After Betting Heavily on NAFTA Pact, Mexico Crosses Its Fingers : Trade: Defeat of the agreement would pull the cornerstone from the nation’s economic plan.

MEXICO CITY —  Ricardo Santibanez has $20 million riding on passage of the North American Free Trade Agreement.

He has invested that much to build Mexico’s first inland rail port, an ultramodern freight station whose scale and design reflect his conviction that approval of NAFTA would lead to explosive growth in exports and imports of grains, minerals and other merchandise--trade that would require new handling and distribution facilities.

“We are confident that the agreement will be signed,” said Santibanez, chairman of Ferropuertos, a company set up to build a network of such railroad freight stations.

“Our investment is based on it. Without NAFTA, we are going to be overbuilt,” he said in a telephone interview from Torreon, Coahuila, 480 miles southeast of El Paso.

Ferropuertos is not alone in wagering big on NAFTA.

For the past three years, the country’s presumed need to get ready for North American free trade has guided the decisions of the government, industrialists, farmers and investors here. Hardly an investment or policy decision has been announced without a reference to its relationship to NAFTA.

But after Canadians last month threw out the government that negotiated and approved NAFTA--and with support for the treaty still uncertain in the U.S. House of Representatives as Wednesday’s showdown vote approaches--Mexicans are feeling increasingly insecure about their decisions.

Failure to implement the long-anticipated agreement would pull the cornerstone out from under President Carlos Salinas de Gortari’s economic program. While the entire building might not fall, the government would be forced to come up with an economic policy if NAFTA fails.

No one is predicting a return to the closed borders of a decade ago. However, speculation is rife that without NAFTA, the government would be forced to increase spending to maintain economic growth, a sharp departure from the austerity that has won the country international accolades as a model for other developing nations.

Officially, the rhetoric is that NAFTA is merely one part of an overall strategy of economic liberalization. However, to many Mexicans, NAFTA is the strategy:

* Factories have been refitted, expanded or closed based on their perceived ability to compete with imports from the United States and Canada, or to export to those countries.

* Arguing that double-digit inflation would be a competitive disadvantage under free trade, the government has ruthlessly pushed inflation down to single digits. While government policies were successful, the suppression of wages has cut consumer buying power in half.

* Agriculture subsidies have been restructured to prepare for a deluge of U.S. and Canadian grain imports.

“They do not have an economic program that would replace the certainty that NAFTA would bring,” said economist Rogelio Ramirez de la O. NAFTA’s defined rules of trade formed much of the basis for investors’ confidence that the free-market economic policy of the past two Mexican administrations would continue past next year’s presidential elections.

“Since the entire program is built around confidence, I don’t think that in the event of the death of NAFTA the government can avert a crisis of confidence,” said a U.S. institutional investor, who spoke on the condition that he not be identified. “It’s hard to come up with a scenario in which the failure of NAFTA is not deadly.”

The opinions of such investors are important. Mexico’s $23-billion annual trade deficit has been offset mainly by foreign investment. Part of that money has paid for equipment to modernize outdated factories.

However, the most important conduit for foreign funds has been the Mexican Stock Exchange. That money could easily flee the country if investors lose confidence in the economy.

Coming up with an economic policy that would provide the same confidence as implementation of NAFTA is virtually impossible this close to an election, Ramirez said. Competition unleashed in the selection of the ruling party’s presidential candidate tends to exacerbate differences among interest groups, he explained.

That is the worst scenario for developing a new policy, he said, because “the absence of NAFTA calls for massive coordination of conflicting parties.”

A case in point is the drastic change in agricultural subsidies announced last month. Price supports for grains that made Mexican corn twice as expensive as that sold on the international market are being replaced by cash payments to farmers. The new policy would cut into the profits of the nation’s most productive and most powerful growers.

“I don’t think Mexico would have been able to change its agricultural policy if it had not been for a consensus built around NAFTA, the widespread agreement that there had to be change,” said Luis Tellez, undersecretary of agriculture and architect of the new policy.

The prospect of a trade agreement permitted the country to reconsider the long-held goal of agricultural self-sufficiency: producing enough food to feed all its people.

Instead, Mexico has opted to grow what its farmers could grow most efficiently and import the rest, he said. That switch in mentality was the key to convincing farmers that a new policy is needed.

“NAFTA gives us a framework for establishing agriculture trade policy,” Tellez said. “If NAFTA fails, we will have to review agricultural economic policy. If NAFTA does not happen, we will be left in a vacuum.”

Nor is Tellez the only government official worried about the future of the current administration’s reforms without free trade.

The trade agreement cast a spotlight on Mexican antipollution efforts as environmental groups argued that fewer trade barriers combined with lax enforcement would encourage industry to move across the border to cut costs.

In response, Mexico tightened antipollution laws and stepped up inspections. Binational environmental organizations took on new life, and the U.S. and Mexican governments co-founded a border cleanup fund last month.

“Personally, I am very worried that without NAFTA, the U.S. funding won’t come,” said Santiago Onate, federal attorney general for the environment. In previous attempts at binational environmental projects, such as the Integrated Border Plan, U.S. funding has been slow, he said.

Until the advent of NAFTA and the accompanying side agreement on the environment, Onate said, the border was a forgotten region.

“With the side agreement, there is a little hope that something might happen on the border,” he said.

From a practical viewpoint, pollution cleanup will be more expensive without the agreement, said Jose Antonio Ortega, general manager of Radian Corp., an environmental consulting firm. NAFTA would eliminate Mexico’s 20% tariff on antipollution equipment, in effect cutting the cost by one-fifth for industry here.

In addition, said Ortega, “if NAFTA is not passed, industry will have less resources to spend on antipollution equipment.”

There may also be less incentive, Onate warned.

“Remember,” he said, “the environmental side agreement goes into effect with NAFTA. In other words, it won’t go into effect unless NAFTA goes into effect.”

Besides the effect on agricultural policy and environmental enforcement, the collapse of the agreement would ripple through the economy, shaking scores, if not hundreds, of individual investments such as Ferropuertos’.

For example, without NAFTA, Ferropuertos would sharply scale back on an additional $28 million it planned to invest in building an industrial park and warehouses around the freight station, Santibanez said. The rail port would place more emphasis on selling its service domestically.

“There will not be the increase in traffic that we had projected,” he said.

Similar stories can be found in numerous industries. Textile and garment makers, battered by imports, have counted on NAFTA to open U.S. markets currently limited by quotas. Continent-wide sales would allow companies to produce on a larger scale, justifying the investments they need to modernize obsolete factories.

“The signing would be a real advantage for us,” said Marco Antonio Haddad, a member of the family that owns Coordinados Elite, a jeans maker in Tehuacan, Puebla, 158 miles southeast of here.

The company exports 96% of its production--about 7,000 pairs of jeans a year--under the brand names Bugle Boy and Lee, among others. To remain competitive, the Haddads need to keep expanding, and removal of quotas under NAFTA would allow them to sell more to customers they already know.

“Otherwise, we will have to look for other markets,” Haddad said.