What Has Nafta Wrought? Plenty Of Trade

Trucks are rumbling back and forth across the U.S.-Mexico border, carrying tomatoes, chewing gum, Ford Broncos, electric generators, and Maybelline mascara at a feverish clip. U.S. and Canadian companies are rushing to set up offices and factories in Nuevo Laredo, Monterrey, and Guadalajara.

In the north, Canada's Bank of Montreal has just launched the first mutual fund, to be marketed in all three countries, targeting companies poised to cash in on the North American Free Trade Agreement. The portfolio includes key players in Mexico's construction craze: Quebec's Bombardier, telecommunications giant Telefonos de Mexico, and Caterpillar.

As the first anniversary of NAFTA's signing approaches, the treaty is doing what it was designed to do: erase national borders for business and create a new North American market. As cross-border commerce quickens its pace under the accord, executives are no longer planning operations just in the U.S., Canada, or Mexico. They're thinking North America. While NAFTA hasn't yet created all the jobs or given Mexico the boost its most zealous backers predicted, it is paying big dividends in increased trade.

BIG WINNERS. Just look at the numbers. According to the latest Commerce Dept. data, U.S. exports to Mexico have increased by almost 18% in the first 10 months since NAFTA went into effect (charts). That rate is expected to increase slightly through the rest of the year as an improving Mexican economy pulls in more U.S. wares. The biggest winners will be food and beverage manufacturers such as Sara Lee; such consumer-goods manufacturers as Procter & Gamble, whose exports to Mexico rose 75% in the first half of 1994; and agribusinesses, among them Archer-Daniels-Midland. "Our exports to Mexico have tripled, and they're going to triple again next year," crows ADM CEO Dwayne O. Andreas.

Hand in hand with the rise in trade on the continent, direct foreign investment is also increasing, if a bit more slowly, knitting the economies ever closer. U.S. and Canadian companies invested $2.4 billion in Mexico in the first eight months of 1994, accounting for 55% of Mexico's total foreign direct investment. Third countries, too, are investing in North American capacity to take advantage of lower tariffs. In early November, Toyota Motor Co. announced a $450 million expansion in Ontario to make Corollas for the North American market. "When you look at the number of business contacts, the partnerships developing, the investments being made," says John M. Weekes, Canada's chief NAFTA negotiator, "NAFTA is laying the foundation for something that will be a lot bigger."

EARLY WARNING. NAFTA's players are getting a nice boost from the business cycle, since its implementation has coincided with a recovery in the U.S. and Canada and with Mexico's climb out of its economic slump. Economists admit it's difficult to say how much of the good news is NAFTA's doing and how much the result of cyclical events. They also caution that it's way too early to hail NAFTA as an unqualified success.

For one thing, it hasn't been the awesome job creator envisioned by some. The U.S. Labor Dept. estimates that fewer than 100,000 of the 1.7 million net new jobs created in the U.S. this year have been NAFTA-related. But then, neither have job losses approached the figures predicted by opponents. Through the first 10 months of the year, 12,015 U.S. workers have been certified for aid under NAFTA's Adjustment Assistance Program. That's about what the Labor Dept. had expected.

Moreover, the Mexican economic miracle NAFTA was supposed to trigger has yet to materialize. Political violence during Mexico's election year helped keep interest rates high and delayed investment decisions by foreigners and Mexicans alike. Growth predictions of 4% have been lowered to 3% for 1994, an insufficient rate for creating the 1 million new jobs Mexico needs each year.

Some of the accord's strongest advocates worry that economic progress remains a long-term proposition. Gary C. Hufbauer, a senior fellow at the Institute for International Economics in Washington, argues that NAFTA can't be a vehicle for job creation in Mexico while companies there struggle with real borrowing rates of more than 10%.

Another somewhat disappointing trend is that U.S. imports from Mexico and Canada have been rising faster than exports to both countries. U.S. makers of high-end products were supposed to clean up in Mexico. Instead, electronics, computer products, and telecommunications equipment have been coming into the U.S. from Mexico twice as fast as they've gone in the other direction. If the trend continues, the U.S. will suck in a record $48 billion in Mexican goods and $120 billion in Canadian goods this year. Economist Jeff Faux of the anti-NAFTA Economic Policy Institute argues that the large U.S.-Mexican wage gap explains the phenomenon. NAFTA opponents "pointed out there was a fairly sophisticated manufacturing base in Mexico that pays peanuts, and the numbers bear that out," he says.

Even so, U.S. exports to Mexico are growing three times faster than U.S. exports to the rest of the world. And Mexico just passed Japan as the second-largest consumer of U.S. products. U.S. trade with Canada is up more than 10%--double the gain with Europe and Asia. And almost two-thirds of Canada's imports come from the U.S, while U.S. purchases account for 25% of Canada's gross domestic product. All the more incentive for CEOs to "look, not [only] at what's happening now, but what will happen five years from now," says Regina Vargo, director of Mexican affairs for the U.S. Commerce Dept.

For the U.S. auto industry, the dramatic changes promised by NAFTA are here. Before the free-trade pact was approved, the Big Three had to produce locally most of the cars they sold in Mexico. Now, Ford can freely export cars to Mexico. At the same time, it's spending $60 million to revamp its Cuautitln plant near Mexico City to produce smaller cars and light trucks for global sales. The numbers are startling: Ford's vehicle exports to Mexico are up from 1,200 in 1993 to an estimated 30,000 this year. Its exports of Mexican-made vehicles to the U.S. have jumped, too--up 30% in the year's first eight months.

"WE'VE CREATED JOBS." The good news for American auto workers is that there was no flood of jobs to Mexico. Although Mexico's average labor costs of $6 an hour, including benefits, are vastly lower than those of the U.S., productivity is lower because of less automation. And almost 80% of the components in Ford's Mexican-assembled cars for export come from the U.S. "We've created jobs here and in the U.S.," boasts Victor M. Barreiro, president and general director of Ford's Mexico operations.

Although political turmoil and poverty will be a drag on Mexico for decades, corporate execs are counting on more growth. And the optimism is giving momentum to proposals to add other Latin American countries to NAFTA, starting with Chile, linking the entire hemisphere with trade. Canada's Weekes thinks it could happen within the next two years. After all, free-trade Republicans are now in full control of the U.S. Congress. Although it's no easy challenge, a hemispheric free-trade zone may no longer be just a pipe dream.

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