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Free trade in the Americas: the debate heats up.

The falling of the trade barriers with Mexico and Canada would create the world's largest and most diverse common market, allowing the free movement of goods and services from the Lookout Ridge in Alaska to the Sierra Madre's in Mexico. The proposed North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada must next be ratified by the legislatures of all three nations. The brewing debate will focus on the agreement's impact on employment and the environment in both the U.S. and Mexico.

The proposed North American Free Trade Agreement is a result of a changing atmosphere in Mexico, partially directed by President Carlos Salinas de Gortari who made the agreement an integral component in his economic reform program. Its impetus also comes from witnessing the success of the U.S.-Canada Free Trade Agreement (CFTA) signed in 1989. The CFTA removed bilateral tariffs and simplified standards, and trade between U.S. and Canada has increased 18 percent since 1989 when the CFTA was implemented.|1~ In spite of the political risk involved by supporting NAFTA, the Administration of President George Bush reasoned the time has come to liberalize trade throughout the North American continent.

Free trade supporters contend there are many compelling reasons to include Mexico. By adding Mexico to the free trade areas of the U.S. and Canada, the North American continent will have a total market of 364 million consumers. This is estimated to be 25 percent larger than the 12-nation European Community (EC).|2~ Such a sizable market without tariffs will lower costs and increase economies of scale, thus making the North American market more competitive vis-a-vis the EC. This would be especially important against the possible existence of a 19-member European Economic Area of 380 million consumers. The EC has already spent two years in negotiations with the seven-member European Free Trade Association to create such a unified European trading bloc.

Critics, on the other hand, contend the passage of the NAFTA and subsequent expansion from the current two thousand foreign-owned assembly plants or maquiladoras ("maquilas" for short) will only acerbate infrastructural problems that exist in Mexico. U.S. jobs will be lost, and problems involving pollution and toxic waste in Mexico will only increase.

However, as Congressman George Brown Jr. (D-California), chair of the House Committee on Science, Space and Technology puts it, "The relationship between U.S. and Mexico is complex and marked by controversy and misunderstanding." While pro-free trade, Brown acknowledges complex problems which require, "new world thinking at the Department of State. The benefits of a free-trade agreement will never be fully realized without substantially increased levels of scientific and technological cooperation between Mexico and the United States."|3~

This article presents a brief historical overview on this sensitive U.S.-Mexican relationship. It also discusses how the arguments for and against these maquila plants carry over to the reasons for and against signing and ratifying the NAFTA. As will be seen in this article, powerful global and economic factors have dramatically changed the U.S.-Mexican relationship.

An Unsettling Relationship

In order to better understand the framework of the fragile U.S.-Mexican friendship, one must first take an historical perspective. In 1830, all of California, Nevada, Utah, Arizona, New Mexico, Texas and parts of Wyoming, Colorado, Kansas and Oklahoma belonged to Mexico. These territories were lost by three historical events which basically changed the U.S.-Mexico border to its present state: the annexation of Texas in 1845, the acquisition of Mexican territory after the Mexican-American War in 1848, and the Gadsden Purchase in 1853. According to Border by Leon C. Metz, the establishment of this border has been fraught with conflict, border raids, antagonism, racism, revolution, and warfare. Neither side has been without fault during this tumultuous era?|4~

Significantly, twentieth century Mexico-U.S. problems have revolved around migration (as well as oil and water rights). Around the turn of the century, Mexican workers arrived in Southwestern United States in substantial numbers to work on the railroads. While the U.S. appeared to welcome thousands of European immigrants with open arms, such friendliness was not always extended to Mexican workers. During the 1920s, it has been estimated that 100,000 illegal Mexican workers crossed the border each year.|5~ When unemployment shot up during the 1930s, immigrants often took the brunt of the blame. Mexicans began recrossing the border to work on programs begun by the Mexican government. The 1938 nationalization of foreign-owned oil fields (mostly U.S. and British) in Mexico only added to the tensions. Then World War II came along. Relief from unemployment pressures helped improve Mexican-U.S. relations.

Notably, in 1942, the Mexican Farm Labor Supply Program (or "Bracero" Program) allowed up to half a million Mexican farm workers seasonally into the U.S.|6~ This negotiated deal between Mexico and the U.S. included certain guarantees for housing, medicine and worker's rights. Wages were set at "prevailing" rates by the U.S.

Maquilas are Born

When the Bracero Program collapsed in the early 1960s, the U.S., fearful of massive unemployment in Mexico, encouraged the Mexican government's efforts to initiate the Border Industrialization Program.|7~ A prominent part of that program has been the development of maquilas.

Maquilas are assembly plants operating in Mexico under special customs treatment and foreign investment regulations whereby they import duty-free into Mexico, on a temporary basis, machinery, equipment, spare parts, raw materials and components for the assembly or manufacture of semi-finished products.|8~ Major products include autos, electronics, and textiles. These plants pay only a value added tax on exports. Such plants may be U.S., Japanese, and even Mexican owned. The Border Industrialization Program was designed to take advantage of U.S. tariff laws that were already in effect.

Originally this program was restricted to areas along the Mexican border, but later, in the mid-1980s, the Mexican government extended the area to include the interior of Mexico as well. It is estimated that 80 percent of the maquilas are still near the border and that 90 percent are U.S.-owned.|9~ Fortune 500 companies with maquilas include Ford, GM, Motorola, and Eastman Kodak. International companies include Volkswagen, Nissan, and Sony.

The number of maquilas has increased significantly from 12 plants in 1965 to 2,070 in 1992. The biggest push to maquila expansion occurred in February 1982 after a 30 percent devaluation of the Mexican peso. Six months later, the peso was again devalued by 75 percent. Such devaluations lowered the wage rate and made investment in maquilas an attractive alternative.

Arguments for Maquilas

Five reasons are usually given as to why U.S. manufacturers might want to establish a maquila in Mexico. First, there is access to low tariffs; second, Mexico's labor wages are among the lowest in the world; third, maquilas enjoy transportation cost advantages over Asian firms; fourth, Mexico has little enforcement of environmental legislation; and fifth, Mexico is a country with relative political stability and is moving toward a laissez-faire market economy.

The Border Industrialization Program initiated by Mexico capitalized on U.S. Tariff Schedules 806.30 and 807.00.|10~ These two measures allow manufacturers the ability to export U.S.-made components for processing or assembly, and then to reimport the products back to the U.S. Maquilas have a major advantage because the only required duty is on the "value-added" to the product. This means maquilas receive a major tax break if their products are reimported into the U.S.

Even more attractive to manufacturers are the low Mexican wages. In 1990 the average U.S. labor cost was $12.04 per hour compared to 83 cents per hour in Mexico. This wage beat out Taiwan at $2.15 per hour, the Philippines at 88 cents per hour, and Malaysia at $1.31 per hour.|11~ Japan, with a labor rate of $14.10 per hour, has begun to increase dramatically the number of Japanese-owned maquilas for the same labor saving reasons as the U.S. Professor Stanley E. Fawcett of Michigan State University compared operating costs at 234 maquilas with similar domestic firms. He reveals a tradeoff between logistics and labor costs. A U.S. firm typically has to absorb some moderately higher costs to benefit from the lower wage rate.|12~ These other costs include longer supply lines and higher inventory. Also, under Mexican law, Mexican carriers are required to service the maquilas, which creates delays at the border.

Environmentalists point to the Rio Grande area as evidence of laxity in the enforcement of Mexican law. A study by the General Accounting Office points out that 28 wood-furniture plants moved to Mexico in 1990 in search of cheaper labor and less restrictive environmental laws.|13~ According to a May 1991 article in the New Republic, Mexico only has 12 environmental inspectors along the entire U.S.-Mexico border.|14~

Cornerstone of Salinas' Economic Policy

Finally, with a pro-trade attitude, President Carlos Salinas has strongly encouraged NAFTA. His pro-business stance contrasts considerably with his predecessors who had pushed programs that repelled foreign investment. He has spent substantial time lobbying for the passage of NAFTA. In September 1991, Salinas arrived in California for a three-day visit. Besides taking part in Stanford University's centennial celebrations, he attended meetings with Governor Pete Wilson and Prime Minister Brian Mulrooney of Canada to discuss the anticipated agreement.

This expansion of economic ties between the U.S., Mexico, and Canada is timed to coincide with a $100 million public relations campaign by the Mexican government to boost commercial ties with its North American partners. In a television address to his nation on the morning after the agreement was announced, Salinas said, "Above all, the agreement means more jobs and better-paid |ones~ for Mexicans. More capital and investment will come, bringing more job opportunities here in our country, for our countrymen."|15~ Salinas' policy of pursuing competitive free market reforms commits his nation and future Mexican presidents to a dramatic new way of doing business.

Disadvantages and Controversies

The issue of lost U.S. jobs has generated the most controversy with NAFTA. Labor organizations in the U.S. contend that maquilas reduce employment opportunities in the U.S. Declines in employment in the garment and auto industries are often cited as examples. On the other hand, supporters of NAFTA argue that the jobs lost to maquilas would otherwise have gone to Pacific Rim countries. They also argue that these jobs are mostly low-tech manufacturing and assembly work, the kind of labor that would not appeal to Americans.

A 1990 study by William Gruben, a senior economist at the Federal Reserve Bank of Dallas, presents statistical evidence showing that both sides are about equally correct in their assertions.|16~ He demonstrates that the growth of maquilas is greater when labor wage-rate differentials between the U.S. and Mexican workers are large. U.S. jobs are indeed lost, but it is not exactly one U.S. job for one Mexican job.

He also shows that the number of maquilas expands when Mexican wages are lower vis-a-vis Pacific-Rim wages. This means that many manufacturers who would have gone off-shore to Taiwan, Malaysia, or the Philippines are now creating jobs in Mexico.

In addition, the U.S. Department of Commerce in 1988 estimated that a half million U.S. jobs were created for the initial manufacturing start-up of parts before export to Mexico.|17~ In terms of jobs, a University of Maryland study predicts the U.S. will actually gain 44,500 new jobs in the field of machinery, metals, chemicals, plastics and rubber if the agreement is ratified.|18~

Lastly, the low wage rates of Mexico encourage a shift toward more labor intensive methods. This trade-off of labor for capital further dilutes the one-for-one job loss claim made by some critics of the maquila program. Thus, the answer to the question whether U.S. jobs are being lost is simply "probably," but the size of the effect is not known.

Infrastructure Woes and Union Opposition

According to critics, one primary problem is the lack of Mexican infrastructure needed to support the maquila employees and their families. With the number of maquilas continuing to grow at an estimated 25 percent per year, sewer systems, schools, roads and housing have not kept pace with this accelerated development. Slum conditions often are reported around bright clean maquiladora facilities. As reported in the Congressional Quarterly, there is so much untreated waste in Tijuana that the U.S. has agreed to finance and build a water waste treatment plant to keep pollution from spreading into the San Diego Bay.|19~

Moreover, a number of experts claim jobs in the maquilas are highly repetitive, mind-numbing, boring, and harmful to humans. Michael J. Kelly, a research scientist at the Georgia Institute of Technology, states, "Apparel manufacturing is a hand intensive job" that can lead to musculoskeletal pain and cumulative trauma disorders (CTD), especially carpal tunnel syndrome.|20~ While this is a problem anywhere in the world, more industrialized nations have attempted to address this issue through ergonomics, education, robotics, and better health care.

Most maquilas have 70-90 percent female employees, a significant reversal from the mostly male Bracero program. Turnover rates in the maquilas range everywhere from five to 20 percent monthly. This has meant addressing a different set of problems (such as child care and transportation) for a youthful female-dominated labor force.

The AFL-CIO, UAW, and other unions angrily oppose the maquila concept. In a 1988 Industry Week article, one El Paso Central Labor Union leader claimed that the maquilas choose to hire employees "who are naive as to working copolitically unaware and inexperienced, passive, accommodating, and docile as to their working conditions."|21~

However, Mark A. Rothstein, a law professor at the University of Houston, comments that, "It is unrealistic to expect developing countries to have the same labor standards that exist in developed countries."|22~ Minimum wage and occupational health and safety are issues examined on a country-by-country basis by the International Labour Organization (ILO).

Rothstein's solution involves multinational corporations taking the lead in complying with a code of workplace and environmental standards. Compliance with such standards would be in keeping with Article 25 (1) of the U.N. Declaration of Human Rights which declares that, "Everyone has the right to a standard of living adequate for the health and well-being of himself (sic) and of his family."|23~

The Impact of NAFTA

The free trade agreement between Mexico and the United States was reached August 12, 1992 and it will spur many changes. But the U.S. Congress and the legislatures of Mexico and Canada must ratify the NAFTA. It promises to trigger extensive debate but most observers believe Congress will eventually approve it.

In terms of problems associated with the environment, concessions have been made by the White House. The Bush Administration agreed that environmentalists were to be on the team to advise U.S. Trade Representative Carla Hills in her negotiations with Mexico. This ensured that environmental concerns were addressed. According to a Business Week article, the fine print of the Free Trade Agreement should commit Mexico to stronger enforcement of regulations. U.S. firms might have to submit environmental assessment of their plants in Mexico.|24~ Nevertheless, some environmental groups remain unsupportive. Larry Williams, director of international programs for the Sierra Club said "Congress should reject the accord unless negotiators correct 'serious flaws' in the agreement." In contrast, William K. Reilly, U.S. Environmental Protection Agency Chief called the pact "the most environmentally sensitive trade agreement ever negotiated anywhere. It will be seen as a model for other countries."|25~

Therefore, a Free Trade Agreement could be the leverage needed to help clean up the slums around the maquilas. As Representative Jim Slattery (D-Kansas) stated in the Congressional Quarterly, "You don't get people to clean up the environment by keeping them poor."|26~

While the incentives or attractions to U.S. manufacturers are microeconomic (e.g., labor costs), the real impact of NAFTA is macroeconomic. Global competition and its ensuing productivity gains mean lower overall costs to consumers. Ultimately, lower prices/or goods and services help increase a nation's standard of living. NAFTA should benefit the U.S. by helping to stimulate faster economic growth in Mexico. In turn, this should enhance Mexican demand for more U.S. products and services. "The United States accounts for almost 70% of Mexico's imports ... Per capita, Mexico imports $295 from the United States compared with $266 for the European Community and $9 for Eastern Europe."|27~

In sum then, the NAFTA has a number of benefits for consumers, both in the U.S., Mexico, and Canada. Yet, as pointed out in this article, the debate around NAFTA is heating up because controversies surround the unchecked growth of maquilas without the housing and the infrastructure needed to keep the water and air clean. If these issues can be addressed, a better and more stable Mexico will be one important outcome. As President Carlos Salinas pointed out on his visit to California, "Today, more than ever, economic well-being, like knowledge, should be a common benefit extended to humanity as a whole."|28~

SUE GREENFELD, D.B.A., is a professor of Management at California State University, San Bernardino.

HAROLD DYCK, Ph.D., is an associate professor of Information and Decision Sciences at California State University, San Bernardino.

The authors wish to acknowledge the helpful assistance of Ernesto Reza in their initial draft of this article.

1 Roger W. Wallace, "North American Free Trade Agreement: Generating Jobs for Americans," Business America, Vol. 112, No.7, April 8, 1991, 3-5.

2 Paul Magnusson and Stephen Baker, "The Mexico Pact: Worth the Price?" Business Week, May 27, 1991, 32-35.

3 George Brown Jr., "New World Order, Old Worldview," Los Angeles Times, September 11, 1991.

4 Leon C. Metz, Border: The U.S. Mexico Line, El Paso, Texas, Mangan Books, 1989.

5 Metz, Ibid, 376.

6 American Chamber of Commerce of Mexico, Mexico's Maquiladora In-Bond Industry Handbook, Third Edition, 1987, n.p., 1.

7 Philip Mirowski and Susan Helper, "Maquiladoras: Mexico's Tiger by the Tail?" Challenge, May-June 1989, 24-30.

8 American Chamber of Commerce, Mexico's Maquiladora...," 2.

9 S.C. Gwynne, "From Yukon to Yucatan," Time, June 3, 1991, 20-24 passim.

10 William C. Gruben, "Mexican Maquiladora Growth: Does it Costs U.S. Jobs?" Economic Review, January 1990, 15-19.

11 Stanley Fawcett, "Logistics and Manufacturing Issues in Maquiladora Operations, "International Journal of Physical Distribution & Logistics, Vol. 20, No. 4, 1990, 13-21.

12 Fawcett, Ibid, 13-21.

13 Gwynne, "From Yukon to Yucatan," Ibid, 21.

14 "Rio Grande Illusions," The New Republic, May 27, 1991, 7-8.

15 Juanita Darling and Marjorie Miller, "Agreement on Trade a Coup for Salinas, Los Angeles Times, August 13, 1992, A6.

16 Gruben, "Mexican Maquiladora Growth...," Ibid, 15-29.

17 Lawrence W. Nowicki, "U.S. Plants and Their Mexican 'Twins': A Jobs Controversy," Directors & Boards, Vol. 12, No. 4, Summer 1988, 28-29.

18 Gwynne, "From Yukon to Yucatan," Ibid, 21.

19 Phillip A. Davis, "Environmental Opposition Fading," Congressional Quarterly, May 18, 1991, 1258.

20 Interview with Michael J. Kelly, "The Apparel Industry & Worker Safety," Workplace Safety & Health, Vol. 4, No. 9, September 1991, 3-4.

21 Thomas M. Rohan, "Mexican Border," Industry Week, Vol. 237, No. 4, August 15, 1988, 46-49.

22 Interview with Mark Rothstein, "Multinationals & Working Conditions in Mexico," Workplace Safety & Health, Vol. 4, No. 8, August 1991, 3-4.

23 United Nations, Universal Declaration of Human Rights, pamphlet, n.d., 13.

24 Magnusson and Baker, "The Mexico Pact: Worth the Price?," Ibid, 34.

25 Larry B. Stammer, "Impact on Environment Questioned," Los Angeles Times, August 13, 1992, A6.

26 David Cloud, "Bush's 'Action Plan' May Be Key to Approval of Fast Track," Congressional Quarterly, May 4, 1991, 1120-1125.

27 Wallace, p.5.

28 Patrick McDonnell, "Salinas Lobbies for Trade Pact," Los Angeles Times, September 29, 1991, A3 & A31.
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Title Annotation:North American Free Trade Agreement
Author:Greenfield, Sue; Dyck, HArold
Publication:Business Forum
Date:Sep 22, 1992
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