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.
[8]See
Peter Morici, Trade Talks with Mexico:
A Time for Realism (Washington:
National Planning Association, 1991), pp. 21-23 and 27-29.
[11]Maquiladora
factories assemble U.S. components; duties are assessed only on Mexican value
added when products reenter the United States.
[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).
[15]Lawrence
B. Lindsey, "America's Growing Economic
Lead," The Wall Street
Journal (February 7, 1992), p. A14.
[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.