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FEDERAL RESERVE BANK: NAFTA RATIFICATION WOULD AID WESTERN ECONOMY

 SAN FRANCISCO, Nov. 15 /PRNewswire/ -- California and Arizona stand to benefit the most among the western states if the North American Free Trade Agreement (NAFTA) is ratified by Congress, according to a study of the Federal Reserve Bank of San Francisco.
 With more open trade, both the United States and Mexico should improve their economic growth and standards of living, said Ronald H. Schmidt and Carolyn Sherwood-Call, regional economists at the bank. They added that NAFTA would spark more industrial competition in each nation which encourages innovation, improvements and gains in efficiency and productivity.
 "Some job dislocations can be expected, particularly in low-wage industries, which suggests a need for domestic policies for worker retraining," said the study. "Overall, however, there is likely to be a net gain in the number of jobs and the job gains should come in high-wage industries in which U.S. workers are especially productive.
 "The jobs that are vulnerable to being lost to Mexico are the same jobs that have been moving overseas (to Asia as well as to Mexico) for the past decade. Increasingly open trade with Mexico has caused and will continue to cause some movement of low-wage jobs out of the United States. The jobs that are threatened by NAFTA are in industries in which U.S. manufacturers have trouble competing against many low-wage countries. Thus, even without NAFTA, many of those jobs will be lost to other countries in Asia or Latin America."
 Writing in the bank's Weekly Letter of Nov. 19, the economists said the industries in which U.S. producers have a comparative advantage over Mexican producers tend to be those in which education, training and skill levels make U.S. workers especially productive. Fitting this description are electronic equipment, computers and industrial machinery which are particularly important sources of exports from Arizona and California to Mexico.
 California ranked second to Texas in exporting $6.6 billion in goods to Mexico in 1992, while Arizona ranked third at $1.8 billion. Electronics and transportation equipment accounted for 38 percent of Arizona's total exports last year, while industrial machinery, computers and electronic equipment accounted for 39 percent of California's total. Taken together, the seven other states in the 12th Federal Reserve District exported a relatively modest $831 million in merchandise to Mexico in 1992.
 "With fewer trade restrictions, we would expect Mexico to specialize in labor-intensive production where low labor costs are very important, while U.S. producers would tend to specialize in more capital-intensive production that requires more technological sophistication and demands a more highly trained and productive work force," said Schmidt and Sherwood-Call. "With more open trade, both countries should gain. Increased production in Mexico would raise incomes there, perhaps significantly, which would increase demand for U.S. goods. Meanwhile, the United States would gain jobs in industries where workers are paid more because their workers are highly skilled and productive."
 The report also addressed the following concerns regarding the impact of NAFTA:
 Immigration
 Over time, the passage of NAFTA would likely result in substantial improvements to the standard of living in Mexico relative to the present situation and ultimately reduce the incentive to migrate to the United States.
 Tariffs
 Since 1987, Mexico's average import tariff has been reduced from 23 percent to around 10 percent, and the Salinas government has made broad moves toward more liberalized trade. As trade restrictions become less binding, trade flows between countries have increased. Between 1987 and 1992, the dollar volume of U.S. merchandise exports to Mexico rose 178 percent, a change of $26 billion.
 Environmental Standards
 Increased attention to environmental quality typically rises with a nation's standard of living. Consequently, to the extent that growing trade with Mexico boosts its standard of living, the attention to reducing pollution there is likely to rise over time. This increased interest in pollution control could even create an additional market for U.S. products, since the United States is a leader in environmental technologies. This potential market is particularly important to the western states bordering the Pacific Ocean where some of the leading environmental technology firms are located.
 -0- 11/15/93
 /CONTACT: Carolyn Sherwood-Call, 415-974-3175, or Ronald H. Schmidt, 415-974-3271, both of the Federal Reserve Bank of San Francisco/


CO: Federal Reserve Bank of San Francisco ST: California, Arizona IN: FIN SU: ECO

JH-AL -- SE005 -- 4401 11/15/93 12:07 EST
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Date:Nov 15, 1993
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