A ‘Deal’ to Give Away the Store : Mexico: A free-trade agreement with the U.S. would be a travesty of history and economics. Even talking about it is an act of political desperation.

Leaks in Washington and rumors in Mexico about the beginning of talks on a free-trade agreement are both surprising and expected.

The move toward a common market is surprising because Mexico has always questioned whether full economic integration with the United States would benefit Mexico; the present administration has constantly restated Mexico’s position that across-the-board free trade was not in our best interest. Just two weeks ago, President Carlos Salinas de Gortari, speaking in Chile, stressed the need for Mexico to strengthen its ties to Latin America, rejecting the notion of joining any one trading bloc.

So it was a surprise, to say the least, to learn that at the same time, Salinas’ top aides were secretly meeting in Washington with the secretaries of State and Commerce, James A. Baker III and Robert A. Mosbacher, and Trade Representative Carla A. Hills, along with National Security Council Director Brent Scowcroft. The subject: possible negotiations on fully open trade between the two countries.

At the same time, these developments cannot be considered entirely unexpected. For months, many careful observers of the Mexican economy have been warning that, under existing conditions, and despite its apparent, superficial success, Salinas’ economic reform program faced nearly insurmountable obstacles. Herein lies the explanation for the Mexican move toward an agreement with Washington, as well as its accelerated pace and secrecy. Herein also lie the reasons for doubting the wisdom of this bold--or reckless--step.

The problem is relatively simple. The initial drastic trade opening abruptly imposed on Mexico two years ago has had foreseeable consequences. Even with a barely growing economy, but thanks to a politically indispensable appreciating exchange rate, imports have skyrocketed and exports have stagnated. Purchases abroad rose 57% in 1988, nearly 30% in 1989, yet the economy grew only at an average of 1.5% per year, and investment in infrastructure, capital goods and retooling remained low (even though these are all import-intensive areas). Exports grew only 15% in 1989, and half of that growth represented a rise in oil prices. Non-oil exports increased only by 8%. During the fourth quarter of 1989, the annualized figure for the trade deficit was $3.5 billion--higher than at any time since 1981.

The meaning of this was evident. If the economy were ever to reach even a 4% sustained yearly growth, it would require enormous external funding--roughly $5 billion a year--for a considerable period of time.

Given the country’s foreign debt and the trade opening, for Mexico to grow it had to drastically reduce its debt service or obtain money some other way. The Salinas-Brady debt package ended up providing only marginal relief--outstanding debt remaining more or less stable, and yearly debt service dropping by 15%, at most.

That left only three possibilities for easing the deficit: a recession, which in fact happened early this year; or the return of Mexican capital from abroad, quickly and in droves; or a rush of direct foreign investment into Mexico. Some money has trickled back, but even in small amounts, repatriation of capital requires exorbitant domestic real interest rates, and the process does not seem likely to become lasting or substantial.

More important, foreign investment is not forthcoming, despite changes in regulations and the government’s efforts to woo investors. During the first nine months of last year, the net flow, according to Mexico’s respected financial daily, El Financiero, reached only $1.337 billion, down 45% from the previous year. Prospects are even less encouraging as European and Japanese investment is diverted to Eastern Europe.

Beyond the immediate problems, analysts of the Mexican economy see a broader obstacle to a significant rise in direct foreign investment. In the past, investors were attracted by Mexico’s growing, protected internal market. But since 1982 the domestic market in Mexico has been stagnant or shrinking, and since 1987 it has been totally unprotected. U.S. investment will flow to the Mexican export sector--which is directed essentially at the U.S. market--or not at all. But export investment requires guaranteed product access to export markets as well as full, unrestricted, across-the-board investor access to the host-country banks, insurance companies, communications, consultants and so on. This is where the free-trade agreement comes into play.

If Mexico is to receive the amount of foreign investment that the Salinas program requires, a full-fledged open trade agreement with the United States seems to be a necessary condition. It is also an urgent one: Salinas faces congressional elections next year and a presidential election in 1994. If things do not come together quickly on the economic front, his entire presidency may unravel. But the solution--economic integration with the United States--may prove more costly and more dangerous than the problem. This explains the secrecy and the government’s waffling on the issue.

It is not an easy issue to deal with. Mexicans’ fears and doubts about a common market are not groundless. While parts of the country and society would benefit--the north, and the upper-middle class--others could be permanently condemned to the humiliation of the underpaid, under-skilled underclass. Political autonomy might be sacrificed for prosperity for certain regions and sectors but not for the whole country.

Mexican nationalism would not easily acquiesce to this state of affairs. And tying the Mexican economy’s future to that of the U.S. economy at a time of great uncertainty is not necessarily the most prudent course to follow.

On the other hand, Latin American economic integration seems illusory, and Mexico’s economic links to the north are already extraordinarily tight. Indeed, the question of closer economic ties with the United States appears increasingly less relevant than that of how to establish them in a way that reduces their negative potential and enhances their benefits for Mexico. In this case, the issue changes, and Salinas’ rush toward integration becomes open to criticism for different reasons.

If Mexico must consider the prospect of a common market, or even a limited free-trade agreement, with the United States and possibly Canada, it should do so only under certain conditions. The first one, of course, has to do with openness and democracy: Such a major change in the country’s history cannot be carried out behind the Mexican people’s backs, or without their informed and democratically expressed consent. Nothing of the sort is taking place.

The process should be undertaken as part of a patient, long-term, well-thought-out political and economic strategy. It cannot and will not work as a quick fix undertaken for reasons of political survival or expediency. Countries that negotiate in a hurry generally give away the store, and Mexico’s store has been given away far too many times.

Also, Mexico should press, and hold out as long as is necessary, for access for its main export to the United States, now and in the foreseeable future: people. Freedom of entry for Mexican labor is obviously something Washington will not accept willingly overnight.

But this is what real negotiations, as opposed to unilateral concessions, are all about: accepting the previously unacceptable. Bold strokes and historic changes should come about on both sides of the border, in American policy toward Mexico and in the Mexican government’s policy toward Mexican society. Otherwise they are simply desperate shots in the dark, which a proud and worthy people will not countenance.