Megamarket

By Barbara Rudolph

Supporters see it as the best hope for escape from economic stagnation, a boost for trade and investment, a boon for employment, a lift for standards of living. Critics counter that it will strike a mortal blow at entire sectors of U.S., Canadian and Mexican industry, idling tens of thousands of workers whose jobs will move elsewhere, never to return. Europeans and Asians fret that it may accelerate a division of the world into giant protectionist trading blocs lurking behind new walls of tariffs and bureaucratic restrictions.

The subject of these conflicting visions is an edifice of daring scope and complexity, the North American Free Trade Agreement. Negotiators for the U.S., Canada and Mexico, at work virtually nonstop for the past 14 months, are in the final stages of preparing several hundred pages of regulation upon regulation, written in droning legalese. Yet once approved by the three governments, the trade pact will mark a dramatic turn in the history of the continent: at a stroke it will formalize a grand economic alliance, cement Mexico into a unity it has always occupied geographically, if not psychologically and culturally, and reshape the way North American business is done.

The agreement will bind together three major economies -- two mature and wealthy, the third relatively poor but in the throes of rapid and profound modernization. Building upon a similar agreement between the U.S. and Canada that took effect in 1989, the expanded pact will create a $6.4 trillion megamarket of 363 million consumers. But it will also challenge the three governments with the prospect of far-reaching social dislocations. What worries politicians in all three nations is, Will the trade-off be worth it?

At its most basic level, the treaty will roll back as many as 20,000 separate tariffs over the next 10 to 15 years. Currently those barriers average nearly 11% in Mexico, around 5% in Canada and less than 4% in the U.S. (though duties on products like cocoa, for example, go as high as 20% in Mexico; in Canada tequila is slapped with a 183% duty). More important will be the steps that NAFTA takes to diminish nontariff barriers, such as dairy and cotton quotas in the U.S. and Canada, and various import licenses in Mexico. By rapidly widening the consumer market, the pact aims to spur capital investment across all three jurisdictions. This would be a striking change for Mexico, which has long banned outside ownership of strategic sectors like farm and border lands and oil.

While sweeping, the treaty will not cover everything: Mexico, in line with its constitution, has flatly ruled out foreign ownership in its energy industry, while Canada seeks to extend the blanket protection it won in its earlier agreement with the U.S. for "cultural industries" such as television and publishing. But in a major concession, Mexico has agreed to allow American companies to establish stakes in its banks and, under NAFTA will include insurance and securities firms, institutions previously barred to foreign ownership.

Behind the numbing technicalities that define any trade agreement, the bottom line of NAFTA concerns growth and jobs. Proponents argue that the agreement will create both. Washington's conservative Heritage Foundation estimates that Mexico's growth rate, 3.6% last year, could rise to between 6% and 9% if the treaty is ratified.

The U.S. economy will not get anywhere near as big a jolt -- it is eight times as large as the other two combined -- but should enjoy an explosion in exports to Mexico. According to trade experts, those could increase substantially from a projected $40 billion this year, ultimately creating more and bigger American paychecks. Says U.S. Trade Representative Carla Hills: "For every billion dollars worth of exports, we gain 20,000 jobs." More important, she told a press conference last week, jobs in export industries pay on average 17% more than employment in the rest of the economy.

Labor leaders fear pain rather than gain. They contend that tens of thousands of workers will be laid off as U.S. companies shift production south to take advantage of industrial wages in Mexico that are roughly one-sixth of those in the U.S. and Canada. The U.S. auto industry alone could lose thousands of positions. Mexican workers earning less than $20 a day are already building hundreds of thousands of Ford Mercury Tracers and Buick Centuries in Hermosillo and Ramos Arizpe and shipping them north. Under the pact, the Big Three's presence south of the border will surely grow in the next few years.

Yet many of those lost jobs would probably vanish anyway, either going under to foreign competition or moving to Asia. And there is an advantage to keeping even lost employment closer to home: manufacturers who move to Mexico are more likely to retain their proximate U.S. suppliers than are those who move to Asia. In fact, the trade pact may persuade many U.S. and other companies to shift production from low-cost Asian plants to low-cost Mexican plants, which could generate additional business for U.S. suppliers.

Zenith Electronics, for example, the leading U.S. producer of television sets, has already moved many of its operations from Taiwan to Mexico, and two months ago closed its Asian assembly plant altogether. Without a Mexican base, Zenith guesses, it would have lost about 4,000 U.S. jobs from its Chicago circuit-board plant and its Missouri molding and assembly factory. Another 2,000 to 5,000 supplier jobs would have vanished as well.

Despite the stakes, NAFTA has not made much of a splash in the U.S. presidential campaign . . . so far. The main reason is that Bill Clinton generally supports the idea of a free-trade treaty and believes it is in the best interest of American labor, at least over the long term. But he has criticized Bush Administration negotiators for not doing enough to protect American workers. "The President made clear representations on labor standards," Clinton said, "and there appears to be very little of that in the agreement."

What will be the pact's effect on the global economy? Most economists believe that the world is drifting toward three major regional trading blocs: North America, Europe and, more slowly, Asia. The question, says Michael Aho, a fellow at the Council on Foreign Relations in New York City, is whether these connections will turn out to be "benign or belligerent."

Some opponents of NAFTA argue that regional trade arrangements are inevitably destructive. "The NAFTA pact is managed trade," says economist and Nobel laureate Milton Friedman. "Worldwide reduction of tariff barriers is much to be preferred to regional trade agreements." That may be so, but the so-called Uruguay Round of global tariff reductions under the General Agreement on Tariffs and Trade is stalled. Proponents of the North American pact argue that nothing in the agreement will contravene the GATT accord, if it is ever reached.

And in any event, with or without NAFTA, the three North American economies are becoming ever more entwined. The U.S.-Canada trade relationship, for years the world's largest ($176 billion last year), grew at a substantially higher rate after the 1989 deal. Even without NAFTA, U.S.-Mexico trade has exploded to $43 billion, more than double the total five years ago.

The one certainty is that the trade agreement will not please everyone. Like all political accords, it will be packed with compromises, limitations and second-best solutions. The best basis for assessing the accord is not whether it causes dislocation for any given group of enterprises or people -- international competition already does that -- but whether it provides a better foundation for the economic security and future prosperity of 363 million people. The benefits derived so far from closer economic relationships between the three countries, and the benefits likely to ensue, make the proposed pact look like a gamble worth taking.

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With reporting by David Aikman/Washington and Laura Lopez/Mexico City, with other bureaus