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NAFTA: What's in it for us? continued...

By Jock O'Connell

Listening to the respective sides of the FTA debate, one might gather that a free trade agreement will bring either unparalleled prosperity or apocalyptic ruin. For those who suspect that the results are unlikely to be that extreme, there is another perspective to be found in a February study issued the administration's own International Trade Commission (ITC). According to the ITC, Mexico's economy will grow rapidly in the coming years "because of its recent economic reforms, whether or not an FTA is adopted." The study goes on to state that, while the US will profit substantially from Mexico's economic expansion, "the United States will probably obtain most of these benefits without an FTA." The ITC report further notes that the economic consequences of an FTA to the United States are expected to be "small in the near to medium term" for two major reasons. First, although a nation of 88 million souls, Mexico's economy is much smaller than the US economy. In 1989, Mexico's gross domestic product was $187 billion -- only 3.6 percent of the US GDP. (Even California's economy is nearly four times larger than Mexico's.) And while Mexico conducts about 70 percent if its external trade with the United States, it accounts for only about 6 percent of US imports and 7 percent of US exports. Clearly, an FTA would have a much more pervasive economic impact in Mexico. Second, with a few exceptions, both countries already have relatively low tariff and non-tariff barriers to trade with each other. Just over half of US imports from Mexico currently enters either duty-free under the Generalized System of Preferences or at substantially reduced tariff rates under the production-sharing arrangement commonly known as the maquiladora program. As the ITC study concludes: "... relatively low barriers already allow most of the benefits of trade between the two countries to be realized and therefore limit the potential benefits to the United States of an FTA." In short, an FTA would be no big deal.

Interestingly enough, this view finds support in a January report by the California State World Trade Commission (WTC). Based on extensive discussions with the state's international business community, the report suggests that the real impediments to increased US trade with and investment in Mexico have more to do with the inadequacies of Mexican commercial law, official regulations and administrative practices than with the barriers to trade and investment that would be addressed in an FTA. For example, although Mexico has been easing its restrictions on imports and foreign investment in recent years, its commercial code remains reflective of a time when the country was deeply suspicious of foreign domination and when economic policies emphasized a high degree of national self-sufficiency and state-ownership of key industries. As the WTC report noted: "Without a common set of rules for contracts, such as is contained in the US Uniform Commercial Code, companies are uneasy about doing business in Mexico, especially when that business involves investment of capital and equipment."

This unusually candid report also took issue with the quality of commercial justice south of the border. After acknowledging that the judicial systems of both nations are overloaded and fraught with costly delays, the report charged that: "...even if a company does succeed in getting a judgment through the Mexican legal system, judgments are often ignored." Without greater protection for trademarks, patents, copyrights and trade secrets, many American firms will remain reluctant to enter the Mexican market. Such s were expressed to the WTC staff not only by high-tech firms worried about patent infringement and software piracy. The entertainment industry was likewise troubled by inadequate copyright safeguards and the piracy of films and recordings. Even agribusiness felt aggrieved. According to the WTC, California firms have been denied royalties when Mexican producers illegally used seed varieties or rootstock developed and patented in the United States.

Problems of this nature are not inconsequential. With some business software priced at over $500, there is an enormous incentive to duplicate programs illegally. Yet not only does Mexican copyright law fail to protect computer software, it permits "private" copying of software by individuals so long as they do not sell the copy to others. In the rare event someone is successfully prosecuted in Mexico for illegal copying of computer software, the maximum fine for copyright infringement is 10,000 pesos. At the current rate of exchange, that comes to all of $3.37. Mexico has drafted legislation which it claims will address US concerns over inadequate protection for intellectual property, but the status of that legislation is unclear. Even if such legislation is finally enacted, American businesses may prefer to see how zealously Mexican authorities enforce these new statutes before committing new investment fund.

Mexico's bureaucracy -- long treated as a public employment program for the PRI faithful -- also comes in for critical scrutiny in the WTC report. California companies complained that it is hard to do business in Mexico because government officials are unresponsive. Approval processes are said to be low and often lacking in transparency. Government agencies are bogged down by paperwork, and rules are allegedly changed frequently and with little or no warning.

As both the ITC and WTC reports attest, Mexico could enjoy most of the advantages of increased American investment and trade by unilaterally continuing to reform it laws, regulations and administrative practices. Neither report offers a powerful endorsement of a free trade agreement. On the other hand, neither report provides much reason to reject free trade negotiations. From a strictly diplomatic perspective, however, the ITC report -- regardless of how prescient it may be -- is virtually irrelevant. Neither Congress nor the president is in any position to persuade Mexico that its continued economic prosperity is not contingent on an free trade agreement. Clearly, the Salinas government is not prepared to forego an FTA since only a formal free trade pact would guarantee Mexico permanent access to what is far and away its single most important export market. At the same time, there is every reason to believe that, absent an FTA, Salinas would find it extraordinarily difficult to continue with a domestic economic reform agenda that includes a number of politically unpopular steps.

Over the next four weeks, Congress will have to work its way through a complex matrix of dilemmas. Its deliberations, leavened as always by partisan political considerations, will be further circumscribed by diplomatic and budgetary constraints as much as by the conflicting demands of powerful interest groups. Should Congress conclude that negotiating an FTA would not be in the best interest of the United States, it must reckon with the very strong likelihood that its rejection of this initiative would cause severe damage to bilateral relations. If, on the other hand, Congress determines that trade talks should proceed, it must decide what it, along with the Bush administration, can reasonably do to ease the transition of those individuals and communities that are apt to be adversely affected by an FTA. Many Democrats, sensing that the President Bush and the GOP are most vulnerable on the economic front, will doubtless press hard on this point in order to demonstrate how they are concerned about working people while the GOP cares only about the interests of business.

On a somewhat different plane, Congress will also have to reach some possibly historic conclusions about the kinds of domestic economic and foreign trade policies that will guide the United States in the new era of international competition. Although the dispute is usually presented as a clash between economic nationalists (nee protectionists) and free-traders, a decision to embrace a free trade accord will not necessarily be a vote of confidence in policies rooted in the principles of free trade. For to the extent that Congress and the White House also take heed of the need for more substantive economic adjustment programs to help people cope with the sometimes harsh realities of global competition, the nation would be moving away from laissez-faire. But then compassion has seldom been a companion of consistency.

Even if the economic benefits of a free trade agreement prove to be minimal, especially in the near-term, the fact remains that the United States has an immense stake in the presence of a politically stable and economically prosperous neighbor along its southern border. While the world may be getting smaller, it paradoxically seems to be doing so in a way that makes the people next door all the more important. As Mexico's Secretary of Commerce and Industrial Development, Jaime Serra Puche, told a gathering of California state officials and business leaders in Sacramento last Monday, the inescapable fact is that, regardless of whatever else is happening around the world, "the US and Mexico will always be neighbors." Whether that comment turns out to be an invitation to friendship or an ominous commentary now depends on Congress.

Copyright (c) 1991 by J. A. O'Connell

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