A NORTH AMERICAN FREE TRADE AREA:
What's Really In It For Us?
By June 1, Congress will decide whether to authorize the Bush administration to negotiate a free trade agreement (FTA) with Mexico. With the United States and Canada already phasing out most of the trade barriers between them under a two year- old treaty, the talks with Mexico could thus result in the establishment of a North American common market which would knit the region's 360 million citizens into a single economic unit larger even than the twelve-nation European Community.
Such an accomplishment would represent a remarkable departure from the history of distrust and disharmony that has plagued relations between the US and Mexico ever since competing territorial claims first brought the two nations into conflict over a century and a half ago. But changes which only a few years ago seemed improbable have lately been occurring with regularity throughout the world, and there is no question that a dispassionate reappraisal of US-Mexico relations has been long overdue on both sides of the border. For a wide range of economic, social, cultural and strategic reasons, the importance of a healthier bilateral relationship have been growing increasingly evident in recent years.
President Bush and Mexican President Salinas de Gortari, along with other senior members of their respective governments, have been lobbying hard for the free trade accord. Yet, despite their considerable efforts, the vote in Congress remains too close to call. Those who believe an agreement would be a major stimulus to economic expansion and job creation throughout North America are meeting strenuous opposition from a loose but formidable coalition of organized labor, environmentalists, consumer advocates, and those industries (such as textiles and agriculture) which feel most directly imperiled by unrestricted trade with Mexico. Clouding the prospects for congressional approval are a surfeit of unresolved questions not merely about the implications of an FTA for the United States but also about the broader social, economic and trade policies that will guide the US through the new post-postwar era of global competition.
The consensus of most observers is that Mexico has a great deal to gain from an agreement to eliminate tariffs and most other types of barriers to the movement of goods, services and capital across its border with the US. To be sure, the FTA initiative is not universally applauded in Mexico where national sovereignty is still often measures in terms of maintaining political distance from the United States. Moreover, as the Bee's Mexico City correspondent recently found, small and medium-sized Mexican businesses are apprehensive about their ability to compete under a free trade arrangement with firms from the north. Still, on balance, Mexico is expected to benefit greatly from guaranteed access to the US market and from new investments from abroad.
Whether the US will similarly benefit from an FTA with Mexico is a matter of more intense conjecture. Some, like the California Labor Council, fear substantial job losses will occur as US firms move south to take advantage of Mexico's cheaper labor market. Similarly, agricultural organizations such as the Irvine-based Western Growers Association are concerned that an FTA might bring about the demise of hundreds of smaller, family farms. Still others are troubled by the adverse impact an FTA may have on America's ability to maintain its current environmental protection, consumer health and worker safety standards. There are even zealous free trade advocates who are worried that, by pursuing the creation of a North American free trade bloc, the US may be abandoning its traditional support for the General Agreement on Tariffs and Trade (GATT), the mechanism which had been the principal focus of trade liberalization efforts since World War II. And, as if to round things off, there are some trade experts whose research tends to downplay the significance of an FTA to bilateral economic relations.
So what can we really expect from an FTA? The agreement's proponents are nothing if not up beat in describing the advantages a free trade pact should yield. Most start by observing how much the US has already benefited from the far-reaching liberalization of Mexico's trade and investment policies begun by former Mexican President Miguel de la Madrid in the mid-1980s. Just between 1986 and 1990, US exports to Mexico jumped from $12.4 billion to $28.5 billion, resulting -- by some estimates -- in the creation of some 400,000 new jobs for U.S. workers.
Quite naturally, the White House anticipates that the surge of new foreign investment expected to flow into the Mexico following ratification of an FTA will stimulate even greater demand for US exports, especially such high value-added goods as machine tools, telecommunications equipment, computers, software, office machines and other products essential to the operation of a modern industrial economy.
More exports, of course, will mean more employment -- perhaps as many as a quarter of a million additional manufacturing jobs in the US over the next few years, according to President Bush. At the same time, FTA advocates say that consumers should count on seeing wider selections of merchandise at lower prices as tariffs fall and as companies all across the continent begin to realize unprecedented economies of scale. Beyond the direct economic benefits, Washington clearly hopes that an FTA, by contributing to economic development south of the border, will help staunch the flood of illegal immigrants currently streaming into the United States.
To be sure, the chances that this free trade confection will taste as good as George Bush says it looks will depend on the precise contents of the treaty negotiators hammer out. Despite its name, a free trade agreement will not mean that the US and Mexico will have pure free trade across the board. Industries deemed too vulnerable to competition, too vital to national security, or too politically persuasive will continue to enjoy some measure of protection. Mexican officials, for example, are likely to resist any overtures to open petroleum and natural gas reserves to US investment for reasons that go to the heart of Mexican nationhood. (The Mexican Constitution specifically forbids foreign control of natural resources and other parts of what it terms the "national patrimony.") And, even where it is agreed that trade barriers will be lifted, the process of phasing them out will take a number of years. Consequently, as even the most buoyant FTA proponents concede, the pains of adjusting to new economic circumstances will have to be endured before most of the real gains from an FTA become manifest.
Much of the formal opposition to a free trade agreement comes from expected sources, namely those whose material interests are threatened by changes in the status quo. In many respects, the complaints being raised about the talks with Mexico reprise the kinds of objections lodged three years ago when the US-Canada pact was being approved. But there are also factors that make the current debate unique. Most evidently, there are the sheer difficulties of integrating an advanced industrial economy with what is essentially a Third World economy. (President Bush's tendency to gloss over this issue strikes some FTA skeptics as reminiscent of German Chancellor Helmut Kohl's brusque dismissal last year of charges he was gravely underestimating the costs of German economic unification.) In Mexico's case, per capita income is just one-tenth that of the US, a fact most clearly reflected in the huge wage disparities between the two nations. Not surprisingly, organized labor regards an FTA with Mexico as a grave threat to US workers, especially those employed in low-tech nor no-tech production jobs.
According to FTA supporters, however, concerns about job losses are short- sighted at best. While they readily concede that some jobs may be lost in certain industries, they predict a substantial rise in US employment as the result of an FTA. Moreover, as if to deny economics' status as the dismal science, some of its more hopeful practitioners even suggest that healthy economies should periodically purge themselves of no-tech or low-tech jobs so that the labor force can be redeployed to higher value-added forms of employment. As an editorial in last week's issue of The Economist reasoned: "Work that can be done more cheaply in Mexico should be. This would not make America poorer - quite the contrary. The labour and capital it once employed wastefully would soon move to newer and better uses and command higher incomes."
Critics retort that such expectations are criminally cavalier, and, in this case, the critics have a point. The unhappy fact is that very large segments of the US population are simply not able to adapt quite so easily to changing economic conditions. Were it true that American workers have been routinely moving on to higher paying forms of employment as US industry exported less demanding jobs to Third World countries, real personal income should have been increasing in this country. But this has not been happening. Instead, real personal income has remained stagnant since the mid- 1970s, even though for most of the intervening years the US economy enjoyed one of the longest periods of uninterrupted expansion in history. This suggests that, far from moving on up, the average American is heading down or at best holding his or her own economically.
The principal reason real life is confounding the assumptions of many orthodox economists is that the responsibility for facilitating economic adjustment among millions of Americans has been largely disowned by the nation's elected officials and business leaders. While there is abundant talk about the salient role of public education and worker retraining programs in maintaining the highly skilled and adaptable labor force needed to meet the competitive challenges of the global economy, remarkably little is actually being to done to halt the deterioration of the educational system or to promote the development of retraining programs. As a result, the prospects for finding new employment in high value-added, well-paying positions are scarcely improving for substantial numbers of Americans. For most, the only form of economic adjustment assistance is the small percentage of their former wages paid out as unemployment insurance. The inescapable conclusion is that, absent a new public-private commitment to providing quality K-12 education and lifelong training programs for workers, the US must retain millions of decent-paying, low-tech jobs.
Not unexpectedly, this issue has been seized by Congressional Democrats not so much for the purpose of defeating the free trade proposal but to extract a firm promise from the Bush administration to address the plight of US workers displaced by an FTA. Just this past week, the White House agreed to work with Congress in devising a plan to assist such workers, thus substantially enhancing the odds that Congress will vote to grant the administration the negotiating authority it has requested.
Beyond the dispute over employment, the FTA debate has profound implications for the future of US economic and trade policy in the new global economy. In past debates over national trade policy, those who expressed reservations about the wisdom of free trade policies were automatically cast as protectionists, a species widely held to be ill-informed, xenophobic and presumably racist. During their respective 1988 campaigns for the presidency, Democrats Richard Gephardt and Michael Dukakis were both savaged by the press for flirting with a variant of populism known as economic nationalism. Their sin was to suggest that US trade policies be predicated on the principle of reciprocity rather than on a comparatively abstract ideal like free trade. However, paralleling the public's mounting apprehension that America is rapidly losing its competitive edge in the world market, a respectable body of scholarship has lately emerged to give intellectual cover to politicians bold enough to ask whether the US is being well-served by economic and trade policies that only seem to produce prodigious trade deficits year after year. Among the more notable figures mounting this challenge are MIT's Paul Krugman, Harvard's Robert Reich, Berkeley's Stephen Cohen and Laura Tyson, economic affairs columnist Robert Kuttner, and former Commerce Department official Clyde Prestowitz.
For postwar generations accustomed to a steadily growing volumes of world trade made possible by increasingly liberalized trading rules, it is axiomatic that free trade is so beneficial as to be virtuous. And for good reason. The history of the world economy in recent decades provides abundant evidence of the value of free trade. Nations which adopted liberal foreign trade and investment policies have almost uniformly outperformed those countries which have sought to develop their economies behind restrictive trade and investment barriers. Indeed, were it not for the peculiar anomaly of Japan, which has continued to flourish even while severely restricting foreign participation in its domestic economy, attacks on free trade would not be nearly as fashionable as they now are.
At a time when the US seems locked in perpetual trade disputes with mercantilist Japan, along comes this "revisionist" camp with its startling proposition that free trade is not necessarily the best medicine for American policy. Pointing to a decade of massive trade deficits, the loss of entire industries to foreign competition, and our hapless trek during the Reagan years from being the world's foremost creditor nation to being its biggest debtor, Prestowitz and others go so far as to contend that unswerving devotion to free trade is nothing less than the commercial equivalent of unilateral disarmament in the face of rival powers who do not shirk from using mercantilistic means to advance the interests of their own industries. Although chiefly noted for challenging the basic tenets of free trade, these revisionists raise two concerns which seem especially pertinent to the Mexican FTA debate.
First, they focus attention on the novel problem of maintaining national standards when global trade is making national boundaries less and less significant? For example, existing US laws and regulations affecting the activities of businesses in this country (such as minimum wage laws, workmen's compensation insurance, occupation health and safety standards, environmental regulations, and consumer safety laws) reflect the values and priorities of American society. But how does a democratic society such as ours preserve its values and priorities when commerce is able to operate outside the jurisdiction of the law? In addition to offering an avenue for evading a whole host of US environmental, worker safety and consumer protection laws, an FTA could also result in irresistible pressure to relax the enforcement of these regulations within the US. As some critics worry, an FTA would almost certainly lead many American business organizations to seek relief from such laws and regulations by arguing that it is hardly fair to expect them to compete against rivals located in Mexico where the regulatory climate is far less restrictive. Labor leaders and environmentalists are not being entirely paranoid in suspecting that ultra-conservatives like John Sununu and Richard Darman favor an FTA with Mexico precisely because they appreciate how useful it could be as a cudgel for coercing American workers into granting wage and benefit concessions and for pressuring Congress into approving laxer environmental controls on industry.
For their part, FTA proponents submit that a free trade pact would do just the opposite. Stringent regulations, they argue, are luxuries that only the most prosperous and highly developed economies can afford. Mexico's environmental, consumer protection and occupational health laws are in fact probably better than other nations at the same stage of economic development. By promoting further economic growth in Mexico, an FTA would therefore help provide Mexico with the financial and technical resources needed to achieve the level of safeguards observed in the US and Canada.
The revisionists' other main point is that, in a global economy, what's good for General Motors may no longer be good for America. The issue here, as scholars like Robert Reich point out, is that most public discussions of America's "competitiveness crisis" are out of focus and therefore may lead to inappropriate policy prescriptions. As Reich and others contend, the relentless forces of global economics (most notably in the form international acquisitions and mergers, cross-national production sharing arrangements and offshore manufacturing facilities) are causing more and more corporations throughout the industrial world to lose their national identity. Yet too often, the schemes offered to maintain America's competitiveness or restore it in those areas where it has been eroded dwell on how best to promote the competitiveness of US companies, even though the economic interests of these companies may no longer correspond to the broader interests of the American nation.
What this implies in the context of the Mexican FTA debate is that care should be taken in differentiating what may be good for corporate America from what is good for the rest of the country. For example, in defending the Mexican FTA, President Bush has repeatedly insisted that American companies will enjoy easier access to the Mexican market. But what does this really mean if, as the result of an FTA, hundreds of American companies shift their operations to the lower cost and less regulated climate of Mexico? Senior management and stockholders may reap rewards, but what of the idled workers left behind? What of the communities which must endure plant closings? Likewise, the White House insists that a free trade agreement will create 250,000 new jobs in this country to satisfy Mexico's growing demand for American goods. But, as critics counter, who is to say that a large part of Mexico's demand will not be met by American (as well as Asian and European) companies operating in Mexico?
Similarly, FTA opponents warn that an agreement may encourage foreign investors to pass up the US in favor of Mexico, thus depriving the US of much needed capital, jobs and technology. Although most European and Asian firms would prefer to manufacture either at home or in the Third World's low-cost labor markets, many of them have established facilities here as a form of insurance against the risk that Congress, frustrated with chronic trade imbalances, will erect new protectionist barriers. By affording these companies secure access to their US customers from manufacturing sites in Mexico, an FTA would thus remove a powerful incentive for foreign direct investment in the United States.
In many respects, the mere fact that Mexico and the US are even considering an FTA seems almost implausible. After all, these have not been the friendliest of neighbors. Less than five years ago, Mexico was committed to economic policies that actively discouraged imports and sharply limited foreign participation in the Mexican economy. Those policies reflected not just a deliberate economic strategy Mexico shared with other developing nations; they also mirrored the country's abiding phobia about US domination of Mexico's economic and political life. For its part, the United States had scarcely exhibited serious interest in improving ties with its immediate neighbor to the south. Under the Reagan administration, the US all but ignored Mexico, preferring instead to indulge its obsession with zealous anti-communist crusades waged in the some of smaller and less consequential countries of Latin America. Far from drawing nearer to our considerably larger and more important neighbor next door, official Washington chose to vilify Mexico on a variety of charges including political corruption, human rights abuses, illegal immigration, complicity in the drug trade and, in general, for being insufficiently subservient to American wishes.
So why the sudden change of heart in Mexico City and Washington, D.C.?
Of the two, Mexico's conversion is much easier to explain. It was a case of economic necessity, pure and simple. Not long ago, any mention of a formal trading relationship with the US was outside the bounds of non-violent conversation in Mexico. In an interview with The New York Times shortly after his inauguration in December 1988, President Salinas de Gortari, like his predecessors, shunned the idea of building closer economic links with the United States. Among the reasons he cited was a that, absent barriers to imports and investments, the much larger American economy would likely dominate large and valuable chunks of Mexico's economy.
What changed Salinas' mind was a growing that Mexico, having only recently determined to expand its export trade as a means of generating the income needed to service its enormous foreign debt, might find itself locked out of the world's largest markets. During a visit to Europe in January 1990, the Mexican president was reportedly dismayed by the Common Market nations' preoccupation not only with achieving full economic integration by the end of 1992, but also with the historic events then unfolding in Eastern Europe. Salinas was further troubled by the prospect that the post-1992 European Community would exclude from its markets the goods of countries lacking the power to command reciprocal treatment. To make his despair complete, he also returned home with no real hope that substantial amounts of European investment would be channelled to Mexico in the foreseeable future.
With the opportunity for expanding Mexico's commercial ties with Europe in doubt, Salinas was alarmed by developments to the north. Nationalistic rhetoric notwithstanding, Mexico had grown severely dependent on the US, the destination for 60% to 70% of its total exports. (A similar share of Mexico's imports come from the United States.) Many of Mexico's most vital industries had become tightly integrated with American industry, with about 90 percent of Mexico's exports of manufactured goods going to the states. That degree of economic intimacy left Mexico extremely vulnerable to economic as well as political developments in the United States. A slowdown in the US economy or a rise in interest rates -- anything that would dampen demand for Mexican goods or keep American tourists at home -- could have a devastating impact in Mexico. More ominously, diplomatic friction over illegal immigration and drug enforcement issues posed a very real danger that US policy- makers might slap trade sanctions on Mexico. To prevent this, Salinas had to act quickly and decisively to preserve access to the US market. The solution to his need was, of course, a formal free trade agreement.
Much less straightforward are the reasons for the Bush administration's decision to embrace the idea of an FTA with the Mexico. Only a year ago, the White House reacted tepidly to Mexico's offer to initiate free trade talks. Although the administration said it was agreeable to preliminary discussions, this response was purely diplomatic. The administration clearly thought a formal accord would not be feasible for several years. Since then, relations between the two nations had not changed appreciably. The problems of drug trafficking and illegal immigration remain as intractable as ever. So what had happened to change things so dramatically? One important clue may be found in a speech George Bush made to a Hispanic Chamber of Commerce group in Houston last month. In enumerating the benefits of an FTA, he ventured the opinion that: "A stronger Mexico means a stronger North American alliance."
An alliance against whom? It is doubtful that Bush was referring to a more imposing military bulwark against communism. Even during the most anxious days of US-Soviet confrontation, Washington did not seek to draw Mexico into a military alliance. Instead, what the president almost certainly had in mind was an economic bastion -- perhaps even the basis of an extended Fortress America) to offset the powerful regional trading blocs coalescing in Europe and, somewhat less coherently, in the Far East under Japan's spreading dominion.
With the eclipse of the Soviet Empire and the end of the Cold War, the nature of international relations has been assuming an entirely new look. Although GOP campaign strategists will doubtless seek to keep memories of Desert Storm alive through November 1992, the administration will have to reckon with a New World Order in which international conflicts are more apt to be expressed in the idiom of economic competition rather than through the force of arms. Polls suggest that the public already perceives Japan and a united Europe to be the principal threats to American interests today, not Third World satraps or even the USSR. Concerned that the US could soon be overshadowed economically and even politically by its putative free world allies, the administration appears to regard the creation of a North American free trade area as an indispensable objective. As the linchpin of the $7 trillion North American common market, the US would enjoy greater leverage in negotiating favorable outcomes in international trade disputes with Europe and Japan. At the same time, such a step would help enable the US to retain its premier role in international diplomacy. (Curiously, the Bush administration's exceedingly ambitious timetable -- an FTA by next spring -- appears almost deliberately aimed at upstaging the EC's much publicized effort to establish a single internal market by the end of 1992.)
In vigorously pursuing a regional trading bloc so soon after the collapse of the latest round of multilateral GATT talks, the Bush administration appears to be tacitly admitting that it no longer considers the GATT to be a particularly useful vehicle for bringing discipline to the world trading system. If true, this would signal a major shift in US policy. For over forty years, successive US governments have used the GATT to tear down trade barriers worldwide in order to promote a more open system of multilateral trade. Most recently, it was the Reagan administration that in 1986 almost singlehandedly instigated the latest series of GATT talks -- the Uruguay Round -- in order to address an array of issues, including intellectual property rights protection and trade in services, that were becoming increasingly critical in the development of world trade. Trade policy historians will have an engaging time sorting out why the US and the European Community -- two of the world's most heavily industrialized and advanced economic systems -- permitted these talks to reach an impasse last December over a dispute involving agricultural trade, of all things. In any event, the dispiriting end to the Uruguay Round may have led the Bush administration to conclude that the GATT had simply become too unwieldy and unresponsive a mechanism for resolving important trade disputes, especially when the world of international commerce may soon be dominated by three regional superpowers. The Bush administration's complicity in hastening the emergence of such trading blocs by bringing Mexico into a North American free trade area is ironically being received with considerable misgivings by many free trade advocates.