The U.S. And Mexico: A Closer Look At The Costs Of Free Trade

What would be the consequences of free trade between Mexico and the U.S.? Proponents of a North American Free Trade Agreement (NAFTA), which would unite the U.S., Canada, and Mexico in a free-trade zone with 360 million consumers, say it's a win-win prospect, with all participants sure to enjoy enhanced trade and growth. Opponents view free trade as a win-lose proposition, with Mexico set to gain jobs and output mostly at the expense of U.S. workers. Two recent studies suggest that the likely outcomes won't be so clear-cut. For one thing, many victims won't be anywhere near North America. And trade creation will indeed hurt low-skilled workers in the U.S., but high-skilled workers may gain.

DRI/McGraw-Hill argues that the most probable near-term impact of NAFTA's adoption will be on low-cost Asian producers who export to the U.S. and Canada. Mexico already boasts a stunning wage advantage: Hourly compensation in manufacturing amounted to $2.03 in 1991, while the four Asian tigers--Hong Kong, Korea, Singapore, and Taiwan--averaged $4.10 an hour. (For the U.S., the figure was $15.33 in 1991.)

A free-trade agreement will lift existing tariff and nontariff barriers and thus give Mexico a further advantage. dri/McGraw-Hill predicts that Mexico will be most competitive in product lines that most overlap those of Asian producers--electrical machinery and consumer electronics, for example. Mexico should be viewed as a threat by such countries as Singapore: Fully 91% of its U.S. exports are in product lines in which Mexico enjoys success (chart). Asia swamps Mexico, though, in exports to the U.S. of apparel and office equipment.

If trade diversion was the only consequence of free trade between Mexico and the U.S., then the effects of NAFTA would hardly be felt here. Over time, however, Mexican producers are likely to target new industries, and Asian and other manufacturers increasingly will use Mexico as a platform for entering the U.S. market, thus evading whatever protective measures apply to non-NAFTA countries, argues Edward E. Leamer, an economist at the University of California at Los Angeles. Looking at the history of changes in relative prices of labor- and capital-intensive goods as foreign competition rises, Leamer predicts that over several years, this commitment to free trade will reduce real annual wages for low-skilled work in the U.S. by about $1,000, while annual earnings for high-skilled work could rise as much as $6,000. "Everyone need not benefit from increased international commerce," he concludes.

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