.S. firm is selling in the U.S., it doesn’t need DRC. I’m sure those 360 members are very engaged with Canada. The problem with Mexico is there is no enforcement. If you’re a Mexican wholesaler importing apples, you don’t have to be part of a licensing system.
Q: Is there real opportunity to actually grow the export market to Mexico?
A: Yes, definitely for products like stone fruit, apples and oranges. If Mexico has an infrastructure for inspection and companies embrace it, there’s a good market to export to Mexico. U.S. exports to Mexico have increased. If you look at the top U.S. produce exports to Mexico, apples are Number One and have multiplied by four times, tomatoes have increased from essentially $0 in 2005 to $50 million in 2009, and pears have more then doubled.
The whole market is underutilized. Most U.S. exporters don’t want to export because they view it as too risky. This is a hurdle. It’s good to have a dispute resolution system that is formal and will boost members. But also the Mexican government has to invest in the infrastructure.
One of the big failures in Mexico was how the government handled membership incentives. In 2004, the Mexican government decided to subsidize the membership, paying for the Mexican firms to join the DRC.
Q: Wouldn’t that jumpstart enthusiasm?
A: But it’s unsustainable. They subsidized companies initially, but the incentive was superficial without addressing the underlying issues. In 2004, Mexican membership picked up to 211, and then dropped dramatically when it wasn’t subsided anymore.
DRC needs to figure out how to provide value to Mexican firms and for government to invest in the necessary systems.
DRC has been very successful with Mexican companies exporting to Canada. They definitely embrace the DRC. They are trying to communicate the benefits to the Mexican sector. The Canadian government was very receptive to its companies’ needs. They quickly realized it was good for commercial relations not to have to go to court. When you have this collective support, it is easier to go to the Mexican government and encourage infrastructure investment.
Q: Your presentation will be a part of our Global Trade Symposium. How do trade disputes between U.S. produce industry sectors and Mexico impact development of initiatives like the DRC?
A: I think things are changing in Mexico, but it doesn’t help when you have these Florida tomato trade disputes. The Florida dispute is terrible. It damages the trust in the industry. If you have any trade irritant, it just hurts future initiatives and overall relationships.
Formal trade dispute mechanisms can boost trade and help the industry. The story in Canada has shown success, and the U.S. system works, but we are still missing the opportunity of a regional harmonized system.
The problem is a policy issue. There are many in Mexico who believe this is a very important system to have. But there is a political case that needs to be made for infrastructure and training, an inspection process at shipping points to check the grades and quality standards…
Q: When was your study completed and what feedback have you received?
A: It’s been about six months, and feedback has been positive. I’ve been invited to talk about these issues in Mexico and the U.S. It is important for the industry to have a cost effective strategy. In the long run, we want to be efficient. With DRC, most of the disputes are related to quality of product and related payments.
Q: How successful has the DRC been in alleviating trade problems? Do you have statistics?
A: The DRC success rate is impressive. It involves formal and informal mediation. Eighty-five percent of disputes are resolved before moving to the arbitration stage of the process. [Editor’s note: you can read more about the resolution process here.]
In discussing the challenges, we need to remember to put out the positive messages. By 2010, DRC resolved over 1,300 disputes. The value is about $35 million. Think of these 1,300 disputes going to court or not being resolved.
Q: Do you have any additional thoughts to share with our readers in anticipation of your presentation?
A: It is important to share the benefits of belonging to one system collectively in the produce industry. You must look beyond what is good for your own business to what the industry needs to optimize commercial trade.
Reducing transaction costs and making this work is crucial to expanding trade. Following the presentation by Professor Gómez, we are putting together a terrific respondent panel, to help the trade move this process to the next level and to help today’s traders navigate the perilous waters that exist today. We will be announcing members of that panel soon.
Come hear the panel and Professor Gómez in person by registering here for The Global Trade Symposium and The New York Produce Show and Conference.
Spouse/Companion program registrations are available here.
You can get travel discounts here… and discounted hotel rooms here.
We still have a few opportunities to exhibit and sponsor events available. If you would like more information, please let us know here.
With the event taking place December 4-6, 2012, New York is a magical place this time of year, with the tree up in Rockefeller Center, the Rockettes kicking their heels at Radio City Music Hall and the shop windows on Fifth Avenue prepped for Christmas.
And The New York Produce Show and Conference is a terrific venue for learning, trading, networking and communicating. Come enjoy a Fresh Celebration! in the capitol of the world.