Mexico Free-Trade Pact Would Help U.S.

So the United States and Mexico have agreed to start talking about a free-trade agreement--similar to the one negotiated a year and a half ago between the United States and Canada.

So what? Such talks may be bold in concept, but do they really mean anything much to you?

More than you may think. Mexico offers the United States an opportunity to create the world’s largest market here in North America--after two decades of feeling pressured economically by other nations or trading blocs, from OPEC to Japan’s industrial machine to the European Community. A North American free-trade area, including Canada, would be larger in population and economic size than the 12-nation EC.

Psychologically, fears of an isolated, threatened U.S. economy would evaporate; economically, an enlarged market would increase jobs and opportunities.

But any such grouping will face tremendous obstacles. In fact, whether the potential is ever realized may depend on how well we understand what the talks with Mexico are all about.

They’re about a potential market and industrial producer that could put Eastern Europe in the shade. Mexico, with a growing population of 88 million--40% under the age of 15--is a larger market for U.S. goods than all of Eastern Europe. And as a producer of goods, it could surpass South Korea.

For some, that may raise a specter of low-cost imports and loss of American jobs--Mexican workers make $2 an hour, compared to the U.S. average wage of $10 an hour.

But in Mexico’s case, that perspective misses half the equation. When Mexico exports, it also imports; unlike many places in Asia and Europe, Mexico uses U.S. machinery to make its goods. Last year it bought more than $10 billion worth of U.S. machinery, computers and tools.

Overall, Mexico purchased $25 billion of U.S. exports and sent $27 billion northward as U.S. imports in 1989, as machinery, food, oil, motor vehicles and parts flowed in both directions.

All three U.S. car makers manufacture in Mexico, for both the U.S. and Mexican markets. With 6 million cars for 88 million people--compared to 185 million cars for 240 million Americans--Mexico is one of the greatest potential car markets on Earth.

Still, potential has been there for years without fulfillment. In the 1970s, Mexico found new oil deposits and tried to take an industrial leap forward. But it over-borrowed, wasted money and fell back, buried under billions of dollars in foreign debt.

Even today’s enthusiasm for free trade with the United States is due to desperation. Mexico’s President Carlos Salinas de Gortari needs foreign investment. And U.S., European and Japanese investors aren’t eager--having lost too much in peso devaluations in the ‘80s. In any case, says a business leader in Japan, where Salinas visits next week, Japanese firms can get low-cost manufacturing elsewhere:”We have Mexicos closer to us, called Thailand and Singapore.”

So Salinas, the 41-year-old, Harvard-educated economist, must try to attract back some of the billions of dollars--perhaps $100 billion, says one expert--that wealthy Mexicans have sent abroad. “To do that he wants to tie the economy to the United States,” says Rudiger Dornbusch, an economics professor at Massachusetts Institute of Technology.

Salinas will have to overcome opposition at home from those who say he is selling out Mexico to the United States, and from U.S. labor and some industries who see free trade only as cheap competition. And he’ll have to overcome widespread skepticism among global business people and investors that Mexico can really get its act together.

But Mexico may surprise the skeptics. Despite the reversals of the last decade, Mexico’s economy is in better shape than Spain was 15 years ago when it began to modernize. Today, thanks to entry into the European Common Market, Spain has blossomed into one of the world’s fastest-growing economies.

With national income per person of $2,300 a year, Mexico today is entering another, higher stage of economic development, say experts. With help and orders from U.S. firms, Mexican companies are now beginning to make precision parts for computers and medical equipment. As they learn, Mexican companies will make--and also use--more complex equipment--selling to and buying from the United States.

And as Mexico develops jobs and opportunities at home, fewer of its people will need or want to go north to pick crops or do menial jobs in U.S. cities.

Sure, that vision may sound ideal. But there is an example to back it up in the U.S.-Canadian auto agreement of 1965, says Prof. Jose de la Torre of UCLA’s Center for International Business. In that pact, the U.S. auto industry, the United Auto Workers union and the two governments agreed that certain car models could be manufactured in Canada and come duty-free into the U.S. market. In return, U.S. industry got to sell more goods to Canada.

The result was a tremendous boon for Canada, lifting pay scales and living standards. But the agreement also expanded the Canadian market for U.S. goods, so that it remains by far the largest customer for U.S. exports.

In international trade as in any other business, the moral is simple: You help others, you help yourself. That’s why President Bush later this year will talk about free trade with President Salinas.