Mexican president Felipe Calderon announced a new USD 16 billion financial aid program for farmers in rural Mexico last month. The program, the largest of its kind in the history of Mexico, includes millions of dollars in subsidies to Mexican producers of corn, beans, sugar cane and milk.

Entitled "el Programa para el Desarrollo Rural Sustentable y la creación de la Comisión Interinstitucional" [Program for sustainable rural redevelopment and the creation of the inter-institutional commission], the program is aimed in part at helping Mexican farmers deal with the phasing out by 2008 of the last agricultural tariffs allowed under the North American Free Trade Agreement (NAFTA). The programme is slated to run for six years through 2012, coinciding with Calderon's mandate.

Under NAFTA a scheme was set up for the elimination of import tariffs between the three signatory countries. The agreement divided goods into five staging categories and assigned different phase-out schedules for each category. At one end of the spectrum, Category A required immediate duty-free status as soon as the treaty came into effect on January 1, 1994. Tariffs on products in staging category C+ were to be removed in 15 equal annual stages, so that all goods in this category would be duty-free by January 1, 2008.

It is in response to the elimination of tariffs to goods in this last category that Mexico appears to be enacting these latest subsidies.

While NAFTA has strong provisions for the elimination of tariffs, the agreement makes no commitments to the reduction of subsidies. Article 704 on support measures merely requires that the parties strive towards domestic support measures that have minimal trade distorting or production effects and are consistent with GATT reduction commitments.

The Mexican government has not detailed how much of the new programs massive budget will go towards subsidies, nor what shape these subsidies are likely to take. A senior Mexican official tells Subsidy Watch that although Calderon's announcements have yet to be clarified it is likely that they represent a continuation of the existing Programa de Apoyos Directos al Campo (PROCAMPO) [Program of Direct Assistance for the Countryside].

PROCAMPO was set up in the early nineties to coincide with the introduction of NAFTA. It provides payments to Mexican farmers based on production, making Mexico one of the few developing nations to offer subsidies. Most developing countries rely on tariffs for protection due to their budget constraints. According to PROCAMPO's government website the programme is intended to counterbalance subsidies given to farmers of other countries while at the same time substituting for a discontinued guaranteed price scheme.

According to the OECD, Mexico has been steadily increasing its agricultural subsidies in recent years, raising them by over 20% from 2004 to 2005. Nonetheless, it is doubtful that the new subsidies would run afoul of Mexico's World Trade Organization (WTO) commitments. Mexico has plenty of room before it hits its ceiling in the WTO's Amber Box of trade distorting subsidies, and these subsidies are unlikely to exceed that limit, say knowledgeable sources. A US based-economist involved in WTO litigation notes that Mexico has avoided breaking WTO rules with its subsidies and it would make no sense for it do so now.