The Mexico Pact: Worth The Price?

In San Diego, city bigwigs are thinking of building the first truly international airport--with a main runway extending across the border into Mexico. In Japan, executives at Nissan Motor Co. plan a $1 billion auto-assembly plant in Aguascalientes that may ship cars and trucks into the U. S. duty-free. And in Nuevo Laredo, Ruben Solis Carbajal, 27, sits hunched over wiring diagrams in an electronics classroom, awaiting the day when a deluge of

foreign investment gives him the job he needs to lift him and his family into Mexico's small middle class.

On both sides of the border, hopes--and fears--are rising as the prospect of free trade with Mexico edges toward reality. The idea took a big leap forward on May 14, when the Senate Finance Committee and the House Ways & Means Committee easily approved talks aimed at adding Mexico to the existing U. S.-Canada free-trade zone. The result would be the world's largest free market, with 364 million consumers and a total output of $6 trillion--25% larger than the European Community.

The deal would sustain the boom in North American trade. During the 1980s, U. S. exports to Canada and Mexico doubled, from $55.3 billion to $111.4 billion. The pact would also mark a bold departure. Never before have industrialized countries created such a massive free-trade area with a Third World neighbor, much less one with 90 million people, half of them under 16 (table). After decades of sending its job-starved laborers north, Mexico hopes instead to move its economy from Latin America to North America. But millions of the new North Americans are desperately poor, ready to work for $5 a day.

Those vast disparities have startled everyone--from union leaders to environmentalists to powerful business lobbies. All these interested parties have now elbowed their way to the negotiating table. The result is likely to be a watered-down free-trade agreement (FTA). But even with an agreement less grand than Presidemt Bush and Mexican President Carlos Salinas de Gortari envisioned, the inevitable melting away of the border is certain to continue.

That's just what worries U. S. workers. Take Thelma Martin, who for 21 years has helped produce irons and coffee pots at a Hamilton Beach/Proctor-Silex Inc. factory in Southern Pines, N. C. She and hundreds of other workers--many of them single parents--face layoffs without severance pay if the company shifts more production to a plant in Juarez, Mexico. Appealing to board members at the annual meeting in Cleveland of the parent company, NACCO Industries Inc., Martin asked them to imagine what it would mean to lose your health insurance at midnight after your last day at work.

SLUDGE AND SMOG. Indeed, American labor leaders are sounding alarms over the Mexico deal. Hundreds of thousands of workers such as Martin, they say, would lose jobs as plants move to cheap-labor havens in Mexico. Environmentalists point to the sludge in the Rio Grande and the smog hanging over Mexico City and warn that Mexico could degrade clean-air and toxic-waste standards across the continent. Already, the lower Rio Grande is the most polluted river in the U. S., gathering massive doses of chemical waste and sewage along its course from El Paso to the Gulf of Mexico.

The consternation doesn't stop there. Critics claim that free trade will draw more of Mexico's desperate jobless north. Concerned parents wonder if more drugs will sneak into the U. S. along with swelling exports from Mexico. Farmers fear that cheap fruits and vegetables, some of them contaminated with pesticides banned in the U. S., will stream over the border. Removing the U. S. tariff on orange juice will "wipe out the Florida industry," says Bill Becker, a citrus grower in St. Lucie County, Fla., and chairman of the Florida Citrus Commission. "We can't compete with our environmental constraints, labor constraints, and the other regulations."

Mexophobia has not been lost on Washington. To win Congress' approval to start talks, the Administration laid bare many of its negotiating objectives, including transition periods of more than 10 years for reducing U. S. tariffs and rules requiring that manufactured goods from Mexico contain more than 50% local parts and labor in order to qualify for duty-free treatment (table).

U. S. environmentalists drew a strong hand as well, picking up a seat at the negotiating table and establishing an official advisory panel of environmentalists to match existing groups of business and labor advisers. And the Administration promised to extract pledges from Mexico for strict enforcement of environmental regulations, particularly along the border. The U. S. is committed to use "whatever carrots and sticks it can to bring up Mexican standards," says Richard A. Johnson, former General Counsel for International Trade at the Commerce Dept.

Some issues have already been decreed too hot to handle. In a bow to Mexican sensitivities, the U. S. won't push for direct foreign investment in Mexico's nationalized oil industry. U. S. Trade Representative Carla A. Hills calmed American unions' biggest fears by ruling out discussions of so-called labor exports--allowing Mexico to export its workers along with its goods by opening the border to totally free immigration. And shoving ideological objections aside, President Bush has agreed to increase unemployment benefits to U. S. workers who lose their jobs to import competition.

The White House promises to make sure that Congress' blessings won't end there. Too much is at stake. Failure to iron out an agreement would be a humiliating defeat for Bush. Not only does the Administration see the FTA as a long-term boost to the U. S. economy, but it's also insurance against any future reversal of Salinas' pro-U. S. attitude. The purpose of the trade pact "is primarily to stabilize Salinas and cement the structural changes going on in the Mexican economy," says James K. Galbraith, an economist at the University of Texas.

In fact, something resembling free trade between Mexico and the U. S. began five years ago, when Mexico started tearing down import barriers after it joined the General Agreement on Tariffs & Trade. Today, 45% of Mexican goods enter the U. S. tariff-free. The Hamilton Beach/Proctor-Silex plant in Juarez, just south of El Paso, is one of 2,000 maquiladoras, plants that have sprung up near the border over the past two decades using cheap labor to assemble American-made components for reexport to the U. S. Farther inside Mexico, Chrysler Corp. makes its Ram Charger trucks in Mexico City and ships them north. General Motors Corp., with 55,000 workers in Mexico, is the nation's largest private employer. And Americans have been using Mexican onions and tomatoes for their salad for some time.

So, the more precise question is not whether the U. S. should enter into free trade with Mexico, but at what pace. "Free trade just formalizes what's already happening," says Claudio X. Gonzalez, general director of Kimberly-Clark de Mexico. But U. S. companies still aren't likely to stampede southward. Even with free trade, Mexico will remain a quirky place to do business. The phones often don't work, and electricity can be a sometime thing. The roads are bumpy. The bureaucracy remains imposing. The legal system is something out of Franz Kafka and often subject to political interpretation or outright corruption. And the government controls prices. "With all the change, capitalism is still a dirty word around here," says a corporate lawyer in Mexico City.

To remake Mexico would require a tremendous surge in foreign investment. Investment to date has produced mainly low-pay, low-skill assembly jobs. After oil, the 500,000 workers in the maquiladoras provide Mexico with its second-largest source of income. But the maquilas are a creature of the current tariff structure that would be swept away with an FTA. Theoretically, Mexico could then expect world-class, integrated foreign investment away from border areas already strained by the lack of roads, housing, sanitation, and schools.

But there are other limits to progress. Primary is Mexico's fast-growing population, which swells the labor force by nearly 1 million new job-seekers every year, many of them failing to reach the eighth grade. With unemployment at 13.5%, even thousands of new jobs with U. S. companies would barely begin to absorb the surplus. And with so many available for work, Mexico's low wages won't rise dramatically anytime soon. That doesn't paint a pretty picture for the immigration problem, either. While new jobs will help keep some Mexican workers home, they won't come close to stopping the steady stream of job seekers northward.

Then there's the rough-and-tumble side of Mexico, where laws of all sorts, including environmental rules, are often ignored. Safety features, from seat belts to hazardous-material-transport rules, for example, are viewed as imports from more neurotic cultures. These attitudes run deep. Carlos Solis Villalobos experienced the sort of nightmare labor and environmentalists both fear. In late March, he was getting out of his car parked on a residential street in Juarez, when a chemical truck rolled by spraying calcium sulfate through a leaky valve. Solis was hospitalized with extensive body burns.

PEN STROKE. Free trade alone won't cure environmental abuses in Mexico. But even so, a scenario of hundreds of U. S. companies scurrying south to the land of easy-polluting is unlikely. With all of its problems, Mexico has a strong executive that can shut down factories for polluting with the stroke of a pen. In April, with U. S. environmentalists decrying filthy air and tainted water, President Salinas closed scores of factories--foreign and Mexican-owned--from a General Motors maquiladora to a Hoechst chemical plant. In Mexico, polluting managers even risk their freedom. "No matter who you are, they can throw you in jail tomorrow," says Samuel Podolsky, general manager of Novedades Editores, a Mexican publishing company.

Despite the muscle of its supporters, a sweeping North American pact is far from certain. Formidable opposition in Canada is one big problem. Although Prime Minister Brian Mulroney enthusiastically backs North American free trade as "a next logical step," his Progressive Conservative government is weak and unpopular. Canada's deep recession, which has raised unemployment to 10.2%, is being blamed largely on the 1988 U. S.-Canada FTA. Polls show a majority of Canadians are opposed to including Mexico in a free-trade area. The North American deal is being put together to provide multinationals "the lowest common denominator" in wages and job benefits, charges Maude Barlow, who chairs the Council of Canadians, an anti-FTA group.

As if that weren't enough to imperil the tripartite deal, U. S. trade ambassador Hills has vowed to use the talks to beat down barriers in Canada to U. S. movies, TV programming, books, and magazines. Canadian Trade Minister Michael Wilson warns that protection of Canada's "cultural industries" isn't negotiable. The Mulroney government "is not prepared to negotiate now what was settled then."

Time will weigh heavily on the negotiators' minds. Congress' renewal of White House negotiating authority is for two years. Bush is up for reelection in '92; Salinas' term ends in '94. That gives bargainers barely a moment to reach the biggest free-trade deal ever undertaken.


RULES OF ORIGIN A U.S.-Mexico free trade pact will set domestic-content requirements for Mexican exports. Auto makers, for example, want levels as high as 80% to keep the Japanese from using Mexico as a back door into the U.S.

TRANSITION Various measures might guard against sudden surges in imports of fruits, vegetables, cement, and other goods from Mexico. Phasing in new rules or tariffs over 10 years or more is one possibility. Another is "snap-back" tariffs reimposing duties if goods flood in

AGRICULTURE To counter complaints from domestic farmers, U.S. officials will step up inspection of Mexican produce for pesticide residues

THE ENVIRONMENT Mexico will have to commit to stronger enforcement of existing regulations along the border. Also, U.S. companies might have to submit environmental assessments of their plants in Mexico. The two governments will work together to combat air and water pollution and hazardous waste at the border

JOBS President Bush has promised retraining and extended unemployment benefits for U.S. workers who lose their jobs because of imports or plant relocations, even though no such provision will be in the pact