Building Free Trade Bloc By Bloc

When United Flight 1002 bounced to a landing at Dulles International Airport on the afternoon of May 2, groans mixed with cheers throughout the cabin. Nearly all of the passengers were U.S. officials returning home from a week of intensive trade negotiations in Mexico City. Fourteen-hour workdays and local cuisine had taken their toll: A week later, some were still too weak to climb on another plane to Toronto. The conclusion of ambitious negotiations linking the U.S., Canada, and Mexico into the world's largest free-trade zone had to be put off a little longer.

No matter. Despite grumblings on Capitol Hill, the talks on a North American Free Trade Agreement (NAFTA) are suddenly moving so fast that a summertime deal is almost inevitable. The discussions, which ultimately could boost U.S. exports by $10 billion, have resulted in tentative agreements on major provisions--from tough content rules to the deregulation of cross-border truck traffic.

NORTHERN EXPOSURE. Negotiators from Canada and the U.S. say the breakthrough came when Mexican officials began cutting deals that seemed virtually impossible just weeks ago. "The Mexicans realized we are at the 11th hour in the talks, and they began asking what they had to do to close the deal," says one senior Bush Administration official. Their incentive: The pact will expand Canada-Mexico trade by 30% by 1995 and add 600,000 jobs to Mexico, according to an Institute for International Economics study.

Mexico now seems willing to accept, for instance, a crucial provision that any cars assembled in North America would have to have a 60% regional parts and labor content to qualify for duty-free treatment--although auto makers may be able to count such costs as executive salaries, employee uniforms, and advertising toward local content (table). Mexico and Canada, both eager for continued Japanese investment, initially had resisted the strict origin requirement.

As U.S. negotiators straggled into Toronto to tie up the loose ends, Canadian Prime Minister Brian Mulroney was preparing for a May 20 White House meeting with President Bush and a trek to Capitol Hill the next day. Despite polls showing that just 4% of Canadians approve of the current U.S.-Canada free-trade pact, Mulroney is willing to sign the broad deal.

His motive: the hope that such an agreement will pull the Canadian economy out of its two-year-old slump. Mulroney sees Mexico as a prime market for Canadian telecommunications and mining equipment, and the NAFTA as a way to update Canada's four-year-old free-trade agreement with the U.S.

GUTTED GATT. Meanwhile, the NAFTA euphoria has all but blotted out the slow collapse of the granddaddy of all trade negotiations: the six-year-old, 108-nation General Agreement on Tariffs & Trade (GATT) talks in Geneva. Meant to cool all the world's protectionist fevers in one broad stroke, the negotiations have been the Bush White House's top trade priority. But Europe's refusal to cut its $45 billion in yearly farm subsidies has turned many Third World nations and exporters of agricultural goods against the pact.

The Administration has asserted that a new GATT treaty would boost world trade by $5 trillion over a decade. That, says U.S. Trade Representative Carla A. Hills, is like "giving every American family of four a check for $17,000 payable over 10 years." Warnings of a failure are equally hyperbolic. "The worldwide trading system as we know it will collapse," warns Dexter Baker, chairman of the National Association of Manufacturers. "Once the genie of trade wars is out of the bottle, the cost will be in the tens of billions of dollars."

Both the hopes and fears are exaggerated. The failure of global trade talks would not scrap the current rules of GATT, under which worldwide trade has

nearly doubled in the past 10 years. Besides, trade liberalization continues outside GATT in the form of regional agreements. Latin American nations are anxious to piggyback onto NAFTA once it is ratified, and a free-trade zone stretching from the Arctic to Tierra del Fuego by the end of the decade is not out of the question. Eastern Europe and Scandinavia are candidates for inclusion in the 12-member European Community, whose trading rules are being liberalized. And a large, informal Asian trading bloc, with Japan as its core, is a growing reality.

Academics once warned that the rise of such regional agreements would carve the world into a set of warring, protectionist trade blocs. One fear was that trading groups would steer local customers away from low-cost producers outside the region toward low-tariff producers within the bloc. Instead, regional pacts have spread the philosophy of freer trade by showing how increased local trade leads to economic growth. "Global liberalization may be best," says World Bank Chief Economist Lawrence H. Summers. "But regional liberalization is very likely to be good."

There is a danger in the collapse of GATT: It might encourage protectionist forces, especially in the U.S. Take the trade bill introduced on May 7 by House Ways & Means Chairman Dan Rostenkowski (D-Ill.). The election-year measure sweeps up half a dozen tough trade initiatives and is likely to pass the House this summer. Democrats see the bill as a way to draw an election-year distinction between the "free-trade" Administration and the "fair-trade" Congress.

Some provisions have broad support, including a measure to computerize the U.S. Customs Service's recordkeeping. Other provisions would require the Administration to get tougher with nations that exclude U.S. goods outright or that violate existing trade agreements.

But the bill does have some blatantly protectionist components. One aims to freeze the number of Japanese cars sold in the U.S. for seven years. It would even apply to cars assembled in the U.S. by Japanese subsidiaries.

AIRBUS ATTACK. Few expect such extreme provisions to turn into law. But the trade bill marks a growing determination in Congress--even among Republicans--to take charge of trade issues. When the Administration announced a tentative agreement limiting European government subsidies to Airbus Industrie recently, Senator John Danforth (R-Mo.) helped lead the attack on the pact.

Ultimately, the legislators' newfound interest in trade bodes ill for congressional ratification of the final NAFTA treaty--at least this year. Although Bill Clinton supports NAFTA in principle, Democrats are likely to bottle up any agreement submitted to Congress in 1992, focusing on fears that it will move jobs to low-wage Mexico. In a year when smoldering inner cities are already suffering from the flight of high-wage factory jobs abroad, that argument is tough to counter.

But failure to ratify a pact before Congress hits the campaign trail would only be a temporary setback. Barring a major upheaval in the November election, the next Congress likely will ratify the pact. And rather than being the harbinger of a world divided into regional fortresses, NAFTA may mark the start of a major liberalization of world trade.

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