Benefits from the importation of tomatoes

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Cases 619
4. Russia is largely dependent on oil exports to drive
its economy forward. Given the sharp fall in global
oil prices that occurred in 2014 and 2015, what impact do you think this will have on FDI into Russia?
5. Volkswagen has signaled that it is going to stay the
course in Russia, despite current political and economic headwinds. Why do you think it made this decision? What are the pros and cons of this decision?
In your opinion, is it the correct decision?
Case Discussion Questions
1. What factors underlay the decision by Volkswagen
to invest directly in automobile production in Russia?
Why was FDI preferable to exporting from existing
factories in Germany?
2. Which theory (or theories) of FDI best explain
Volkswagens FDI in Russia?
3. How do you think FDI by foreign automobile companies might benefit the Russian economy? Is there any
potential downside to Russia from this inflow of FDI?
When the North America Free Trade Agreement
(NAFTA) went into effect in December 1992 and tariffs on imported tomatoes were dropped, U.S. tomato
producers in Florida feared that they would lose business to lower-cost producers in Mexico. So they lobbied
the government to set a minimum floor price for tomatoes imported from Mexico. The idea was to stop Mexican
producers from cutting prices below the floor to gain
share in the U.S. market. In 1996, the United States
and Mexico agreed on a basic floor price of 21.69 cents
a pound.
At the time, both sides declared themselves to be
happy with the deal. As it turns out, the deal didnt offer
much protection for U.S. tomato growers. In 1992, the
year before NAFTA was passed, Mexican producers exported 800 million pounds of tomatoes to the United
States. By 2011, they were exporting 2.8 billion pounds
of tomatoes, an increase of 3.5-fold. The value of Mexican
tomato exports almost tripled over the same period, to
$2 billion. In contrast, tomato production in Florida has
fallen by 41 percent since NAFTA went into effect. Florida growers complained that they could not compete
against low wages and lax environmental oversight in
Mexico. They also alleged that Mexican growers were
dumping tomatoes in the U.S. market at below the cost
of production, with the goal of driving U.S. producers
out of business.
In 2012, Florida growers petitioned the U.S. Department of Commerce to scrap the 1996 minimum price
agreement, which would then free them up to file an antidumping case against Mexican producers. In September
2012, the Commerce Department announced a preliminary decision to scrap the agreement. At first glance, it
looked as if the Florida growers were going to get their
way. It soon became apparent, however, that the situation
was more complex than appeared at first glance. More
than 370 business and trade groups in the United States
from to meat and vegetable
producers and Wal-Mart Storeswrote or signed letters to
the Commerce Department in favor of continuing the
1996 agreement.
Among the letter writers was Kevin Ahern, the CEO
of Ahern Agribusiness in San Diego. His company sells
about $20 million a year in tomato seeds and transplants to Mexican farmers. In a letter sent to The New
York Times, Ahern noted that yes, Mexico produces
their tomatoes on average at a lower cost than Florida;
thats what we call competitive advantage. Without the
agreement Ahern claimed that his business would suffer. Another U.S. company, NatureSweet Ltd., grows
cherry and grape tomatoes under 1,200 acres of greenhouses in Mexico for the American market. It employs
5,000 people, although all but 100 work in Mexico. The
CEO, Bryant Ambelang, said that his company couldnt
survive without NAFTA. In his view, Mexican-grown
tomatoes were more competitive because of lower labor
costs, good weather, and more than a decade of investment in greenhouse technology. In a similar vein, Scott
DeFife, a representative of the U.S. National Restaurant Association, stated, people want tomato-based
dishes all the time. . . . You plan over the course of the
year where you are going to get your supply in the winter, spring, fall. Without tomatoes from Mexico, a winter freeze in Florida, for example, would send prices
shooting up, he said.
Faced with a potential backlash from U.S. importers,
and from U.S. producers with interests in Mexico, the
Commerce Department pulled back from its initial conclusion that the agreement should be scrapped. Instead,
in early 2013, it reached an agreement with Mexican growers to raise the minimum floor price from 21.69 cents a
pound to 31 cents a pound. The new agreement also established even higher prices for specialty tomatoes and
tomatoes grown in controlled environments. This was
clearly aimed at Mexican growers, who have invested billions to grow tomatoes in greenhouses. Florida tomatoes
are largely picked green and treated with gas to change
their color.
The NAFTA Tomato Wars
620 Part 7 Cases
3. Who benefits from the importation of tomatoes
grown in Mexico? Who suffers?
4. Do you think that Mexican producers were dumping
tomatoes in the United States?
5. Was the Commerce Department right to establish
a new minimum floor price rather than scrap the
agreement and file an antidumping suit? Who
would have benefited from an antidumping suit
against Mexican tomato producers? Who would
have suffered?
6. What do you think will be the impact of the new
higher floor price? Who benefits from the higher
floor price? Who suffers?
7. What do you think is the optimal government policy
response here? Explain your answer.
Sources
E. Malkin, Mexico Finds Unlikely Allies in Trade Fight, The
New York Times, December 25, 2012, p. B1; S. Strom, United
States and Mexico Reach Tomato Deal, Averting a Trade War,
The New York Times, February 3, 2013; J. Margolis, NAFTA
20 Years After: Floridas Tomato Growers Struggling, The
World, December 1, 2012.
Case Discussion Questions
1. Was the establishment of a minimum floor price for
tomatoes consistent with the free trade principles
enshrined in the NAFTA agreement?
2. Why, despite the establishment of a minimum floor
price, have imports from Mexico grown over the years?
For the Japanese carmaker Subaru, a sharp fall in the
value of the yen against the U.S. dollar has turned a
problemthe lack of U.S. productioninto an unexpected
sales boom. Subaru, which is a niche player in the global
auto industry, has long bucked the trend among its
Japanese rivals of establishing significant manufacturing
facilities in the North American market. Instead, the
company has chosen to concentrate most of its manufacturing in Japan in order to achieve economies of scale at
its home plants, exporting its production to the United
States. Subaru still makes 80 percent of its vehicles at
home, compared with 21 percent for Honda.
Back in 2012, this strategy was viewed as something
of a liability. In those days, 1 U.S. dollar bought only
80 Japanese yen. The strong yen meant that Subaru cars
were being priced out of the U.S. market. Japanese companies like Honda and Toyota, which had substantial production in the United States, gained business at Subarus
expense. But from 2012 onward, with Japan mired in recession and consumer prices falling, the countrys central
bank repeatedly cut interest rates in an attempt to stimulate the economy. As interest rates fell in Japan, investors
moved money out of the country, selling yen and buying
the U.S. dollar. They used those dollars to invest in U.S.
stocks and bonds, where they anticipated a greater return.
As a consequence, the price of yen in terms of dollars fell.
By December 2015, 1 dollar bought 120 yen, representing
a 50 percent fall in the value of the yen against the U.S.
dollar since 2012.
For Subaru, the depreciation in the value of the yen
has given it a pricing advantage and driven a sales boom.
Demand for Subaru cars in the United States has been
so strong that the automaker has been struggling to keep
up. The profits of Subarus parent company, Fuji Heavy
Industries, have surged. In February 2015, Fuji announced that it would earn record operating profits of
around 410 billion ($3.5 billion U.S.) for the financial
year ending March 2015. Subarus profit margin has increased to 14.4 percent, compared with 5.6 percent for
Honda, a company that is heavily dependent on U.S.
production. The good times continued in 2015, with
Subaru posting record profits in the quarter ending
December 31, 2015.
Despite its current pricing advantage, Subaru is moving to increase its U.S. production. It plans to expand its
sole plant in the United States, in Indiana, by March
2017, with a goal of making 310,000 a year, up from
200,000 currently. When asked why it is doing this, Subarus management notes that the yen will not stay weak
against the dollar forever, and it is wise to expand local
production as a hedge against future increases in the
value of the yen. Indeed, when the Bank of Japan decided
to set a key interest rate below zero in early February
2016, the yen started to appreciate against the U.S. dollar,
presumably on expectations that negative interest rates
would finally help stimulate Japans sluggish economy. By
late March 2016, the yen had appreciated against the dollar and was trading at $1 = 112.
Sources
Chang-Ran Kim, Subaru-Maker, Fuji Heavy Lifts Profit View
on Rosy US Sales, Weak Yen, Reuters, February 3, 2015; Yoko
Kubota, Why Subarus Profit Is Surging, The Wall Street Journal, November 14, 2014; Doron Levin, Subaru Profit Soaring
on Weaker Yen, Market Watch, November 15, 2014; Y. Kubato,
Weaker Yen Drives Subaru Makers Profit Higher, The Wall
Street Journal, February 4, 2016.
Subarus Sales Boom Thanks to the Weaker Yen

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