NEWS ANALYSIS : Major Impact Expected on Markets, Jobs, Wages : Commerce: Mechanized U.S. farms could enjoy windfall. But labor-intensive crops may be undercut.
Markets for everything from automobiles to computers would expand under the landmark North American Free Trade Agreement reached Wednesday, creating new jobs, especially for skilled workers in Southern California and other border areas.
But unskilled workers like those in Los Angeles’ garment district could see their jobs disappear as companies move work to Mexico to take advantage of meager wages.
Others might see their wages fall as displaced Mexican farmers--put out of work by imports of U.S. corn--leave their home country and swell the pool of unskilled labor in the United States.
Among U.S. farmers, those with highly mechanized farms, such as big wheat and corn growers, could enjoy a windfall as trade barriers in Mexico fall and markets open up.
But farmers who grow labor-intensive crops, such as tomatoes and lettuce, might be undercut in the marketplace by low-wage competitors south of the border.
Overall, if the proposed pact is approved by the U.S. Congress and legislators in Mexico and Canada, it would be an economic boon to North America and could profoundly alter the structure of world trade, most economists agree.
Its potential impact is enormous, expanding the home markets of the three countries by adding Mexico’s 88 million people to the 275 million in the United States and Canada. Southern California’s struggling economy eventually could get a big boost as well.
Gary Hufbauer, a senior fellow at the Washington-based Institute of International Economics, says that free trade would create about 325,000 new U.S. jobs over the next five to seven years, with about one-third in the Mexican border states of California, Arizona, New Mexico and Texas.
And, Hufbauer estimates, the value of goods the United States ships to--and takes in from--Mexico would rise by 25% to 40% in the first two years of the agreement.
In the short term, however, the pact clearly would disrupt jobs and livelihoods, as some were blessed with new prosperity while others were forced to find new work.
“If Mexico grows, there will be a net gain in jobs for the United States,” said Sherman Robinson, a professor of agriculture and resource economics at UC Berkeley. “But there will be winners and losers. The net disruption in the United States will be over moving people toward higher-skilled jobs.”
Labor leaders and some economists warn that unfettered free trade would speed the departure of California light manufacturing, such as furniture, garment work, metal finishing, electronics assembly and auto parts.
Still, the deeper significance of the trade agreement, economists say, is not that Mexico would get jobs because of low wages but that Mexican industry would develop and over time be able to pay its workers more.
Officials hope that Mexican industry would evolve as a full-fledged producer of goods for its northern and world markets. “Mexico will compete with Asia to supply goods to the United States and Canada,” predicts Edward Leamer, a UCLA economics professor.
That would result in a shift in emphasis for the United States and Canada, which now have far more trade with Europe and Asia than with Mexico and Latin America.
Over time, the effect of doing more business with Mexico could yield cultural benefits. Americans could become more conscious, and respectful, of Mexican products and culture as they have grown from disdain to respect and admiration for Japanese products and culture.
And increasing Mexican prosperity should enable that nation’s vast young population to find work at home and not trek north to enter the United States illegally, as a million or more do every year.
More is involved than population numbers. By doing more business with each other, these countries would strengthen their ability to do business with the world. Mexico would develop, and the other two nations would benefit by helping it develop.
Yet, for all these advantages, many Americans doubt that the trade agreement would really benefit them.
They look at the seemingly insurmountable arithmetic of wage differentials. The best-paid industrial workers in Mexico earn $1.50 an hour, compared to a U.S. worker’s $12 an hour in cash and almost double that if benefits are included. Skeptics see only an enormous attraction for U.S. companies to transfer operations to Mexico so they can pay cheap wages and ship products back to the United States.
But that’s not likely to happen on a massive scale, many experts argue. Mexico’s maquiladora plants, which now perform simple functions on goods shipped across the U.S. border, may no longer be needed under free trade.
Many companies in industries that would benefit from the wage differential have already moved plants south. Furniture and electronics factories have relocated into American-owned maquiladoras on the Mexican side of the border since the 1960s, when liberalized trade laws allowed U.S. firms to export from their own plants in Mexico and pay tariffs only on the value added.
Also, one of the first results of the trade agreement would be a rise in shipments of U.S. automobiles to Mexico thanks to the relaxation of Mexican barriers to car imports.
In the first five years of the agreement, analysts expect U.S.-Mexico automobile trade to double or triple, with Mexico exporting some of the cars that now come from Japan or Korea, and importing U.S. cars as rising prosperity allows its people to afford them.
But automobile plants won’t move south of the border. Fact is, it’s cheaper to produce a car in the United States. A U.S. auto plant can turn out more than twice the number of cars per hour as a Mexican plant with only half the number of workers. Cost of materials are lower for the U.S. auto plant--and the effective costs of electricity, transport, equipment and maintenance are lower too.
Indeed, economists see U.S. industry benefiting by supplying factory machinery, telecommunications equipment and many other development tools to Mexico in a complementary trade between unequal economies--the U.S. economy is 25 times the size of Mexico’s--that nonetheless have similar needs.
In addition to auto firms, U.S. companies making machine tools--which were hurt in two decades of competition with Japan--would get fresh opportunity in Mexico. U.S. petrochemical, plastics and pharmaceutical firms would also benefit.
“America has a lot to offer Mexico--simple things like efficient distribution,” said Blair Labatt, head of Labatt’s Food Service, a family-owned company that supplies restaurants and hotels in San Antonio and Dallas. In the United States, Labatt’s can efficiently keep track of 7,000 items for the larders and kitchens of 2,000 customers. But in Mexico even fine hotels typically must deal with 80 food vendors and employ 20 clerks to keep track of inventory.
Labatt’s last January opened a food service operation in Mexico City--in partnership with Grupo Gutsa, a local family firm--and is now supplying Sara Lee cakes and Tyson’s chicken along with computerized inventory control and cost savings to Mexican hotels.
Small wonder that U.S. computer makers see a growth market. Mexico, with 88 million people, buys fewer computers than the Netherlands with 15 million people.
The United States would continue to import oil from Mexico, and U.S. firms would be involved within the limits specified in the trade agreement in exploration and development of Mexico’s oil.
In many cases, analysts say, a two-way trade would evolve between U.S. and Mexican industries--U.S. exports of special quality steel complementing imports from Mexico of construction reinforcing rods, for example.
Many banks--apparently recovered from loan losses suffered there a decade ago--also seem eager to tap the Mexican market under relaxed trade rules.
“Any region with its borders to Mexico can gain significantly through the ascendancy of their economy,” says Roger Brossy, a principal and national director of the Financial Services Practice of the consulting firm Sibson & Co.
Overall, the best scenario, many economists say, is to gradually phase in the free trade measures in order to avoid disruptions.
That would result in “increasing growth of trade and increasing real wages on both sides of the border, and the migration pressures realistically decrease,” said Raul Hinojosa-Ojeda, an assistant professor in the Graduate School of Architecture and Urban Planning at UCLA.
Under such a scenario, only about 100,000 U.S. workers would lose their jobs over a 10- or 15-year period of time in specific industries, Hinojosa-Ojeda said.
To ease the change, mitigating policies should be adopted, such as creation of a North American regional development bank and adjustment fund patterned on similar institutions in Europe, Robinson and Hinojosa-Ojeda said.
Such a fund would aid rural development in Mexico, help build border infrastructure, ensure investment in environmental protections there, and provide retraining for workers displaced in the United States, Hinojosa-Ojeda said.
