Oranges For Bulldozers

By Jay Branegan

Some people look south of the Yucatan and see poverty and underdevelopment. Robert Petterson sees roads and bridges to be built and land to be cleared for modern housing and industry--all with the yellow earthmovers and other heavy equipment made by Caterpillar, based in Peoria, Ill. A quarter of the firm's $21.2 billion annual revenues comes from exports, but not enough of it from Latin America, thanks in part to tariffs that can reach 30%. Create a giant free-trade zone in the hemisphere, says Petterson, a Caterpillar vice president, and "we calculate that industrywide, over 10 years, the market for construction equipment would be 60,000 machines higher"--or a cool $4.5 billion.

Gains like that, multiplied across scores of industries, will be much on the minds of President Bush and the other 33 heads of government from Latin America and Canada when they gather later this month in Quebec City for the third Summit of the Americas. Topping the agenda: how to move forward with the Free Trade Area of the Americas, an ambitious effort launched in 1994 to create a single market, free of trade barriers, from the southern tip of Chile to the Arctic Circle, with a population of 800 million and a total annual income of $11 trillion.

Consumers would benefit from lower prices, and each country's strongest industries would gain new markets. But the trade pact would also be highly disruptive, creating new winners and losers.

Most Republicans support the free-trade area, and President Bush wants Congress to give him the "fast-track" negotiating authority that is essential to forging a deal. But the AFL-CIO, fearing the shift of U.S. jobs to Latin America, has called for rejection of the trade agreement in its current form. And Congress now includes more Democrats than when it failed to grant fast-track authority to President Clinton.

Many South American unions are against the free-trade area. And Brazil, the biggest economy in Latin America, worries about its inefficient, state-protected industries. Brazil wants to assert itself as the Latin economic and political leader through Mercosur, its customs union with Argentina, Chile and other neighbors, and it will be the region's toughest negotiator.

Helping push for the free-trade area are America's high-tech firms. "Five hundred million people live south of Texas, but only 100 million of them have phones in their homes, and only 17 million have personal computers," says Michael Maibach, a vice president at chipmaker Intel. One reason: tariffs on computer and telecom equipment range as high as 30% in some Latin American countries. Telephone regulations also keep Internet fees high. Phone companies like BellSouth and WorldCom are eager to expand in the Latin American market. Bell Canada International works in Mexico and four South American countries but chafes at "buy local" rules and tariffs. "We'd love to be able to buy the right communications network equipment from wherever it is best," says spokesman Peter Burn.

The free-trade area would also offer a chance for smaller guys to go international. WaveRider Communications, based in Toronto, a maker of wireless Web equipment, has just opened a South Florida office to prospect for new business in such places as rural Venezuela, where the government's peculiar radio-frequency allocations drive up costs fourfold for some components. "If we could get low-cost, 128K wireless connections into their schools, offices and homes, they'd go crazy for it," says Scott Winn, the firm's South America manager.

But for every potential winner, it seems, there's a loser. Saddled with high taxes and a decrepit transportation infrastructure, the Brazilian machinery industry would simply "collapse" if forced to compete with North American firms, a Brazilian industry official says. The country's chemical industry says it would have to invest an extra $5 billion a year to avoid a similar fate, while Gianni Coda, director of Fiat Latin America, frets that "the entire Brazilian automotive sector will lose out."

Latin America's shoe and apparel makers could be big winners, as could the major U.S. apparel firms, who rely on imports to supply two-thirds of the U.S. clothing market and who see a chance to find new suppliers after the end of worldwide quotas in 2005.

The loser would likely be Asia. Larry Martin, president of the American Apparel and Footwear Association, says that since 1994, when NAFTA went into effect, "the Mexican and Caribbean share of our imports has risen from 24% to 38%, while China's share has dropped from 11% to 6%." Brazil's footwear industry is overwhelmed in the U.S. by China, where costs are 10% lower, but foresees a boom if it can eliminate the current 8.5% U.S. tariff.

Gains in Latin American fruit, flowers and other agricultural exports are supposed to help offset losses in other areas, and North America's normally pro-trade farmers are worried. Says Shawn Stevenson, a citrus and pistachio farmer in California's San Joaquin Valley: "It's hard to compete against folks who don't have the regulatory burden we do, or a minimum wage, or high fuel prices." Brazilian producers of frozen, concentrated orange juice are thirstily eyeing the U.S. market, in which they once enjoyed a 45% share. That was before the U.S. industry got Washington to impose whopping 63% tariffs, slashing Brazil's slice of the $8 billion market to just 12%. Brazil, with its much lower costs, has threatened to scuttle the whole free-trade area unless it regains free access for its juice. But the citrus agency in Florida claims that without tariffs, it could not "keep our growers in business."

The free-trade area could turn some of NAFTA's winners into losers. The Mexican auto-parts industry, for instance, exports more than 60% of its production to the U.S. But Enrique Zambrano Benitez, CEO of Proeza, a partsmaker that employs 5,000 in Monterrey, Mexico, is anxious about Brazil's big parts indus-try, which currently faces U.S. barriers that would fall in the proposed free-trade area.

Many executives harbored similar fears about the NAFTA treaty, but it has delivered far more opportunities than disruptions. That's the strongest argument that proponents of freer trade will bring with them to Quebec City.

--With reporting by Sol Biderman/Sao Paulo, Susan Catto/Toronto, David S. Jackson/Los Angeles, Peter Katel/Mexico City, Tim Padgett/Miami and David Thigpen/Chicago

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With reporting by Sol Biderman/Sao Paulo, Susan Catto/ Toronto, David S. Jackson/Los Angeles, Peter Katel/ Mexico City, Tim Padgett/Miami and David Thigpen/Chicago