Time - Man of the Year/Time_Man_of_the_Year_Compact_Publishing_3YX-Disc-1_Compact_Publishing_1993.iso/moy/081092/08109933.000

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                                                                                TRADE, Page 43

MEGAMARKET


The North American Free Trade Agreement: a $6 trillion market
gamble for 363 million consumers

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


    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.