The Danes and Ross Perot Balk at Treaties, but Similarity Ends There

For the last few years, strong political movements have been chipping away at the economic barriers between neighboring nations, both in Europe and in this hemisphere. But two recent developments may have stalled those movements.

A Danish referendum rejected the Maastricht agreement, which was to formalize the final steps for European integration, and Ross Perot questioned the oncoming U.S.-Mexico free trade agreement, raising trade protection as a new political issue in this election year.

Though both these events appear to be about the same thing, the two situations are, in fact, very different.

Without rehashing the general arguments for why open trade is beneficial even to high-wage countries, it is worth noting that Perot’s protectionist attack ignores even the simple facts about U.S.-Mexican trade. So far this year, while U.S. exports to Western Europe, Japan and newly industrialized countries of the Far East remain unchanged from a year ago, our exports to Mexico have risen by a third, or $10 billion at an annual rate. At the same time, our imports from Mexico have risen at a $3-billion annual rate, about the same as our imports from Western Europe and Japan. Thus our trade balance with Mexico improved greatly at a time when it worsened with just about every other country.

Many of our exports to Mexico are capital goods that are helping to industrialize that country and thus to produce goods for export to the United States and elsewhere. So we should expect our imports from Mexico to rise substantially in the years ahead. But as they do, the Mexican goods will not just compete with U.S.-made products but will displace imports that would otherwise have come from other regions of the world. And these other regions are not nearly as inviting a market for U.S. exports as is Mexico, where fully 70% of imports have come from the United States in recent years.

Because of this special relationship between our countries, opening up our trade with Mexico probably has even greater economic benefits for the United States than opening up trade more generally. Furthermore, by contributing to prosperity in Mexico, it will reduce the pressure for Mexican workers to immigrate illegally to this country in search of jobs. An attack on the Mexican free trade agreement based simply on the perennial fear of cheap foreign labor misses all these reasons for favoring it.

The issues surrounding the Danes’ rejection of the Maastricht agreement are quite different.

Within its boundaries, Europe is already well on the way to open borders for goods and services, free movement of capital and standardization in commerce. The Treaty of Rome, which called for these market-opening measures, left some unsettled questions: Will barriers to outside nations grow even as barriers within Europe fall? And who will be outside the boundaries of the new Europe covered by the treaty and who will eventually be in? But the basic changes called for by the Treaty of Rome are accepted and welcomed by the member nations of the European Community.

The further changes envisioned under the Maastricht agreement are much harder to accept than the market-opening measures of the Treaty of Rome. In important ways, Maastricht would have sacrificed national autonomy to a stronger European Community. Concern over this attrition of national identity and economic control was probably at the center of the Danes’ disapproval of the agreement.

The main new economic changes under Maastricht included rigid standards for budget deficits and a merger of the monetary systems of the separate countries, leading to a single European currency and a single European central bank. Whereas opening borders for goods and capital promised greater competition, efficiency and benefits for consumers, these further steps called for by the Maastricht agreement would have reduced the scope for setting national budgetary priorities and taken away the power of individual governments and central banks to act independently in stabilizing their economies.

Acting independently, a nation can respond to economic shocks using both monetary and budget policies. If the economy falls into recession, lower interest rates and lower exchange rates can be used to limit the downturn and contribute to a recovery. In addition, variations in revenues and in unemployment compensation payments can be used to ease the burden of recession on individuals and to modify economic fluctuations by damping the associated fluctuation in income.

With no independent currency or monetary policy and restraints on budget policy, nations would lose their stabilization tools. It might appear that this would leave them no worse off than the individual states of the United States. But U.S. labor is highly mobile and moves readily from one state to another in response to job market opportunities, in the process helping to even out regional economic conditions. The nations of Europe are not melting pots that are receptive to foreign labor, and labor mobility cannot be counted on to help stabilize their individual economies.

Of course, nations may arrange to limit their use of stabilization tools because they do not trust themselves to use them well and wisely.

The way other countries of Europe have closely tied the value of their currencies to the German mark in recent years--in effect giving up exchange rates and interest rates as stabilization tools--is an example of such behavior. It is motivated by a past in which Germany managed to maintain a reasonable combination of prosperity and price stability.

Whether it is wise to give up policy independence permanently is a different question that reasonable people, such as the Danes, may sensibly decide against. And such a decision bears no relation, except the coincidence of timing, to Ross Perot’s attack on the U.S.-Mexico free trade agreement.