What U.S. Gains From Free Trade Pact

Common sense and a little straight information would help Americans understand the United States-Mexico-Canada free trade agreement, which negotiators may initial very soon but which the U.S. Congress won’t ratify until at least 1993.

Essentially, it’s a case of Mexico trying to enter the ranks of industrialized nations and so offering business opportunities to its northern neighbors, the way baseball owners in Orlando and Denver are paying entry fees to get their teams into the National League.

Admittedly, that’s not how the agreement is usually described. Debate has been dominated by rhetoric about American jobs and industries moving to Mexico once the pact is signed, as if a poor country was about to benefit at the expense of a rich one.

In the real world, the rich don’t usually lose out in deals with the poor, and the proposed North American Free Trade Agreement is no exception. U.S. industry and the economy are already benefiting from pre-agreement improvements in Mexico. U.S. exports to Mexico will reach $40 billion this year--yielding a $7-billion trade surplus that has created 135,000 new jobs, say economists Gary Hufbauer and Jeffrey Schott of Washington’s Institute for International Economics.

And if Congress ratifies free trade--a likelihood despite present criticism--the long-term benefits will be greater. By 1995, economists estimate, the United States will be running a $9-billion annual trade surplus with Mexico, gaining almost 200,000 new jobs.

More than a good neighbor policy is involved. Mexico wants the free trade agreement to ensure its own development, first by placing its companies in competition and alliances with world class U.S. corporations, and then by broadening their opportunities in the vast U.S. economy--which is 25 times larger than Mexico’s economy.

Asia be warned. With the United States removing barriers to Mexican goods, but perhaps raising them for goods of other nations, Mexico is a good bet to displace Asian countries as a big supplier to the U.S. market.

Mexico also needs the free trade agreement for a stamp of approval in global capital markets. A poor country, with national output per person of $2,678--compared to 10 times that in the United States--Mexico traditionally has had trouble attracting loans and investments. The oil-rich 1970s, when international banks loaned billions to Mexico, only to see the loans go bad in the oil-bust ‘80s, were an exception.

But since 1988, when President Carlos Salinas de Gortari took office and set Mexico on a course of cooperating with the United States, capital has poured in--perhaps $20 billion in funds returned from overseas by Mexican nationals and new investments by foreign investors seeking opportunity in a developing economy.

Half of that is nervous money, however--short-term investments that will be withdrawn if the free trade agreement does not become reality. Indeed, the Mexican stock market, which has risen steadily in recent years, has slumped 20% this year on fears that the U.S. Congress might derail free trade.

The fears are overblown. What Congress really wants, as House Majority Leader Richard Gephardt (D.-Mo.) indicated last week, are better terms to compensate workers who lose jobs as a result of the trade pact and to fund environmental clean up in Mexico. Gephardt suggested a tax on goods moving across the U.S.-Mexico border to finance a trust fund for retraining displaced workers--such as the employees of Los Angeles furniture plants who are losing jobs as assembly work shifts to Tijuana, Mexico.

The furniture plants in Torrance, Carson and Lomita offer several insights on free trade. Though assembly work is shifting to Mexico, design, administration and marketing jobs are staying in Los Angeles. “The infrastructure, telecommunications, roads, skills and customers are all here,” notes economist Jack Kyser of Economic Development Corp., a consulting firm.

As will be a pattern elsewhere in U.S. industry, the workers displaced are the least skilled. Gephardt’s transaction tax idea is to raise funds for retraining these least fortunate workers from the very economic change that displaced them. But the specific idea is less important than the aim, which is not to oppose the trade agreement but to find ways to make it work--because the advantages are great for both countries.

For instance, though most people are not aware of it, an immediate result of a Free Trade Agreement is that the United States will export cars to Mexico. In time, great numbers of auto parts will flow between the two countries, as has been the pattern between the United States and Canada, which have had an auto agreement since 1964.

Mexico will import the machinery to make cars and other goods from the United States--particularly telecommunications equipment. Telefonos de Mexico, the national phone company that is 10% owned by Southwestern Bell, last week announced a $13-billion modernization program.

Mexico will grow. “Over the coming years, many Mexican companies will become world leaders in their field,” says Douglas Campbell, head of D.A. Campbell & Co., a Los Angles brokerage specializing in Latin America.

“Cemex (Cimientos Mexicanos) is already the world’s second-largest cement company. Cifra, the store chain that has a joint venture with Wal-Mart, will become one of the world’s largest retail companies as it expands from Guatemala down through Latin America.”

Times are historic. Mexico is embarking on long-term development that will lift its living standards toward U.S. levels. The United States and Canada are shifting their economic focus to the Western Hemisphere--a policy change that will influence the next 20 years. Common sense tells you the potential is enormous.