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North American Free Trade Agreement: what are we really getting?

"We must not let the weight of political arguments cloud our thinking on the economic merits of NAFTA and its potential advantages and disadvantages to U.S. citizens."

Depending on one's perspective, the North American Free Trade Agreement (NAFTA) deserves rave reviews or outright rejection. NAFTA is either the pot of gold at the end of the rainbow or a bottomless pit that will pull the American economy into a dark, downward spiral.

What really is known about NAFTA? It is designed to reduce tariff barriers over 10-15 years, protect intellectual property rights, safeguard foreign investment, and not require lowered environmental standards.

What isn't known is the true impact NAFTA will have on American jobs, living standards, health, and safety. No one really knows if NAFTA will induce greater waves of illegal immigration or more occurrences of environmental degradation. Not yet considered adequately is the environment in which U.S. businesses - particularly small ones - would be operating, including a legal process, judicial system, and business practices often alien to America's. Not enough thought has been given to the peso-dollar relationship in the context of NAFTA and whether there should be a consulting, coordinating, or correcting mechanism in place. Policymakers have not weighed properly the implications of integrating the U.S. economy with that of a country whose system is recognized as undemocratic and rife with human rights abuses. In short, the American people really do not know their neighbor to the south, and most U.S. citizens do not want to integrate the two economies based primarily on promises and projections that all will turn out right.

There are numerous reasons for concern about NAFTA, including its short-term approach to U.S. competitiveness; its inevitable encouragement of U.s.-based companies' relocation to Mexico and the consequent loss of jobs; the questionable reliability of Mexico's enforcement process; different and much more lax health and safety standards; the problems inherent in an attempt to integrate the US. system with one that lacks human rights protection, democratic liberties, and judicial integrity; and the exclusion of provisions for dealing with exchange-rate issues.

Past administrations have promoted US. competitiveness by emphasizing exports and free trade. Under certain circumstances, this can be most appropriate. I was a major proponent of the U.S.-Canada Free Trade Agreement, believing it would result in a win-win proposition for both nations. NAFTA, however, takes the wrong road - the short-term, low-wage route - to competitiveness. It encourages companies to pare labor costs to achieve improvements in their bottom line and secure a more competitive position. It purports to promote competitiveness by merging two unequal economies in a short period with effectively no preparation.

NAFTA does nothing to strengthen the foundations of U.S. competitiveness by upgrading on-the-job skills of American workers. It does not promote innovation, new process technology, creative management skills, fresh labor-management relationships, or productive manufacturer-supplier dealings. It only promises job training after a job has been lost to Mexico.

Potential pitfalls

Jobs. The most vexing and disheartening aspect of NAFTA is that some corporations will close their doors in the U.S., move to Mexico, and abandon American workers, their families, and local communities. According to a 1993 survey by the Wall Street Journal, 40% of 455 U.S. business executives said they are likely to shift some production to Mexico if NAFTA is ratified. One-quarter of them said they would use the threat of moving to Mexico as a bargaining chip to get concessions from American unions.

NAFTA proponents argue that jobs would move anyway and that there will be training funds to support US. workers in transition to "higher-tech, higher-paying jobs." Yet, just where are these openings going to be? High-tech industries already are laying off workers: Compaq Computer cut 1,000 jobs; Hewlett-Packard, 2,700; Apple Computer, 2,500; Amdahl, 900; and Cray Research, 650. Moreover, corporations and industries are changing the way they do business, affecting the entire U.S. economy. America is in the midst of a "defense conversion" that not only is affecting its military base personnel, but also highly paid, highly trained, and highly educated workers with government defense contractors such as McDonnell Douglas and Grumman. The potential sources of alternative employment for workers displaced by NAFTA are contracting, not expanding.

There are those who argue that U.S. exports to Mexico have increased dramatically as a result of that nation's economic reforms and that the prospect of NAFTA means more exports and more jobs. However, the rise in exports can be misleading. In 1992, 35% of US. exports to Mexico, $14,100,000,000, went to maquiladoras. These are exports that return to the US. as transformed products. Moreover, over one-third of American exports to Mexico in 1992, $13,600,000,000, were capital goods - those associated with investment in plants and equipment that undoubtedly will result in finished products exported back to the US. This increase in exports is likely to be short-term as Mexico establishes its infrastructure. Once Mexico is able to produce its own capital goods, it will not need to rely on imports from the US.

Manufacturing and service jobs are not the only ones at risk. Agriculture also is affected. While American corn, wheat, and soybean farmers stand to gain modestly - a two-six percent increase in exports to Mexico - winter fruit and vegetable growers in the U.S. will not be as fortunate. In Florida alone - where the agreement is referred to as "Hurricane NAFTA" - an estimated 50,000 people could lose their jobs, and one-fifth of Florida's agriculture industry could disappear.

Health and safety standards. Much publicity has been given to the impossibility of American businesses competing against Mexican labor and environmental laws that are far below US. standards. These issues are the subject of current discussions on supplemental or side agreements to NAFTA. To date, the three parties have not been able to agree on enforcement mechanisms for labor and environmental standards.

There are other health and safety standards not even being considered, such as those for imported fruits and vegetables. Mexico allows the use on food of 58 different pesticides that the U.S. bans. Moreover, Food and Drug Administration testing procedures can detect only about half of the possible pesticides used. With insufficient American inspectors at the Mexican border, the safety of our food imports already is in question. It could become a greater hazard if imports rise under NAFTA.

Another issue receiving little attention is the impact of NAFTA's trucking provisions on highway safety. The pact requires eventual harmonization of truck safety standards. Because Mexico and Canada allow longer and heavier trucks on highways, there is great concern that harmonization would reduce U.S. standards. Canada allows drivers on the road more hours per day, and Mexico has no limit on driving hours. According to highway safety groups, NAFTA could mean larger, older, poorly maintained trucks on U.S. highways, possibly driven by fatigued, unqualified drivers.

Enforcement. Mexico's enforcement of NAFTA will be critical to the success of the agreement. In particular, enforcing rules of origin,- which determine the eligibility of products brought into the US. duty free, will be central to maintaining the integrity of the pact. Mexican customs officials must be able to enforce these "made in Mexico" provisions of origin. Any corruption or lax enforcement will allow third countries to circumvent U.S. quotas or cash in on duty-free entry for their exports. Press reports indicate that factories already are being built to produce "Made in Mexico" labels ready to sew into third-country clothing imports. Mexico's enforcement of its labor and environmental laws has been either weak or nonexistent. If this laxity is indicative of probable NAFTA enforcement, the US. economy will become a dumping ground for many other nations' goods.

Human rights, democracy, and justice. Mexico's stark differences with the US. on the issues of human rights, democracy, and justice are at the core of my deep misgivings about NAFTA. At a Small Business Committee hearing in February, 1993, Mexican and American witnesses gave riveting accounts of conditions south of the border. The president of Mexico's nongovernmental Commission for the Defense and Protection of Human Rights reported that corruption, bribery, extortion, and torture are rife. In November, 1992, the United Nations Committee Against Torture rejected the Mexican government's report on human rights as insufficient and said torture continued to be a "generalized and systematic practice." Two incidents were recounted by an American witness - one of a Peace Corps staffer from Washington, D.C., arrested in August, 1992, in Chiapas and killed in a Mexico City jail; the other, a Californian found hanging by his sweater in a cell in Baja California.

Closer to home for me is the case of a Catholic relief worker from Buffalo, N.Y., who spearheaded a collection of 9,000 sweaters for Guatemalan refugees in the mountains of Chiapas. The sweaters were confiscated by Mexican customs authorities on specious charges. When the relief worker rejected a bribery offer from a low-level Mexican official, the American was stalked and shot 10 times. Somehow, he lived. Mexican authorities - including Pres. Carlos Salinas de Gortari, to whom I and 10 other Congressmen wrote requesting his intervention - have failed to bring the perpetrators to justice or respond to our inquiries.

Moreover, labor rights have suffered since NAFTA has been under consideration in an effort to keep wages low and labor docile. Labor leaders have been arrested and killed. Political rights as Americans know them do not exist in Mexico. The right to vote is "completely unprotected," according to Adolfo Agular Zinser, a senior researcher with the National Autonomous University of Mexico, and electoral fraud is a constant concern.

Finally, witnesses before the Small Business Committee testified to a lack of accountability in Mexico's legal process. Laws are applied arbitrarily, with no respect for due process. These deficiencies raise the troubling question of whether the rights of U.S. businesses in Mexico will be protected and how well NAFTA will be enforced.

Foreign exchange risk. Despite the endless discussions of NAFTA and the advertised potential export and investment benefits to U.S. businesses, few voices have been heard about the peso-dollar relationship and attendant exchange-rate risk. Since 1981, the peso has fallen from 25 to more than 3,000 pesos to the dollar. (In January, 1993, Mexican monetary authorities moved the decimal to create the new peso at NP3.27:$I.00.) The peso is overvalued by about 10% and, given Mexico's widening current accounts deficit, there is concern that, after NAFTA becomes effective, that nation either may sharply devalue the peso or increase the rate of its daily mini-devaluations.

Whatever the course of the peso-dollar exchange rate, negotiators of the free trade agreement must consider the impact and implications of changing currency relationships. Exchange rates are central to trade and investment flows and profoundly will affect the operation of NAFTA and the distribution and nature of any benefits. I believe it imperative that the U.S. and Canada consider a fourth supplemental agreement focusing on the central importance of exchange rates. It would be prudent to make provisions for coordination to achieve currency stabilization, perhaps creating a mechanism that would allow for consultation, coordination, and corrections if necessary.

Why the rush?

With these potential problems, why is there such pressure to come to quick agreement? Inevitably, the arguments for approving NAFTA will focus on the need to support the leader of an important neighbor, one that shares a 2,000-mile border with the U.S. Congress undoubtedly will hear testimony focusing on the need to support economic reform, the damage that would be inflicted on the financial and securities system if NAFTA were not passed, and the importance of achieving Congressional approval before Mexico's presidential election in August, 1994. I can not think of a worse approach to approving a critical economic agreement between countries.

The U.S. must learn to evaluate economic agreements on their economic merits and benefits to the nation - not on the political benefits to the political party of another country, or even to American foreign policy interests that some may view as overriding economic concerns. We must not let the weight of political arguments cloud our thinking on the economic merits of NAFTA and its potential advantages and disadvantages to U.S. citizens.

In all respects, NAFTA is a path-breaking agreement. The US. is venturing into uncharted territory that will have profound consequences for its future economic well-being. Rushing forward without thinking thoroughly about the future is foolhardy. America must be sure that the necessary institutions are in place and that the time is taken to understand what the agreement is about. Most of all, the U.S. clearly must know who its new partner, Mexico, is. America should not go down this path blindly.

Rep. LaFalce (D.-N.Y.) is chairman of the House Committee on Small Business and a member of the Subcommittee on International Development, Finance, Trade, and Monetary Policy.
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Author:LaFalce, John J.
Publication:USA Today (Magazine)
Date:Sep 1, 1993
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