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What If Nafta Loses?

Even for a President who practices the art of high-wire politics without a net, the North American Free Trade Agreement is a heart-stopper. Teetering toward a scheduled Nov. 17 House showdown still short of the votes needed for victory, Bill Clinton knows that a NAFTA defeat could send a chill through the global economy and hobble his Presidency.

To understand why, consider this bleak morning-after scenario: On Nov. 18, a shell-shocked President boards Air Force One for the longest flight of his career. As he heads to Seattle for the meeting of the Asian Pacific Economic Cooperation forum, aides inform Clinton that anti-Yanqui protests have broken out in Mexico. Wire stories chronicle the peso's plunge and warn of a global drift toward protectionism. In Seattle, things get worse. A stone-faced Clinton listens as Chinese President Jiang Zemin rebuffs pleas for better relations. When Clinton gamely exhorts 14 Pacific Rim leaders to broaden trade with the U.S., they snicker at the thought that he can't even broaden it in his own backyard.

Meanwhile, in Washington, pundits are declaring the Clinton Presidency a Carteresque flop. Nervous Democrats react by distancing themselves from the Administration's ambitious domestic agenda. In Dallas, thousands whoop it up as independent Ross Perot talks about 1996.

ZEALOUS CONVERT. Far-fetched? Hardly. If NAFTA loses, it will be a stunning defeat, the first rejection of an international-trade accord since Congress gave the President authority to negotiate trade matters in 1934. A defeat could cast a pall over Clinton's Presidency and tarnish the U.S.'s reputation as a world trade leader. More is at stake than just trade. Even Clinton himself admits as much. NAFTA, he said in a Nov. 10 press conference, "has become the symbol of where we want to go in the world."

Indeed, the NAFTA fight is about far more than formalizing an already extensive network of continental trade. Failure of the accord would be a "tragedy," says William J. McDonough, president of the Federal Reserve Bank of New York, because it would "exacerbate protectionist trends around the world." Adds Robert E. Rubin, Clinton's White House

economic coordinator: "It's enormously important to prevail. If we recoil against change, we will stagnate and decline."

Certainly, no one can accuse the President of shrinking from the battle. After lukewarm support early on, Clinton in the final days before the vote has been passionately scrambling for votes with promises of White House favors. He has lashed out at labor, one of his party's core constituencies. And he finally turned the White House guns on Perot by sending Vice-President Al Gore to debate the Texan on Nov. 9.

That the NAFTA battle has taken on such dimensions is surprising, given the banality of the fine print in the 2,000-page trade pact. Over the short term, the agreement is expected to have an imperceptible impact on the $6 trillion U.S. economy. Mexico is indeed the biggest winner--mainly at the expense of low-wage countries such as Korea, Taiwan, and Ireland. But the U.S. and Canada are likely to benefit by the elimination of the few tariffs left in North America. And the accord should create a strong trading bloc, spurring economic growth across the continent.

There's an additional sweetener for the U.S., too: new rules that give trade benefits only to products with high percentages of North American-made parts will make it unprofitable for Japan and European multinationals to assemble finished products in Mexico from foreign-made parts. That means increased investment in U.S. manufacturing facilities. "We certainly will invest more in the U.S. than we previously would have," says Horst Langer, who overseas U.S. operations for Germany's Siemens. Indeed, Langer argues that "technically sophisticated, high-value goods could only be made in the U.S." under NAFTA.

The fallout from a defeat, however, could go far beyond the three North American nations. Already, global markets are showing jitters over a possible "no" vote. If a defeat were viewed as a victory for protectionism, David Malpass, director of international economics for Bear, Stearns & Co., envisions a contraction in world trade and a slowdown in investment flows. "You can expect to see a falloff in world stock markets of 10% or more," Malpass predicts.

Nowhere would a NAFTA loss be felt more strongly than in Mexico and in Latin America, where the accord is seen as a major step along a 10-year march toward free-market reforms. Mexican President Carlos Salinas de Gortari stands to lose the most. With selection of his successor overdue, Salinas worries that his PRI (Institutional Revolutionary Party) could lose its 64-year hold on the nation's government to a less reform-minded regime. "The most important reason to vote for NAFTA is to lock in [Mexico's] reforms," argues John H. Bryan Jr., chairman of Sara Lee Corp.

BIG RIPPLES. Indeed, in the wake of a nay vote, Salinas' well-received economic initiatives--privatization, fiscal reform, and the push for increased productivity--could be thrown into reverse. The overheated Bolsa, inflated by free-trade expectations, could plunge. And to prevent capital flight, interest rates would have to jump dramatically.

The strain on Mexico was already showing during the week before the vote. The peso plunged 4.8% vs. the dollar on the eve of the Perot-Gore debate. The day of the debate, in the nation's weekly Treasury-bill auction, the Mexican T-bill rate jumped four points, to 17%. The peso recovered, thanks to intervention by Mexico's central bank, market sources say. But market analysts say the auction is an indication that rates could climb perilously higher if NAFTA goes down--potentially turning Mexico's current slowdown into a recession. "This is one of the greatest moments of uncertainty that we have faced in the past decade," says Jes s Reyes Heroles, chief economist of the Grupo de Economistas y Asociados, a Mexico City consulting firm.

Farther south, reform-minded leaders would see the "no" vote as an outright betrayal. Under the plan originally hatched by former President George Bush, other Latin countries and Caribbean Basin nations could sign onto the agreement, eventually creating a hemispheric free-trade zone to dwarf any in Europe or Asia. Chile has already said it hopes to join the bloc; Argentina and Colombia are close behind. "Defeat would be a slap in the face to all leaders in the Western Hemisphere who have chosen the capitalist road over government-controlled economies," says Robert E. Denham, chairman of Salomon Inc. Confirms C sar Gaviria, President of Colombia: "Failure to approve NAFTA would considerably damage the atmosphere of economic understanding between North America and Latin America."

Then there's Asia. With relations between the U.S. and China in a downward spiral, Clinton has agreed to host the first meeting of American and Chinese leaders since the 1989 Tiananmen Square massacre. The parley is slated to begin in Seattle a mere 48 hours after the NAFTA vote. The U.S. sees the conference as a chance for Clinton to reassert U.S. displeasure over Beijing's abuse of human rights and spread of missile technology--and convince President Jiang to open his country's gigantic market to U.S. goods. But Clinton could be thwarted if he limps in as a battered victim of NAFTA-phobia. "To say the timing [of the meeting] is unfortunate is an understatement," sighs one worried senior Administration official.

Jiang isn't the only reason Clinton may end up sleepless in Seattle. With NAFTA's defeat, Japanese Prime Minister Morihiro Hosokawa might wonder aloud to Clinton how the U.S. can fault Japan's inward turn on fiscal and political reforms when Congress has rejected his expansionist trade policies. Other Asian nations are sure to shudder, too. The defeat of NAFTA, says Tony Miller, director general of Hong Kong's Trade Dept., "would be a message to the world that the U.S. is closing in on itself, becoming introverted. That is not a reassuring message to Asia."

PEROT FODDER. A further worry is the effect of a "no" vote on the General Agreement on Tariffs & Trade. The U.S. has taken the lead role in the 7-year-old, 109-nation Geneva-based trade talks that are scheduled to conclude by Dec. 15. A nay vote also would signal a U.S. retreat from trade leadership and undercut the authority of American trade negotiators in both Europe and Asia. "The question is U.S. leadership in the world," says House Foreign Affairs Committee Chairman Lee H. Hamilton (D-Ind.). "That's going to be seriously hurt."

Indeed, some trade experts fear that the President won't have the clout to push the current round to a successful conclusion. "If Ross Perot can scare the American people about a trade agreement with two countries, he'll have an even better case against an agreement with 109," worries Gerrit Jeelof, chairman of the European American Chamber of Commerce. Adds Sir Denys H. Henderson, chairman of Britain's Imperial Chemical Industries PLC: "The next two months are absolutely critical for world trade. NAFTA and GATT are absolutely imperative if we're ever going to pull out of this very low-growth environment. My fingers are firmly crossed." If the accord fails, he frets: "I fear the reaction will be a GATT failure the next month. Then, all sorts of fortresses will start going up."

At home, meanwhile, the stakes are just as high. Still struggling to overcome fears about declining wages and plants moving abroad, Clinton is forced to rely on Republicans for support. That's a perilous position to be in: The GOPers themselves are split between voting their free-trade convictions and the mischievous impulse to watch Clinton self-destruct. In fact, a NAFTA belly-flop would likely wound both parties. "It will strengthen the hand of retrograde labor unions, demagogues like Perot, and reactionaries like Pat Buchanan--the most mean-spirited on the right and the left," says William Kristol, head of the Project for the Republican Future, a GOP think tank. "That aids the prophets of fear in both parties."

For Clinton, the first big casualty could be his agenda for next year. Democrats would be unlikely to fall in line behind Clinton's domestic-policy initiatives, which will include such controversial issues as a health-care overhaul and welfare reform. "Members of Congress will be panicked," says Democrat strategist Ted Van Dyk. "If the President goes down, they'll be afraid of supporting him on almost anything."

An embarrassment on NAFTA, following so closely on the heels of defeats in the New Jersey and Virginia gubernatorial races and the New York City mayoral vote, also bodes poorly for Democratic prospects in the '94 midterm elections. The Presidential party traditionally loses seats in the mid-terms. In the Senate, 21 of the 34 seats up for reelection are held by Democrats, and a damaged Clinton could cost the party its current 12-vote edge. "The Republicans are going to be highly energized," says University of Wisconsin political scientist Charles O. Jones. "They'll work hard at getting the best candidates, they'll attract more money, and they'll picture the Democrats as incapable of running the government."

CRUMBLING CORE? Even more worrisome to the White House are the rifts in the Democratic Party that have widened during the NAFTA fight. In last year's campaign, Clinton ran--and won--as a different kind of Democrat: one ready to defy the party's traditional coalitions. Clinton embraced NAFTA as a vehicle to attract business support and middle-class suburban voters.

But the party's core constituencies are fighting back with unexpected fury, using NAFTA as their rallying point. Organized labor, blacks, and some environmental and consumer groups are fighting for nothing less than the heart and soul of the Democratic Party, arguing that good jobs are more important than economists' abstract arguments about the benefits of free trade.

If traditional Democratic constituencies are in control, it would be difficult for Clinton to turn his 43% plurality in 1992 into a majority in '96, says Al From, president of the centrist Democratic Leadership Council. "You can't have a political party that is run by declining interests and expect it to expand its base," From says. "The problem for the party before Clinton was that it was dominated by forces that looked backward rather than by forces that wanted to lead the party into the future."

Who will win out in the end? In the battle's waning stages, the White House has acknowledged how tight the infighting is by deliberately raising the stakes. In his closing days' rhetoric, Clinton has transformed the struggle from an inconclusive economic debate about wages, jobs, and investment flows into something more cosmic: A huge foreign policy test in which America's leadership in the post-cold war era is on the line.

That may yet turn out to be an exaggeration, even if NAFTA goes down in flames. But it's hard to overestimate the importance of the vote to come. "This is a choice between the politics of fear and the politics of hope," said Gore in his rough-and-tumble showdown with Perot. But for Clinton, there is no choice. To avoid a grim plane ride to Seattle, he must convince America that a failed NAFTA has fearful consequences.

TABLE: THE REPERCUSSIONS IF NAFTA GOES DOWN

PAPER TIGER A "no" vote would be the first congressional rejection of a modern-day President's trade agreement. It would shake international confidence in the U. S. and signal an American retreat from global leadership.

TRUMPED ON TRADE Clinton would be embarrassed at the Nov. 20 Asian-Pacific conference, a confab he's hosting in Seattle to discuss trade. Japan would move more slowly on U.S. demands for market access. Worldwide trade talks in Geneva could die.

BROTHER, CAN YOU SPARE A PESO? Mexico would seek out investments from Japan and Germany, and anti-American sentiment south of the border would grow. Hopes of improving Mexico's standard of living, slowing illegal immigration to the U.S., and cleaning up the border could be dashed.

RETREAT ON REFORM Growing U.S. investment in Latin America would slow, and moves toward political and economic reform in the hemisphere could be dealt a setback. Ruling Canadian Liberals would be emboldened to abandon trade liberalization with the U.S.

CARTER REDUX? At home, President Clinton would look weak and ineffective. Democrats would be less likely to vote for his domestic programs. Clinton badly needs congressional support for such hot-button issues as health-care reform.

WHO LOST NAFTA? The Democratic Party would play the blame game over the loss. The split could help the GOP capture the Senate in 1994.

DATA: BUSINESS WEEK

TABLE: WAR OF WORDS: THE TWO SIDES OF NAFTA

IF NAFTA PASSES, THESE ARE THE WINNERS:

THE AUTO INDUSTRY Detroit will be able to produce cars in the U.S. and sell them in Mexico--which will significantly boost the auto makers' exports.

PRESIDENT CLINTON With a NAFTA win, the White House chalks up a crucial legislative victory it can use as leverage to push for new trade liberalization measures from U.S. trading partners.

MEXICO President Carlos Salinas, who has staked his

country's future and his own presidential place in history on NAFTA, can handpick a successor who will follow in his footsteps and continue market-opening reforms.

BIPARTISANSHIP GOP Senate leader Bob Dole and other Republicans who have long

supported NAFTA can offset their

images as hard-line, gridlock politicos.

A NEW ECONOMIC ORDER High-tech industries and skilled workers will profit from an emerging world market that rewards those who produce the best-quality goods at the lowest possible prices.

TABLE: IF THE TRADE PACT FAILS, THESE ARE THE WINNERS:

BILATERALISM With a major blow having been dealt to the emerging North American trading bloc, the U.S., Mexico, and Canada likely will begin negotiating their own trade agreements with governments in Asia and Europe.

ROSS PEROT That sucking sound will be the populist taking a deep breath before he starts his 1996 campaign.

LOW-TECH WORKERS U.S. industries such as fruit- and

vegetable-growing and broom-making will face less

competition from low-wage Mexican rivals, at least for the time being.

ORGANIZED LABOR After years of declining influence, America's unions have made NAFTA a defeat-or-die issue; if they win, they get a much-needed shot in the arm.

AMERICA FIRSTERS Knocking down the accord will boost Pat Buchanan

and others.

TABLE: NAFTA: IT'S NOT REALLY ABOUT JOBS

PLEDGING ALLEGIANCE AT AN ANTI-NAFTA RALLY IN TAMPA

THE PRO-NAFTA VIEW

NAFTA will produce a gain of 170,000 U.S. jobs during the next decade, says a study by economists Gary Hufbauer and Jeffrey Schott.

THE ANTI POSITION

NAFTA will mean a job loss of 550,000 in the next 10 years, says a forecast by the Economic Policy Institute in Washington, a think tank.

THE CONTEXT

With or without NAFTA, DRI/McGraw-Hill figures overall U.S. employment will grow by about 18 million by 2004.

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