Global competition requires free trade. Politics, not economics, is driving Mexico and the United States to closer ties. On the Mexican side, the depression that started in 1982 threatens the 62-year rule of the Institutional Revolutionary Party. In response, President Carlos Salinas de Gortari has taken radical steps, slashing import barriers, easing foreign investment rules and selling off hundreds of state companies. A free-trade pact would bolster his standing by drawing new investment and ensuring that Salinas’s successors could not undo his reforms. For the United States, a trade agreement is a way to enhance the political stability of a neighbor-and ease the distrust that has tainted relations for 150 years.
Free trade will be a disaster for U.S. workers. Mexico is an economic dwarf compared with the United States. Its output, $175 billion last year, is one thirtieth that of the U.S. economy, and Mexico accounts for only 6 percent of American imports. Despite the hundreds of U.S.-owned factories across the border, the United States sells more manufactured goods to Mexico than it buys. Mexico’s major exports, including electrical machinery, cars and oil, already face negligible U.S. tariffs. True, Mexican clothing, leather goods, furniture and vegetables would gain a larger share of the U.S. market if tariffs and quotas were eliminated. But modernizing the economy will require plenty of new factory equipment-much of which will come from the United States. A trade agreement also could force Mexico to drop barriers to imports of U.S. cars, appliances, chemicals and food.
What about the threat of low-wage competition? It’s a red herring. Free access to the U.S. market would serve largely to give Mexico’s exports an edge over goods from other low-wage nations. That helps American workers: a lamp maker in Taiwan or a dressmaker in Thailand is unlikely to buy components from U.S. factories, but Mexico’s proximity gives U.S. suppliers a good shot. The United Auto Workers union leads the fight against free trade, but Massachusetts Institute of Technology auto expert James Womack says that Mexico will fill a niche now occupied by small cars produced in East Asia. “What could logically be made in Mexico is not made in North America at the moment,” he says.
Mexican goods will flood the United States. “Free trade” does not mean that trade will suddenly be free. The 1988 U.S.-Canada trade pact is full of special provisions covering cars, textiles, hogs, logs and beer. Any agreement with Mexico is sure to have similar exceptions. Reductions in tariffs and quotas will be phased in over 10 years or more. The effect will be felt not overnight but over time, as businesses treat North America as a single market and plan investments accordingly.
A hemispheric free-trade zone is next. Not likely. Free trade from the Arctic Circle to Tierra del Fuego makes good headlines, but it is decades away at best. Much of South America is in economic chaos. The thought of negotiating separate trade agreements with Paraguay, Panama and Peru gives U.S. negotiators nightmares.
Regional agreements are bad news. In the best of all worlds, trade would be free among many countries. The United States, Canada and Mexico all know that, which is why they support the 100-nation General Agreement on Tariffs and Trade. But there are lots of issues GATT has yet to face. Regional pacts allow countries to go where GATT will not. They do create inefficiencies: if Mexico faces lower tariffs than Brazil, its products may drive out goods the Brazilians produce more cheaply. That hurts Brazil, but not the United States.
Free trade is not a make-or-break issue for the U.S. economy. Wages account for much less of the cost of manufacturing than they used to; in most industries, free access to cheap labor will neither save mismanaged U.S. companies nor bankrupt well-run ones. Sugar-cane and garment workers will be hurt; workers in capital-goods industries might gain. The real impact of free trade, though, will come from having a more prosperous and stable neighbor. That won’t show up in your pocketbook tomorrow, but it will pay political and economic dividends for years to come.
