Free Trade with Mexico

A modified version of this paper was published in Foreign Policy (June 1992)

 

Peter Morici

University of Maine

 

Introduction

 

            In September 1990, President Carlos Salinas de Gortari informed President Bush that Mexico would like to negotiate a free trade agreement.  The following June, after much heated debate, the Congress granted the President fast-track negotiating authority. 

 

            Canada has joined the talks, largely to guard against the erosion of its 1989 pact with the United States.  This has not appreciably complicated the negotiations.  A draft agreement could be ready before the national party conventions this summer.

 

            Free trade is a highly charged political issue. Much has been said about potential jobs losses and lax workplace safety and environmental enforcement in Mexico.  These are serious problems but they have solutions and some are already emerging from negotiations.  Moreover, these concerns distract attention from the more substantial reality--free trade has the potential to initiate, solidify and intensify forces that could substantially transform the Mexican and U.S. economies.

 

            For Mexico, free trade would mark the climax of a radical change in development strategy.  In the mid-1980s, Mexico turned away from decades of economic nationalism, which left in its wake crushing debt, an antiquated industrial structure, and an institutionalized incapacity for self-sustaining growth.  Salinas' reforms are reorienting Mexico to embrace American investment and business culture and to exploit, rather than deny, the mandates of international markets.

 

            For President Salinas, the stakes are high.  Rapid labor force growth, rural overcrowding and increasing demands for social progress require robust growth.  Without capital inflows to finance modernization and wider access to foreign markets, his promarket strategy is severely handicapped.  In early 1990, President Salinas visited leaders in the Western Europe where he learned that the likelihood of closer commercial ties with the European Community (EC) were limited.  Free trade with the United States is Mexico's best prospect for attracting new capital and expanding exports.

 

            Regarding political reform, Salinas has done more than many observers acknowledge.  Most notably, his economic program is disassembling the economic mechanisms that his Institutional Revolutionary Party (PRI) has used to reward supporters and maintain power for six decades.  However, a successful transition to stable multiparty government is critically dependent on sustaining growth.

 

            For the United States, a free-trade agreement has the potential to be a key element in a new national policy to foster competitiveness.  Initially, it provides U.S. businesses with the opportunity to combine inexpensive Mexican labor with more highly skilled U.S. workers in joint production ventures, much as Japanese competitors are doing in Asia.  On another level, though, if coupled with sound worker adjustment programs, improvements in public education and forward-looking industrial policies, free trade provides the opportunity to transform the United States into a more knowledge-intensive and wealthier society.

 

            At the same time, free trade would be the best way to support economic and political progress in Mexico and help assure that its new openness and aspirations for partnership with the United States would endure after decades of ambivalence and suspicion about American designs.

 

The Mexican Economy and Reforms

 

            Mexico is a large country with much unfulfilled potential.  It has a population of about 85 million with literacy rate exceeding 80 percent.  Fifty-seven percent of its people are under 30, giving it a young, capable and rapidly growing labor force.[1]  In 1991, the United States exported $33 billion to Mexico, making it our third largest customer after Canada and Japan.

 

            From the mid-1940s to the early 1970s, Mexico's macroeconomic policy was fiscally conservative.  For thirty years, GDP grew at a brisk 6.7 percent rate, and inflation averaged only 3.8 percent.[2]

 

            Like many Latin American countries, though, Mexico sought to industrialize through import-substitution rather than export-led growth.  This approach was part of a nexus of foreign investment, industrial, labor, and social policies intended to assert independence from American hegemony.

 

            Although import substitution worked well for many years, the oil boom of the 1970s emboldened Mexican officials to pursue nationalist policies with even greater vigor.  Restrictions on foreign investment were tightened, and the 1976 Law of Inventions and Trademarks denied pharmaceuticals and other products patent protection.  Imports controlled by licenses rose from 65 percent in 1969 to 100 percent in 1982.[3]  Most commercial banks were nationalized in 1982.

 

            The parastatal sector grew dramatically.  By 1975, subsidies to these and other domestic enterprises accounted for 61 percent of government spending, and the federal deficit was 10 percent of GDP.

 

            By 1982, the year of the first debt crisis, the federal deficit reached 17 percent of GDP, as foreign debt swelled to $86 billion and debt service required 34 percent of export revenues.[4]  Although the IMF provided a major loan on the condition that Mexico exercise fiscal restraint, spending soon picked up again.  In the end, capital flight, economic contraction, and skyrocketing inflation compelled change.

 

            After the 1985 earthquake and the 1986 oil price slide, President Miguel de la Madrid Hurtado (1982-1988) began and President Salinas accelerated a dramatic change in policy.  When inflation soared to 160 percent in 1987, the business-labor-government Pact for Stability and Economic Growth was launched.  Subsidies and spending were slashed.  In 1991, the federal deficit was less than 2 percent,[5] and inflation was 19 percent--both should decline further in 1992.

 

            Structural reform has been breathtaking.  President Salinas has imposed the disciplines of competition on Mexican industry.  The average tariff has been cut from 29 percent to about 10 percent.[6]  Import licenses are required for fewer than 5 percent of products.[7]

 

            The range of industries open foreign ownership has been expanded, and increased foreign participation is permitted in other industries such as petrochemicals and insurance.[8]  A new intellectual property regime provides a model for other developing countries.

 

            About three-fourths of the 1155 parastatals have been sold, merged or closed.[9]  Recent privatizations include the national telephone company, the two national airlines and the four largest banks, as well as holdings in many branches of manufacturing.

 

            Also, President Salinas is reforming Mexico's land tenure system.  Farmers on ejidos--communal estates confiscated under land reform--will now be able to own and sell their plots and enter into joint ventures with foreign investors.  This will consolidate small farms, raise productivity, and lessen dependence on government credits and subsidies.

 

            Salinas has increased spending on infrastructure and has initiated the National Solidarity Program.  Bypassing local politicians and the Mexico City bureaucracy, "Solidarity" gives money directly to community organizations who propose projects and contribute sweat capital to improve roads, schools, hospitals, sewage, and other utilities.[10]  Resources go where they are needed most, and Salinas gets more progress for the peso--Mexico's traditional overhead of administrative bloat and corruption are curbed.

 

            Led by Maquiladora enterprises,[11] these reforms have attracted job-creating investment back to Mexico.  Rapidly increasing exports of manufactures have permitted GDP to expand at an average rate of 3.7 percent from 1989 to 1991.

 

            However, for Mexico to continue to attract capital, investors must be convinced that economic reforms will continue after Salinas leaves office in 1994.  A comprehensive trade agreement with the United States would provide an insurance policy against backsliding and offer good prospects for continued dismemberment of statist policies.

 

What Are We Really Talking About?

 

            Tariffs do not dominate trade negotiations.  Although the United States maintains some tariff spikes (duties greater than 15 percent in import-sensitive industries like apparel, footwear, and leather products), the average U.S. tariff is less than 3.5 percent.[12]  Aside from spikes, the most significant barriers to Latin American exports in the United States are:  (1) the arbitrary application of subsidy/countervailing and dumping duties and other unilateral actions under U.S. trade-remedy laws; (2) management of imports of apparel, steel, sugar, and fruits and vegetables.

 

            For the United States, eliminating Mexico's tariff is important.  However, Mexican wages are about one-eight of U.S. levels,[13] and this offers Mexico much greater advantages in attracting new manufacturing plants than a 10 percent tariff.

 

            Historically, the real barriers to U.S. sales in Mexico have been import licenses, arcane product standards, discriminatory procurement by government agencies and parastatals, sourcing and production requirements imposed on foreign investors, poor patent protection, sectoral strategies in computers and automotive products, and other methods of the import-substitution.  Mexico's record in these areas has improved dramatically but more needs to be done.  The United States needs a trade agreement that ensures that Mexico will complete its internal reforms and afford U.S. products full market access.

 

            Also, lax enforcement of Mexico's fairly stringent workplace safety and environmental rules has attracted smaller enterprises, for example in the furniture industry, from tougher jurisdictions like California. This deprives American workers jobs in much the same way as foreign subsidies.  Moreover, a coalition of U.S. environmental groups, trade unionists and church leaders have made squalid working conditions in some Maquiladoras and poor air and water quality along the border a hot political issue in the Congress.

 

            A free trade pact will not pass Congress if it is not accompanied by reasonable assurances that Mexico will enforce its workplace safety laws and a border clean-up plan.  This would give North America an analog to the EC 1992 Social Dimension.

 

            All of this requires a North American Free Trade Agreement (NAFTA) that is even more ambitious than the Canada-U.S. pact, and events are moving in this direction.  The structures of NAFTA negotiating groups and the working draft agreement indicate that the NAFTA, like the Canada-U.S. pact, will address tariffs, nontariff barriers, investment rules, trade in services, and the application of trade-remedy laws

 

            Mexico has already implemented a policy of only approving new plants that meet strict workplace safety and environmental standards and has sought to improve compliance in existing facilities.  Since the beginning 1991, it has shut (generally temporarily) hundreds of plants in the Maquiladora region for environmental violations.  However, problems persist, and these efforts will take more time, resources and technical expertise to succeed.

 

            In February 1992, the United States and Mexico unveiled a draft environmental clean-up program for the border region that would increase funding for projects and double the number of inspectors in the border area.  In addition, negotiators are working on plans to bring Mexican workplace standards up to levels comparable to those required by the U.S. Occupational Health and Safety Administration (OHSA) and to provide technical assistance Mexican inspectors.

 

            Although these moves should substantially address workplace safety and environmental issues, it is unlikely criticism of free trade from environmental activists and unionists will abate.  If a NAFTA were approved, these agreements would be only the first of many that gradually moved the United States, Mexico and perhaps Canada toward a common environmental regime.  If a NAFTA, fails Mexico will have fewer incentives to work closely with the United States on these issues.

 

            The Administration has indicated a free trade agreement with Mexico is one element of broader strategy for the rest of Latin America, and it wishes to negotiate free trade with other countries that undertake aggressive promarket reforms.  Chile is a prime candidate, because it has already has a free trade deal with Mexico and its promarket reforms are the most advanced in the region.

 

            To facilitate accession by Chile and others, the NAFTA should be a general agreement as opposed to one focusing on the specific trade and investment issues between the United States and Mexico.  This would avoid a complicated web of bilateral agreements with conflicting commitments.  Canada's presence in the negotiations is particularly useful, because the Canada-U.S. pact is the very model of such general agreement.  Assuring that the NAFTA is consistent with it pushes NAFTA negotiators towards more general provisions in a comprehensive format.

 

            In many ways, a NAFTA, parallel accords and an accession provision for other Latin American countries, would establish a process as broad, though initially not as deep, as the EC agenda; it would create an economic community less a common external tariff.  However, the negotiations required to achieve such integration would extend well beyond the first tariff cuts--fast-track talks would only be a down payment on many years of efforts to reconcile the policies and practices of the participating countries.  In the end, a common currency and external trade policy could become necessary.

 

            Noticeably absent from the NAFTA agenda is illegal immigration from Mexico.  This movement of people is largely driven by economic conditions and really cannot be addressed in trade talks.  Some NAFTA proponents have argued free trade, by raising Mexican wages, would diminish the flow of workers.  In the longer run, addressing the root causes of poverty by fostering growth, as free trade would do, is the only viable way to eliminate pressures on Mexicans to leave their homeland.  In the short run, though, large wage differentials would persist, and free trade, by bringing more Mexicans into the urban industrial culture, may actually increase the flow of people across the border.

 

Opportunities and Adjustments for the United States

 

            A NAFTA would instigate a more efficient deployment of human resources and capital throughout North America, and attract more investment from Europe and Asia.  After workers and businesses had a chance to retool and seek out more rewarding opportunities, most would earn higher wages and profits.  Free trade with Mexico would create gains and adjustments that dramatically exceeded those being experienced from the 1989 pact with Canada owing to three sets of factors.

 

            First, thanks to 40 years of tariff reductions sponsored by the General Agreement on Tariffs and Trade, the U.S. and Canadian economies were already substantially integrated in 1989.  Although about 45 percent of Mexico's exports enter the United States at very low rates of duty through the Maquiladora program,[14] the Maquiladoras did not become so prominent because U.S. tariffs on other Mexican products were high; rather, they became important because the development of export-oriented production in the traditional Mexican economy was blocked by nationalist policies.  These substantially segregated Mexico's traditional industrial sector from the U.S. and Canadian economies, as well as from the Maquiladora zone.  The most significant effect of a free trade agreement would be not to remove the modest remaining U.S. tariffs.  Rather, it would be to reassure Mexican and foreign companies that Mexican reforms are permanent and that it is safe to invest in the modernization of Mexico and to orient new production toward U.S. and Canadian markets.

 

            Similarly, the opening and modernization of an economy the size of Mexico, after so many years of misinvestment and underinvestment, offers U.S. businesses vast new opportunities to sell computers, other sophisticated electrical equipment, industrial machinery, petroleum and mining equipment, and many knowledge-intensive services.  The United States enjoys strong comparative advantages in these areas--for example, exports account for about 45 percent of U.S. capital goods production.[15]

 

            In the 1980s, an important impediment to stronger U.S. export performance was the geographic concentration of investment in East and South East Asia where Japanese firms enjoy marketing advantages through the investments of the keiretsu and geographic proximity.  An acceleration of Latin American growth and investment, led by Mexico and facilitated by free trade, could instigate a substantial shift in resources to U.S. capital goods industries and increase the technological-intensity of U.S. manufacturing.

 

            Second, because Mexico has an inexpensive yet literate labor force, free trade would increase the diversity of productive resources available to U.S. businesses in a way that free trade with Canada could not accomplish.

 

            Third, because Mexico's population is so much larger than Canada's and some 20 million live on small agricultural plots where underemployment is a problem, Mexico has many more untapped and underutilized human resources than does Canada.  In terms of GDP, Mexico is only about the size of Belgium or the Netherlands but in terms of population and human resources it is about the size of the united Germany.

 

            The integration of the North American economies would fundamentally alter the composition of resources and market opportunities available to U.S. businesses and instigate a major movement of labor and capital from activities emphasizing ordinary factory labor--assembly and simple fabrication jobs--to more technology-intensive pursuits.  In turn, the growth of factory jobs in Mexico would offer workers there new opportunities for prosperity.

 

            Although free trade has the potential to be a large-scale positive sum game for both the United States and Mexico, this redeployment of resources, being market driven, would impose painful adjustments on many U.S. workers.

 

            The most visible manifestation of this would be relentless wage competition from Mexicans for U.S. factory jobs, as well as site-dependent managerial and technical positions, in industries such as apparel, automotive components and assembly, electrical and telecommunications equipment, food products, and glass and ceramics.

 

            The United States must accept these adjustments to build a more competitive society.  For Japan, accessing low wage factory labor through keiretsu investment and trade in East and Southeast Asia is a key element in its strategy to remain competitive in manufacturing in the face of an appreciating yen and to build a society intensely specialized in high-value, knowledge-intensive activities.  If Americans reject free trade with Mexico and protect semiskilled workers from competition, then we must recognize we are choosing to be a lower-value, lower-income society than Japan.

 

            In many ways, the U.S. and Japanese economies are juxtaposed today as the British and German economies were in the 1950s.  Germany chose to join Europe, established educational and worker-adjustment policies responsive to the needs of modernizing industry, and implement industrial policies that fostered the development of leading-edge technologies.  Britain chose a nostalgic protectionism for steel and other mature industries.  In the end these industries still declined, and Britain was surpassed by Germany in the areas that drove post-war growth--automobiles, electronics and other high technology activities.  Today, incomes in Britain substantial lag those in Germany.  The lesson is clear.  If we protect factory jobs today, we destine all our children to a less prosperous future.

 

            The real challenge for proponents of free trade is to recognize the scale, duration and nature of the adjustments and opportunities that free trade would proffer and to come to terms with policy responses necessary for the United States to fully benefit.  Three sets of points are important.

 

            First, although free trade would reduce the wage gap between semiskilled workers in the United States and Mexico, it won't do so quickly, and competitive pressures on U.S. jobs won't relent quickly.  In 1990, the wage of the average Mexican industrial worker was 12 percent of his U.S. counterpart.  If Mexican real wage growth were to exceed U.S. performance by about 7 percent a year--an heroic assumption--Mexican wages would reach 25 percent of U.S. levels after 10 years and 50 percent in about 20 years.  Its is interesting to note that in 1980 average wage levels in the four East Asian newly industrializing countries were about 12 percent of U.S. levels, and in 1990, they had reached about 25 percent.[16]

 

            Although productivity on East Asian export platforms exceeds 25 percent of U.S. levels, wages there have not caught up, because so many semiskilled workers are flooding the modern Asian economy.[17]  The demographics in Mexico and elsewhere in Latin America indicate that much the same can be expected there.

 

            For the time being, low Mexican wages must be considered in juxtaposition to low Mexican productivity; however, much low productivity in Mexico results from the use of outdated capital and poor management in the traditional industrial sector.  In the Maquiladoras, where firms like Ford and AT&T have invested in modern plants, Mexican productivity is much higher than one-eight or even one-fourth of U.S. levels.  These plants, not facilities further south, are indicative of the kind of competition new Mexican exports will offer American workers.

 

            Second, in industries such as apparel and electronics moving some assembly and fabrication to Mexico permits U.S. companies to keep more technical manufacturing jobs, and accompanying design and management positions, in the United States.  Economists call this intra-industry specialization.

 

            For example, the President Warnaco Inc., a Bridgeport, Connecticut-based clothing maker, maintains that 20 percent of her 8,000 U.S. employees are dependent on 1,000 workers in Mexico.[18]  This story is recounted elsewhere, and this is an important reason why the normally united, protectionist, textile and apparel lobby is fractured on free trade.

 

            Although fewer American jobs are lost when factories migrate to Mexico rather than to Korea or Malaysia, regional effects in the United States can be just as problematic.  In 1990, AT&T was able to recall 450 furloughed workers and add 300 new jobs at its Mesquite, Texas electronics plant by moving the work of 1,000 employees at its Radford, Virginia plant to Mesquite and Matamoros in Mexico.  On a national basis, only 250 jobs were lost.  A far as Radford is concerned 1,000 jobs are gone.[19]

 

            Finally, will American firms be able to find enough properly educated and trained workers to make enough of the knowledge-intensive goods and services Mexico will need?  Evidence is mounting that the answer is no.

 

            Many U.S. manufacturers, when confronted with competition from low-wage imports, deskill jobs and increase their reliance on lower-wage, transient labor.[20]  They can't find enough adequately educated and motivated workers to choose technology-intensive options and invest prudently in training.

 

            This is the starkest contrast between the realities of American and Japanese manufacturers. Although U.S. front-line workers are clearly better educated than their Mexican competitors, as the United States and Japan seek to become more knowledge-intensive economies, inadequacies in the backgrounds of the typical American high school graduate bedevil American employers with problems Japanese firms just don't seem to face.

 

            Additional imports from Mexico would intensify pressures on employers to deskill jobs and keep wages down.  This does not mean that free trade would not raise average U.S. living standards.  However, it does mean that free trade would increase the incomes of the well educated and highly skilled at the expense of workers with only general high school backgrounds and little other training.  Free trade would exacerbate the trend towards a less equal distribution of income.

 

            This dynamic may be one of only several factors pushing labor markets in this direction, but it would have unwelcome consequences for maintaining political support for free trade over the ten to twenty years necessary to fully articulate a NAFTA.

 

            To ease worker adjustments and maintain political support, free trade with Mexico should be seen as one element of a multifaceted national policy to improve competitiveness.

 

            Tariffs and other trade barriers must be phased out at a pace that permits retirements and normal attrition to absorb as many of the job losses as practical.  In the Canada-U.S. agreement, up to 10 years is provided.  In a NAFTA, adjustments would be rougher; therefore, a 15-year transition period for apparel and several other sensitive sectors seems appropriate.

 

            We need school reforms that produce results.  The Administration has advocated national standards for public schools responsive to the requirements of a technologically sophisticated workplace.  However, the vast majority of workers that will be in the labor force 10 or 15 years from now have completed their educations.  We need a national retraining program to help our front-line workers reclaim lost skills and acquire new ones.

 

            Often it is difficult to determine whether workers have lost jobs because of import competition or other factors such as technological change.  Retraining assistance should be made available to all permanently laid-off workers, regardless of cause.  To help even out regional imbalances in adjustment costs, retraining assistance should be made available to all workers, employed or not, in communities designated as economically distressed.

 

            Although the United States has a strong position in capital goods and related services--we have been outspent on R&D and new investment in recent years by Japan.  We urgently need a national development bank to finance export-oriented investments in rapidly expanding industries and a civilian analog to the Defense Advanced Projects Research Agency to assist commercially promising, precompetitive research.

 

            In the end, we must recognize the need to join good international policy with good domestic policy.  We will not get benefits of free trade if we do not equip our workers with the skills and the tools to exploit the opportunities it offers.

 

Economic and Political Adjustment in Mexico

 

            In Mexico, free trade would impose even more difficult adjustments.

 

            Although free trade would expand markets for activities requiring inexpensive factory labor, the plants and firms poised to exploit these opportunities often are not the ones that grew comfortable under import-substitution.  For many manufacturers of products like automotive components, textiles and industrial machinery greater intra-industry trade and specialization will require modernization, downsizing, and sometimes, plant closings.  This spells difficult times for many workers in the traditional industrial centers of Mexico City, Monterrey and Guadalajara.

 

            Many new jobs will be provided by American and other foreign firms, as well as their reconfigured Mexican suppliers.  After Pemex, Ford and General Motors are Mexico's largest exporters.[21]  Also important are IBM, Dupont, Celanese, Motorola, Hewlett Packard, Nissan, and Volkswagen.  However, Mexico has strong enterprises of its own that will penetrate markets throughout North America such as Vitro in glass products, Cemex in cement, Altos-Horn in steel, Petrocel in petrochemicals, and the Alpha group in packaging, petrochemicals and autoparts.

 

            In a textbook example of intra-industry specialization, Vitro and Corning are combining their consumer house wares divisions.  By accessing Corning's U.S. and global distribution networks, Vitro will aggressively expand sales of high-quality glass, crystal and ceramic tableware; while its U.S. partner should be able concentrate more on its high-technology activities.

 

            Although President Salinas has placed economic progress ahead of political reform, he has contributed importantly to cleaning up Mexican politics.

 

            He has established a voter identification system to combat election fraud and has engendered public expectations for honest elections.  Following the August 1991 mid-term elections, two supposedly victorious PRI gubernatorial candidates were confronted by allegations of voter fraud; Salinas pressured them to stepped aside after they could not quell civil unrest.  Although, the PRI won overwhelming majorities in other races, confirming the popularity of Salinas' economic programs, these incidents indicate the PRI must bend to aspirations for honest elections or resort to self-destructive repression.

 

            To fully understand the political significance of Salinas, though, it is necessary to appreciate how the PRI has maintained supremacy for more than 60 years.  It is organized into three constituencies--the popular (middle-class professionals including government workers), labor and farm sectors.  Under the old regime, leaders in each sector enjoyed access to political power and economic benefits, which they used to control and broker support for the PRI among their constituents.  For example, the petroleum workers union awarded some Pemex contracts, creating profitable opportunities for its leaders and the resources to reward its members.  Political allegiance was easily obtained from farmers through government control of land tenure on ejidos and farmers' dependence on federal credits and other assistance.

 

            By phasing-out most price controls, import licenses and other mechanisms of a state-managed economy, economic reforms are circumscribing the power of bureaucrats and opportunities for party stalwarts in government service.  Planned education reform will erode the PRI's strength with teachers.  The labor sector was dealt a significant blow when Salinas arrested the head of the petroleum workers union and reformed Pemex procurement procedures.  More broadly, the elimination of price controls, subsidies and protection means unions are less able to deliver government favors that insulate workers from competitive realities.  Agricultural reform will emancipate ejidatarios from a neofuedal system of control.

 

            In the end, the PRI will have to accede to genuine multiparty competition and share more political power with the opposition Nation Action Party (PAN) and the Democratic Revolutionary Party (PDR), which is led by leftist icon Cuauhtemoc Cardenas Solorzano.  Does this mean Salinas, like Gorbachev, has unleashed forces that will lead to his own demise and that of the PRI?

 

            Hardly.  Salinas has avoided Gorbachev's mistake of dissolving central authority before economic reforms have created the transformations necessary to make them self-sustaining or the prosperity to support stable multiparty democracy.  Moreover, President Salinas seems to be preparing the PRI for the day when erosion of old levers of control will require its candidates to win elections through grassroots campaigning.  He has fostered more open decisionmaking inside the PRI and the party is offering more attractive candidates--younger men and women with local political bases are replacing party hacks.  Similarly, through Solidarity, Salinas has built new bases of support for PRI candidates within community organizations, and several prominent Solidarity figures won senate seats in 1991.

 

            In all of this, free trade would strengthen support for economic reform by increasing investment and technology transfers, thereby raising the incomes of businesses, professionals and ordinary workers and farmers making products for sale in the United States and a rationalized Mexican economy.  In turn, this would provoke additional economic reforms, hasten the erosion of PRI economic levers of political control, and contribute to the prosperity needed to sustain multiparty democracy.  Moreover, an agreement with the United States would make it very difficult for future Mexican governments to offer political operatives new opportunities for control by backsliding on reforms without violating the trade pact.

 

            If free trade does not materialize--either because President Bush determines support for it would hurt     his reelection prospects or the U.S. Congress decides not ratify an agreement--Mexico's ability to attract capital and increase exports at the pace necessary to sustain economic reform would be severely handicapped. 

            An American rebuke of Salinas' free trade initiative would give his critics on the left an opening.  Although, it is doubtful that the PDR or the PAN could elect the next president, a failure to achieve free trade would wound Salinas and affect the policies of the next president.  It would be difficult to dramatically reverse economic reforms already in place; however, a more left-leaning or less proreform administration could slow or halt the process.  Some protectionist measures could be reintroduced, and administrative bloat and corruption could increase its tax on private-sector efficiency, reawaken hyperinflation, and sabotage domestic and foreign investor confidence.

 

Shaping the American Response

 

            The opening of Mexico should summons a bold American policy.  Serving American interests requires thorough assessment and decisive action, not timidity.

 

            Mexico and the rest of Latin America offer prospects for vast new markets and the opportunity for Americans to build a more knowledge-intensive and much wealthier society.

 

            Legitimate concerns have been raised about environmental and workplace safety standards in Mexico.  However, throughout the negotiations, Mexico has demonstrated its desire to bring its performance up to the standards of industrialized countries.  The proposed border cleanup pact and workplace safety accord that will follow offer the United States a critical opportunity to engage Mexico that will be lost if free trade languishes.

 

            Worker adjustments can be handled best by stretching out the elimination of tariffs and quotas.  Wedding such an approach to improvements in education and training programs and industrial policies that encourage export-oriented industries would make it possible to create high wage jobs, and exploit U.S. technological advantages, in capital goods and knowledge-intensive services.

 

            Japan is jettisoning low-skill factory jobs and creating a knowledge-based economy as the keiretsu manages its expansion of trade and investment in Asia. If we can't respond by similarly combining our energies with Mexico, we cannot expect to compete with, or to live as well as, the Japanese.

 

            For decades, Americans have been preaching, nagging and cajoling Latin Americans to open their markets to U.S. goods and investment and let the compelling energies of market capitalism and entrepreneurship transform their societies.  More than any other figure, President Salinas personifies the new promarket ethos that is sweeping Latin America and disassembling the bulwarks of statism and corporatism. America's response to his request for free trade will be a defining moment for U.S. relations with the entire region.

 

            To date, President Salinas' ability to act decisively and pay minimal deference to corporatist vested interests has distinguished Mexican reforms from most other Latin American experiences.  Free trade would provide Salinas with the opportunity to solidify these gains and place Mexico firmly on a non-statist free market path and to pursue political reform.

 

            American rejection of Mexico's offer to enter into a free trade pact would undermine Salinas, and any hint that a more left-leaning PRI government might reassert even minimal elements of discarded statist policies could frighten foreign investors and jeopardize Mexico's recovery.

 

            Americans must recognize both the opportunities that reform in Mexico offers and that a failure to embrace free trade would adversely affect economic and political progress there.  The status quo is not an option, because events are moving so quickly and recovery is so fragile in Mexico that there really is no status quo in Mexico or U.S.-Mexican relations.



     [1]Committee for the Promotion of Investment in Mexico, Mexico:  Economic and Business Overview (Mexico City:  June 1990).

     [2]John H. Purcell and Dirk Damrau, Mexico:  A World Class Economy in the 1990s  (New York:  Salomon Brothers Sovereign Assessment Group, 1990), p. 2.

     [3]U.S. International Trade Commission Report 2275 (April 1990), p. 4-5.

     [4]U.S. International Trade Commission Report 2275 (April 1990), pp. 1-2, 1-3.

     [5]U.S. Embassy, Mexico, Current Economic Trends Report, (August 1991).

     [6]U.S. International Trade Commission Report 2353 (February 1991), p 1-2.

     [7]Department of State, "Mexico's Economic Reforms" (mimeo, 1991).

     [8]See Peter Morici, Trade Talks with Mexico:  A Time for Realism (Washington:  National Planning Association, 1991), pp. 21-23 and 27-29.

     [9]U.S. Embassy, Current Economic Trends Report (August 1991).

     [10]George W. Grayson, "Mexico's New Politics," Commonweal (October 25, 1991), pp. 612-614.

     [11]Maquiladora factories assemble U.S. components; duties are assessed only on Mexican value added when products reenter the United States.

     [12]U.S. International Trade Commission Report 2353 (February 1991), p. 2-2.

     [13]The U.S. Bureau of Labor Statistics estimates, Mexican compensation in manufacturing was 12 percent of U.S. levels in 1990; see U.S. Department of Labor, BLS Report 817 (November 1991).

     [14]U.S. International Trade Commission Publication 2353 (February 1991), p. 1-6.

     [15]Lawrence B. Lindsey, "America's Growing Economic  Lead,"  The Wall Street Journal (February 7, 1992), p. A14.

     [16]U.S. Department of Labor, BLS Report 817 (November 1991).

     [17]The EC enjoyed much success absorbing Portugal and Spain.  However, it is important to recognize that Mexico's population is 85 million--about 30 percent of the United States and Canada, while the population of Portugal and Spain are 50 million--about 15 percent of the EC.  Also, at the time they joined the EC, Portugal and Spain had much higher wages than Mexico does now, and they became eligible for community-wide regional development programs.

     [18]Stuart Auerbach, "Splitting Protectionist Seems:  Mexican Trade Pact Unravels the Once-Durable Textile Lobby,"  The Washington Post (May 12, 1991), pp. H1, H8.

     [19]Frank Swoboda and Martha M. Hamilton, "How Virginia Lost Jobs to Texas, Mexico:  Closing of AT&T Plant Suggests Complexity of Free Trade Issue," The Washington Post (May 5, 1991), pp. H1, H6.

     [20]See Commission on the Skills of the American Workforce, America's Choice:  high skills or low wages!  (Rochester, New York:  National Center on Education and the Economy, 1990).

     [21]America Economica (New York: Dow Jones, December 1991), p. 59.