Free-Trade Pact Must Give U.S. Firms, Workers Edge

The United States will soon be on the fast track to a free-trade agreement with Mexico. But a fast track to what destination? It all depends on the deal we negotiate.

Proponents argue that an agreement will permit the United States to export high-technology goods to Mexico in exchange for labor-intensive goods. Living standards in the two nations will flourish as a result of greater specialization. Low-wage American jobs will be lost, but high-wage American jobs will be created.

This rosy scenario overlooks several important realities:

First, trade between the two nations is already remarkably free as a result of unilateral actions by Mexico to cut tariffs and quotas and relax restrictions on foreign investment. Many remaining barriers to trade between the two nations reflect genuine differences in their industrial policies and their legal and regulatory systems.

A free-trade agreement that fails to address the most important of these systemic differences--in such areas as subsidies, intellectual property protection, foreign investment restrictions and environmental and workplace regulations--would be a bad agreement. Should Mexican firms enjoying domestic subsidies, protection from hostile foreign takeovers or lax environmental and worker safety standards be allowed free access to compete with U.S. firms that are not similarly blessed? Obviously not.

Second, proponents say an agreement will provide investment opportunities for American companies. It is true that U.S. companies will be allowed to produce in one of the lowest-cost locations in the world and to sell to one of the richest markets in the world. But there’s a catch.

Japanese and European companies have stayed on the sidelines, awaiting a signal that Mexico’s commitment to reform is stable. A free-trade deal with the United States would send such a signal.

There is a real danger that Japanese and European companies--with deeper pockets and superior technologies--may move into Mexico more rapidly than their U.S. competitors. If this happens, Mexican imports of high-technology goods and services would shift from the United States toward Europe and Japan. And the United States might find itself importing more from Japanese and European companies set up in Mexico to serve the U.S. market.

Such considerations suggest that the United States should negotiate an agreement that gives preferential treatment to American firms over foreign competitors.

Mexico is offering to open its markets to all comers in exchange for preferential access to the U.S. market. Since such an agreement will inevitably raise the returns to foreign companies, shouldn’t we ask something special in return? A free-trade agreement could include, for example, rules of origin favoring U.S. producers and more rapid elimination of Mexico’s investment restrictions for U.S. firms than for other foreign investors. The same preferential benefits should be extended to Canadian companies to maintain the integrity of the U.S.-Canada free-trade arrangement.

Even if U.S. companies benefit disproportionately, not all U.S. industries or workers will be winners.

Because Mexican wages are one-eighth of U.S. wages, free trade poses threats to American companies and workers in such diverse industries as apparel, electronics and automotive products. Proponents of a free-trade deal assure us that there will be compensatory benefits. Workers displaced by low-wage competition will find new jobs in high-wage industries whose sales are boosted by exports to Mexico. But will this happen?

It is unlikely that many workers displaced from jobs in labor-intensive industries--workers who are disproportionately female, minority and poorly educated--will find new jobs in technology-intensive industries whose work forces are predominantly male and highly educated.

Even under the most optimistic scenarios, a free-trade deal will hurt workers at the bottom end of the income distribution, precisely those most hurt by the policies of the past 15 years. For these workers, a move to new jobs will necessitate some transitional unemployment, some retraining and often costly family relocation. These “adjustments” should be supported by generous assistance programs, as they are in Europe and Japan.

Under the credible threat of a Congressional veto of fast-track, the Bush Administration has grudgingly offered such programs. But the Administration’s commitment is not credible. Can we believe that an Administration willing to sit by while inadequate unemployment benefits run out for millions of American workers will provide substantial income support and skill-building programs for poorer Americans whose jobs are lost to Mexican competition?

It is almost impossible to raise legitimate questions about what a free-trade agreement with Mexico should look like and not be called a protectionist. Nonetheless, I continue to think of myself as a free trader--but not one willing to check her brains at the door.

With a proper negotiating strategy and a clear notion of ends and means, the United States can move toward freer trade with Mexico in ways that maximize the benefits for all Americans.