Supporting Free Trade with Mexico

An edited version appeared in the Journal of Commerce (April 23, 1993)

Peter Morici

 

The recent visit of Japanese Prime Minister Miyazawa underscored the importance--and difficulty--of opening markets to U.S. products.  It also focused attention on the need to assemble a North American "team" to compete with the economic alliances of Japan and Europe. 

 

The North American Free Trade Agreement represents a genuine accomplishment in both these areas.  Amid continuing pressures regarding NAFTA's labor and environmental provisions, it is important the Clinton Administration not let NAFTA slip from its grasp.

 

By any reasonable measure, NAFTA will prove a profound achievement.  It offers an opportunity to radically redefine U.S. relations with Mexico and create vast economic benefits for American workers.

 

For much of this century, Mexico has viewed the United States with ambivalence and suspicion.  Like other Latin American nations, its economic policies were designed to discourage imports and limit U.S. influence.

 

By the mid-1980s, ballooning government deficits and excessive government control left Mexico with crushing debt, triple-digit inflation, antiquated industries, overcrowded farms, crumbling infrastructure, and a neglected environment.  President de la Madrid began the painful process of restoring fiscal discipline.  His successor, President Salinas, is tearing down the old regime and seeking an historic new partnership with the United States.  Average tariffs have been slashed from 29 to 10 percent, restrictions on foreign investment have been eased, and four-fifths of the 1,155 state-owned enterprises have been sold, merged or closed.  American business practices and institutions are now widely emulated.

 

All of this has sparked recovery in Mexico and created new export opportunities for Americans.  Since 1986, U.S. sales to Mexico have more than tripled and now exceed $40 billion a year, making it our third largest market after Canada and Japan.  These sales are heavily weighted toward knowledge-intensive products--transportation equipment, machinery and other durable goods account for about half.  They support the kinds of high-paying, high-quality jobs President Clinton's economic program aims to create.

 

Of course, increased trade has brought increased competition for many American workers.  Over the last six years, U.S. imports from Mexico were up $18 billion, displacing many jobs in industries like apparel, basic electronics and automotive parts.  However, U.S. exports during that time jumped $28 billion, and we enjoy a sizeable trade surplus with Mexico.  Expanding two-way commerce creates more take home pay for Americans than it destroys, something NAFTA's labor critics ought to consider.

 

More significantly, the opening of Mexico has only begun.  Its restrictions on trade and investment still exceed U.S. and Canadian practices, and it needs to establish foreign confidence in the permanence of its reforms and in its legal system.

 

This is where NAFTA enters the picture.  Like the Canada-U.S. trade pact, it eliminates tariffs, most quotas and other barriers to trade.  It establishes timetables for the repeal of industrial and foreign investment policies--for example, Mexican restrictions on automotive imports and U.S. investments in that sector.

           

As importantly, though, NAFTA mandates the modernization of Mexico's legal framework for the conduct of business.  It includes provisions requiring Mexico to implement a modern antitrust regime, spells out in great detail standards for Mexican intellectual property enforcement, and provides for international arbitration to ensure that Mexico's judicial system delivers fair treatment and security for U.S. and Canadian property.

 

Overall, this is an unprecedented package of concessions by Mexico, and represents a wholesale repudiation of past nationalist policies.  The continuing process of reform will translate into vast new opportunities for U.S. exports and investment.

 

Recent studies predict NAFTA will create small net employment gains in this country.  Yet, placing too much emphasis on these estimates is wrongheaded, because few public policies we undertake today will appreciably affect the overall level of U.S. employment in ten or twenty years--macroeconomic conditions will determine that.

 

What really counts is the impact of NAFTA on the quality of job opportunities Americans will enjoy as they increasingly specialize in higher-value, knowledge-intensive exports to Mexico.  This is something economic models chronically underestimate, because they are ill-equipped to gauge the wealth-creating effects of the kinds of social, political and cultural transformations that will be assisted by NAFTA.

 

As it stands, NAFTA is still incomplete, and President Clinton will not submit it to Congress until side agreements on environmental enforcement, labor standards and import surges have been negotiated. On this last point, the trade agreement already permits the United States to reimpose tariffs for up to four years.  This provision is generous and Americans should accept it as adequate.

 

Regarding environment and labor standards, Mexican enforcement leaves much to be desired, and the United States and Canada are already providing technical assistance to Mexico.  Moreover, the Clinton Administration is proposing the creation of trinational commissions to study environmental and labor issues and release non-binding recommendations.

 

This sensible proposal will undoubtedly meet opposition from some who advocate much tougher approaches.  For example, Senator Max Baucus proposes empowering the environmental commission to impose trade sanctions similar to the countervailing duties imposed on subsidized imports.  U.S. Trade Representative Mickey Kantor should resist these pressures for three reasons.

 

First, countervailing duties have had little impact on the overall amount or effect of most foreign subsidy programs.  The recent history of U.S. trade relations indicates "get tough" strategies are counterproductive if we really wish to achieve fundamental change in foreign practices.

 

Second, intrusion into the internal workings of the Mexican government by a supranational commission would be a difficult pill for Mexico to swallow.

 

Third, the Salinas Administration is now making a concerted effort to reverse the environmental neglect of the past.  Lack of resources, not resolve, are the real obstacles, and the prosperity created by NAFTA will do much to alleviate this constraint.

 

It is time for Americans to recognize the foreign policy triumph NAFTA represents, and the positive contribution it can make to North American economic and environmental progress.  We should emphasize collaboration, not confrontation, in the final phase of negotiations.