Treaties: From Yukon to Yucatan

By S.C. GWYNNE/WASHINGTON

To hear George Bush tell it, a free-trade pact between the U.S. and Mexico would be the next best thing to a free lunch. Abolishing trade barriers between the two nations would unleash a flood of new investment that would create hundreds of thousands of jobs on both sides of the border and help stanch the tidal wave of illegal immigration from Mexico into the Southwestern states. The only downside would be temporary "dislocations" in a few American industries until they can adjust to new economic realities.

But to the President's equally passionate adversaries, the proposed North American free-trade agreement would be a disaster. It would cause devastating job losses and a further decline for struggling U.S. manufacturing industries. It would raise the specter of an environmental catastrophe equivalent to a 2,000-mile Love Canal along the U.S.-Mexico border. And it would increase America's vulnerability to Asian competition by allowing the Japanese to take advantage of Mexico's cheap labor and use that country as a staging area for a new surge of exports to the U.S.

The enormous gulf between these competing visions of the future has produced one of the hottest legislative battles of the year -- and the most feverish trade debate in memory. It pits a muscular coalition of protectionist Democrats, Big Labor and environmental groups against free-market Republicans, much of corporate America, and a high-profile Mexican government team backed by squadrons of big-time lobbyists and public relations firms.

The issue came to a head last week when both houses of Congress, after heated arguments, passed resolutions extending the so-called fast-track authority that U.S. Administrations have long used to negotiate international ! trade agreements. Translated from Washington-speak, fast track would authorize the President and his Trade Representative, Carla Hills, to cut a deal with Mexico without congressional meddling. The lawmakers would have the power to vote down a treaty once it is reached, but not to alter it.

At stake in this showdown is Bush's vision of a North American free-trade zone stretching from the Yukon to the Yucatan. If he is able to add a Mexican pact to the free-trade agreement concluded with Canada in 1988, the effect would be to consolidate 360 million consumers into a $6 trillion market, 32% larger than the European Community. The question being posed by skeptics is whether the pact will provide the benefits Bush predicts, or instead increase America's already dire trade deficit, which is expected to reach $75 billion this year. Both economic theory and historic fact support Bush. The Soviet Union's imploding economy is a good example of what happens when a country closes its doors to trade though tariffs, import quotas and other constraints. Mexico, in contrast, offers perhaps the best current example of the benefits that can occur when a country lowers trade barriers. Since the mid-1980s, Mexico has taken a number of daring, unilateral steps to shed the shackles of protectionism. It has slashed its maximum tariff rates from 100% to 20%, and its average tariff from 25% to 10%, while scrapping other nontariff barriers to imports. Seeking a larger role for free enterprise, the country has put many of its 1,155 inefficient state-owned companies up for sale to private interests.

Result: after years of negative growth, Mexico's economy is expanding at a brisk 4% annual rate. Inflation has plummeted from 160% in 1987 to about 25%. The boom has created new markets for U.S. exports, which have more than doubled, from $12.4 billion in 1986 to $28.4 billion last year, creating an estimated 264,000 new jobs in the U.S. in machinery, equipment and agricultural sectors. Mexico is America's third largest trading partner (after Canada and Japan), importing $295 per capita from the U.S., vs. $266 for the European Community.

According to separate studies by the University of Maryland, the accounting firm Peat Marwick and the International Trade Commission, a free-trade agreement would accelerate these welcome trends. The University of Maryland study, for example, predicts that the U.S. economy would gain 44,500 jobs in the first five years of a free-trade pact. The big winners would include producers of machinery and metals, chemicals, plastics and rubber. The losers: clothing, construction, parts of the fruit and vegetable business, furniture, leather and glass.

Mexican industries, notably capital goods like machine tools, would suffer considerably from U.S. competition at first. But those losses would be more than balanced by a flood of new investment from the U.S., Japan and other nations. That influx could help offset Mexico's burdensome $97 billion debt, for which there are few prospects of forgiveness.

The pact's opponents look at the evidence and reach opposite conclusions. They fear that Mexico's low wages (averaging $2.32 an hour, vs. $14.31 for American workers) will tempt U.S. companies to move vast numbers of unskilled and semiskilled manufacturing jobs south of the border. A recent study by the General Accounting Office, for example, found that employment in the U.S. furniture industry dropped 10% in the past year. All those jobs were lost when 28 wood-furniture makers moved to Mexico in search of cheaper labor and less restrictive environmental rules. Florida's fruit and vegetable growers claim the plan would "annihilate" 8,700 agricultural jobs and billions of the state's farming revenue. According to the United Automobile Workers, 75,000 jobs have already been lost to Mexico.

Those who would try to protect low-skilled jobs have good reason to fear the agreement. Even though Mexicans are far less productive than their American counterparts, there is no arguing with the competitive advantages of cheap wages. Just how American workers would be affected by more open borders can be measured by what has happened to the 2,000 plants along the U.S.-Mexico line that enjoy barrier-free trade. Nine out of 10 of those plants -- known as maquiladoras -- are owned by U.S. companies; they employ 465,000 Mexican workers, who are mainly engaged in assembly of electronic, automotive and textile products for export to the U.S. Those are, in fact, jobs that have gone south. And while American manufacturers argue that this kept jobs from moving to Asia, that is small comfort to displaced, unskilled American workers.

Democratic Senator Bob Kerrey of Nebraska, who supports free trade, says the only solution is for the U.S. to come to grips with the deteriorating competitiveness of its work force. "There's a much larger issue here," says Kerrey. "If all I do is focus on low-skilled jobs lost in textiles or small- scale manufacturing, I'd be missing the point, saying, well, I'm just going to protect those jobs. I believe free trade is good for us in the long run, but I also believe that we have to address the issue of worker education and training and readjustment."

Another fear expressed by critics is that a free-trade agreement, which will have the effect of locking in all of Mexico's liberalizations, will end up simply providing the Japanese with opportunities to invest in plants that will export to the U.S. That would squarely contradict one of the Bush Administration's primary aims: to create a trading bloc in the western hemisphere to compete with the formidable bloc being created by Japan in Asia.

"((Mexican President)) Carlos Salinas de Gortari has said Mexico wants Asian investment," says Clyde Prestowitz, president of the Economic Strategy Institute, a Washington think tank. "He wants it in high-value-added, high- technology industries ((that will)) be exporting to the U.S. What we emphatically don't want to do is to make Mexico safe for Japanese investment." Prestowitz' solution is for the U.S. to induce foreign investors to export certain percentages of what they make in Mexico to third countries.

Whatever else it does, a Mexican free-trade agreement seems likely to accelerate the decline in the number of American manufacturing jobs, which provided 35% of U.S. employment in 1948 but now account for only 17%. In time, say economists, both technological advances in the U.S. and competitive pressures from low-wage countries will mean the loss of most of America's unskilled or semiskilled manufacturing jobs.

One of the major arguments against the proposed pact is not economic but ecological: the maquiladoras have an unenviable track record of pollution, which is affecting the health of Americans across the border. Says Stewart Hudson of the National Wildlife Federation: "The maquiladora program is a case study of the kinds of environmental catastrophes that can happen where trade and investment rule." The biggest fear of environmental groups, which include Environmental Action, Greenpeace and Friends of the Earth, is that the leaks and spills and pollution of border rivers such as the New River and the Nogales Wash will turn the border into a cesspool, and that Mexico will end up exporting to the U.S. both its pollution and products made in environmentally unfriendly ways.

Bush's victory on Capitol Hill last week was the result of some % uncharacteristically deft political maneuvering on the domestic front. He has succeeded in splintering both textile and environmental lobbies, while mollifying fence-sitting Democrats such as Richard Gephardt by assuring them that the issues of environment, rules of origin covering foreign investors in Mexico, and adjustment programs for displaced workers will be addressed before any agreement is signed. Bush also cornered the Democrats into choosing between two important constituencies, labor and Hispanics. Just as Bush hoped, the Democratic National Committee recently denounced fast-track authorization, which put them on the side of the shrinking constituency, against the growing one. "The party is not looking at the numbers," said a Democratic Congressman who supported fast track. "They're choosing the protectionist label over a community that will be the largest ethnic minority in 10 years."

Although last week's vote cleared away the biggest obstacle to negotiating a trade agreement with Mexico, it will be some time before Congress gets to vote on an actual agreement. When it is completed, it is likely to be so loaded with adjustments for threatened industries that very little pain will be felt in this country for a long time. And the benefits, according to most economists, will be felt most keenly by the next generation.

With reporting by Michael Duffy/Washington and Laura Lopez/Mexico City