Our Back Door Will Need Double Locks : Trade: A treaty with Mexico needs safeguards against others slipping into the U.S. market.

As the Bush Administration begins to construct a North American free-trade zone, let’s not lose sight of its ultimate objective, which is to fend off challenges from other regional trading blocs, notably the European Community, Japan and the Pacific Basin. To achieve this, careful attention must be paid to writing the treaty’s rules of origin to ensure that parties outside the treaty do not unfairly benefit from free trade.

The Administration has until June, 1993, to negotiate a treaty with Canada and Mexico that will allow manufactured goods to move duty-free from the Yukon to Yucatan. The duty-free preference would be allotted only to goods that contain a negotiated minimum percentage of either labor, raw materials or assembled parts originating in the signatory countries. This would not only save and create jobs; it also would prevent other countries from dumping their products in our market.

Establishing rules acceptable to Canada, Mexico and the United States will require deft negotiating. Mexico has been sending mixed signals on its position. President Carlos Salinas de Gortari caused anxiety in Washington when he told a the Pacific Basin Economic Council in May: “Mexico could serve as a bridge for Asian investment to the North American market.”

In fact, Japan is already poised to increase its investment in Mexico to take full advantage of a free-trade agreement. Between 1980 and 1990, Japan increased its direct foreign investment in Mexico from $818 million to $1.7 billion. This has allowed Japan to increase its exports to the United States. Much of the Japanese investment is in border-area plants that assemble consumer products, bringing down the cost of labor and transportation and substantially raising the profit margin at corporate headquarters back in Japan.

When the North American free-trade zone becomes a reality, as seems likely, Japan can be expected to increase investments, particularly in capital-intensive industries like auto-making. With low-content rules of origin, a Japanese automobile assembled in Mexico could enter the United States duty-free, even though the bulk of its parts originated in Asia.

It could be that our southern neighbor prefers low-content rules of origin, which would allow it to continue to attract investors outside North America.

By contrast, high-content rules of origin, particularly for the electronic industrial sector, could make North America competitive with other trading blocs. The rules could require that 60% to 65% of a product, in either labor, parts or raw materials, come from the countries party to this agreement. High-content rules, along with suitable enforcement measures, could prevent a drain of U.S. manufacturing jobs. In addition, Asian countries would not be granted “back-door” access to the North American market, and we would enhance our regional economic security.

In his May 1 letter on negotiations with Mexico, the President signaled to Congress his intention of seeking “strong rules of origin that would prevent products of third countries from using Mexico as a pass-through for duty-free entry to the U.S. market.” The Reagan Administration made the same promise during negotiations with Canada. Yet our northern neighbor has rejected our request to increase automotive content from 50% to 60% and has even refused to provide the necessary information to ensure compliance.

High-content rules of origin could guarantee that the benefits will be worth the risk we are taking in forming a free-trade zone with Mexico and Canada. Although President Bush has asked Congress to grant him “total faith” in negotiating the treaty, the public and their representatives in Congress should remain vigilant to ensure that beneficial levels of rules of origin are set and mechanisms for compliance are obtained by our negotiators.