A fast-track reality check: a veteran reporter looks at the not-so-nifty side of NAFTA.

Like many other long-time free traders, I was persuaded (in retrospect, perhaps lulled) by the arguments in favor of NAFTA, the treaty that created a common market linking Mexico, Canada, and the United States, when it passed Congress in late 1993. You remember the pitch: Not only would American consumers benefit from cheaper products, but a job boom in Mexico would presumably slow the flow of illegal Mexican immigrants into California and Texas. Besides, it was argued, after more than a decade of increasing global competition, there was no way to build an economic moat around the continental U.S. to protect our industry.

Yes, like others, I was troubled by the prospect of a continuing loss of American manufacturing jobs to low-wage economies such as Mexico, but Ross Perot's dire image of "a giant sucking sound" echoing across America as 6 million middle-class jobs drained south of the border seemed a colorful but off-the-wall exaggeration. Certainly I understood that there would be economic pain across the Midwest heartland, the Northeast, and various other industrial pockets--especially in the auto and electronics industries--as American companies leapt to cut costs by jumping production facilities to Tijuana and Baja California, or to the Mexican beltway of factories, called "maquiladoras," just across the Rio Grande from southern Texas. But the work going to Mexico involved low-skilled, low-paying industrial jobs that American workers wouldn't want, and anyway, those jobs were already being exported to Singapore, Indonesia, and China. Furthermore, Congress would provide money to retrain NAFTA-displaced U.S. workers for better, higher-skilled jobs.

Finally, and most fundamentally, the iron logic of the global free market dictated that as jobs moved south of the border, Mexican wages and living standards would rise toward American levels, Mexico would become a richer consumer market for American-made products, and the balance of trade between Mexico and the United States would tilt in America!s favor. At least, that's the argument that Neil Whiteley-Ross, vice president of San Diego's Economic Development Corporation, made to me. "Our view is, if we can make Tijuana stronger, then their per capita income will increase, their consumption in San Diego will increase, our tax base will increase," Ross asserted. "They will need more products. They will buy more San Diego, and over time, we'll blur that border."

But recent reporting on both sides of the border for a new PBS series, "Surviving the Bottom Line," has sobered me considerably on NAFTA and suggests that it's time for a reality check on some of the basic flaws in the pro-NAFTA logic.

To be sure, the scorecard on NAFTA is far from complete. And while it's true that Ross Perot's "giant sucking sound" did not materialize, at least 150,000 American workers have been certified as having suffered NAFTA-related job losses. Given the difficulties of certification, some economists put the actual total of jobs lost at several hundred thousand.

Even more fundamentally, something went badly wrong with the "iron logic" of the market. The anticipated growth in Mexican consumers' appetite and purchasing power for American-made goods has not materialized. America's $5.4 billion favorable balance of trade with Mexico in 1992 has shifted to an $18 billion American trade deficit in 1996. Some of the shift is attributable to the collapse of the Mexican peso in 1994, but the negative trade swing began before the peso plunged.

Note, moreover, this shift did not occur because Mexico's homegrown industry suddenly began to out-compete American rivals. It occurred primarily because such global giants as Sony, Matsushita, Samsung, and Panasonic found that NAFTA ensured their entry into the American market through the back door: produce in Mexico, sell in the USA. Under NAFTA's North American common market, Mexico has, for trade purposes, become a part of the USA. So goods made in Mexico meet American requirements for local content. This saves Japanese and Korean electronics companies from paying most American duties on their Mexican-based exports.

Since NAFTA, billions of dollars of foreign industrial investments have poured into Mexico. In Tijuana, there are more than 600 maquiladora factories, enjoying both Mexican and American trade privileges, and employing more than 140,000 workers. "Were doing product now that we didn't even dream about in the '60s, that didn't even exist--for computers, for microprocessors, for the medical and electronics industries," asserts John Riley, an American businessman who operates four maquiladora plants and heads a regional maquiladora trade association.

Despite gleaming new micro-electronic clean rooms, the increasing complexity of the work, and the production boom in Mexico's new industrial belts, the wages, living standards, and purchasing power of the Mexican maquiladora workforce have not risen. This is a gaping hole in the NAFTA theory. Mexican workers are not enjoying the fruits of the NAFTA boom. According to Mexican labor statistics and analysis by American economists and scholars, such as Harley Shaiken of the University of California at Berkeley, average workers in Mexican industry, including the high-tech maquiladoras, now earn about half of what they made in 1980. Maquiladora workers average a little more than $1 an hour.

In short, NAFTA's impact is the opposite of what was predicted. Instead of the American economy exerting an upward pull on Mexican wages, the Mexican economy has exerted a downward pull on American wages. And the idea of crowds of Mexicans crossing the border to shop in San Diego is a pipe-dream.

Mexican wages stay "anchored to the bottom," according to analysts such as Shaiken, because the Mexican government exerts pressure on weak Mexican trade unions to set low wages as an inducement to foreign investors; and because foreign and Mexican employers collaborate through their maquiladora trade associations to keep wages low, warning each other that resorting to wage increases to compete for workers will cause dangerous wage spirals. This point was driven home to me during a visit to a Japanese-owned electronics plant making computer memory devices. The plant's Mexican manager was explaining his problems with high turnover among his 300 workers--close to 100 percent a year. I asked the manager why he didn't raise his workers' pay to keep them on the job, and he replied that he couldn't because he had to pay what his competitors paid and not more.

"The irony is, with all the talk about free trade, we have highly controlled labor markets when it comes to wage setting," observes Shaiken. "When you combine Mexican government policy, weak unions or government-dominated unions, and employers who are collaborating in these areas, what you get are very low wages in combination with high productivity."

The drag effect of Mexico and other low-wage foreign countries is one major reason why, even with unemployment at a 24-year low, the income of the average American household today is lower than it was in 1989. "When wages remain low in Tijuana, it exerts a chilling effect on wages in Milwaukee and Detroit, in Stockton, California, and elsewhere," asserts Shaiken. "And employers haven't been shy about making that point. Just the threat of moving a plant to Tijuana causes wages to go down in numerous industries within the United States."

To make matters worse, the skill and productivity of Mexican workers is rising rapidly. This enables Mexicans to compete for more and more middle-class American jobs, and as John Riley told me, this trend will escalate in the years ahead. "I can't project the technology, but I know that Tijuana can keep up with the need for technical people and the ability to assemble and build the products," says Riley. "Mexico is a very young country. They're putting over a million workers a year into the marketplace. These people are being more educated than they have been in the past, and they're a very good work force."

In short, the Mexican drag effect on American living standards is most likely to spread in the years ahead. This is the flaw that undermines the free-trade argument. As long as Mexican (and other developing-world) wages are kept low as a matter of government policy, inadequate labor rights, or collusion among employers, the living standard of the American middle class will continue to erode. To work fairly and effectively, NAFTA needs fixing to overcome this obstacle, and so does any future trade agreement.

Hedrick Smith is correspondent and executive producer of "Surviving the Bottom Line," a PBS documentary series on different strategies being adopted by Americans to deal with the global economy. The series will be broadcast nationwide from Jan. 16-25; see your local listings.