The Globe and Mail

05/19/1990

Canada should join the play in Mexico-U.S. free-trade poker game

Peter Morici

A free-trade deal between the United States and Mexico seems inevitable. Canada has a lot at stake in any such arrangement. If Canadians are to avoid losing their collective shirt, they need to start dealing themselves in now.

A U.S.-Mexico pact that matches the breadth and depth of the Canada- U.S. free-trade agreement is unlikely. The differences between the two countries in terms of economic and social development are simply too great.

Yet each has considerable power in terms of influencing the other's security and other vital interests. One need only consider the alarm caused by the hostility of a relatively small and distant country like Nicaragua, to appreciate the view from Washington in such matters. A hostile Mexico is not something that Americans could tolerate gladly.

Mexico, fiercely independent, jealous of its revolution and with long memories of the yanqui gringos, is equally sensitive in terms of relations with its northern neighbor.

As a result, free-trade negotiations between the two countries are likely to be conducted like a poker game with very high stakes. And the question for Canada is how and when does it want to join the play.

Let's take a look at some of the major issues that are likely to emerge in bilateral talks between Washington and Mexico City.

To begin with, if negotiators were to take the issues addressed by the Canada-U.S. agreement as a starting point, the two sides would have quite different lists of items they would want withdrawn from consideration.

For example, while a U.S. goal would be to get long-term guarantees allowing American interests to undertake direct investments in Mexico, it would be politically difficult for Mexican President Carlos Salinas de Gortari to sell such a guarantee at home.

Similarly, the United States would be seeking concessions regarding energy pricing and supplies similar to what they gained in the FTA. But this would also be politically hard for the Mexicans to swallow, although they might ultimately have to in order to win access to U.S. markets for products such as their petrochemicals and primary plastic products.

Turning to Mexico's agenda, the continued success of its economic reforms requires continually expanding access to U.S. markets for its manufactured goods. Elimination of tariffs and import restraints, as well as the establishment of dispute settlement mechanisms to corral U.S. contingent protection, are likely to be high on Mexico's list of wants.

Yet, given Mexico's low wage structure, unrestricted access to North American markets for its manufactured products could devastate a number of U.S. industries, putting strong political pressures on U.S. President George Bush to remove commodities such as textiles, footwear and basic metals from consideration.

Nevertheless, both countries' leaders have strong incentives to be sufficiently elastic in their negotiating positions so as not to preclude an agreement.

For President Salinas, a free-trade deal would offer the opportunity to ensure that his market-oriented reforms are not done away with down the road by another administration. Future Mexican presidents would be in no position to revert to economic nationalism in the face of a restructured industrial sector that was oriented toward U.S. markets.

At the same time, President Bush cannot afford to let economic reforms fail in Mexico. As already suggested, the security implications for the United States of a political upheaval in its southern neighbor are unthinkable.

Given these mutual imperatives, negotiators for the two countries should be able to finesse difficult issues - like energy, investment and the vulnerabilities of mature U.S. industries - through managed phasing in of harmonized policies and increased market access.

The 1987 trade framework agreement between the United States and Mexico that has allowed the latter to significantly increase its exports of steel and textiles, and more recent Mexican concessions to foreign investors in the automobile industry, indicate that, to use the old adage, where there's a will, there's a way.

Still, this process is likely to be both complicated and messy.

Where does Canada stand in all this?

Mexico's fastest-growing exports are precisely in the kinds of products Canada has been banking on under the FTA to supplement its resource sales in the United States.

For example, the proportion of machinery and transportation equipment in Mexico's exports to the United States jumped from 21 per cent in 1979 to 43 per cent in 1987. The latter figure was about the same for Canada.

It would appear that Mexico has been achieving its rapid export growth by bypassing many U.S. import-sensitive industries and going directly into the kinds of secondary manufacturing that Canadian industrial policy makers have long coveted, such as power generation equipment, telecommunications equipment and electrical equipment.

In this context, Canada cannot afford to have Washington decide unilaterally which U.S."Canadian industries will be sheltered from Mexican-based competition through transitional provisions.

Consultations between Ottawa and Washington will not be enough. Canada must be represented at the table when the dealing begins.

Additionally, Canada has a major stake in ensuring that any deal that liberalizes U.S.-Mexico trade is consistent with FTA rules as they evolve. Comparable rules for U.S. trade with both Mexico and Canada will better ensure the ability of each to hold the United States to its commitments - for example, with regard to safeguard actions and countervailing duties.

In the FTA negotiations, the most significant achievement for Canada was to begin the process of subjecting U.S. actions - that might violate GATT-based norms or that rescind benefits anticipated from tariff cuts - to bilateral review. This gain could be greatly strengthened by a tripartite arrangement.

But the latter could only evolve if the United States and Mexico saw their emerging arrangements through the prism of the FTA. And again, the best way for Canada to ensure this is to be at the negotiating table from the start.

It will not, however, be easy for Canadians to reserve a seat at that table. For one thing, their presence there will certainly have the effect of slowing the negotiating process. It would be much easier to achieve a bilateral agreement than a tripartite one. And the United States, at least, is likely to favor speed.

Also, U.S. trade officials are likely to find their Mexican counterparts relatively inexperienced. They might not welcome the presence of what they came to regard (perhaps surprisingly for Canadians) as Ottawa's canny crew.

What this means is that if Canada is to be represented in the talks, it will have to bring something to the table.

The Mexicans are interested. President Salinas has said that his country wants closer commercial ties with both Canada and the United States. But Canada must be prepared to offer Mexico the same tariff cuts and privileged access to Canadian markets as would be provided by the United States.

Undoubtedly this will provoke strong opposition from Canadian industries such as steel and textiles that could be hit hard by the elimination of protective tariffs. It will also be opposed by Canadian unions fearful of cheap Mexican labor.

Cries will be raised that the costs of cutting a deal with Mexico are too great. But the fact remains that if Canada is to maximize the benefits it receives under the FTA, this is the price that will have to be paid.