Exchange Rate Sensitivity of Fresh Tomatoes Imports from Mexico to the United States

The agri-food trade between Mexico and the United States grew substantially after the implementation of NAFTA in 1994. While some analysts argue that NAFTA has contributed the most to the dramatic expansion of this trade, others have emphasized the role played by the exchange rate in this process. An attempt is made in this paper to address this issue by quantifying the effects of NAFTA, the Mexico-US exchange rate changes and its volatility on the fresh tomato imports into the United States from Mexico using the maximum likelihood cointegration analysis. The results from the cointegration analysis show that while changes in exchange rate have a positive effect on trade flows, volatility of the exchange rate has a significant negative effect on trade flows. The results from the error-correction model show that both NAFTA and the exchange rate have significant positive influence on fresh tomato imports in the United States from Mexico. However, the effects of exchange rate changes outweigh the effects of NAFTA in the short-run