NEWS ANALYSIS : ‘Free’ Doesn’t Apply to Trade Pact, Critics Say

As more of the closely held details of the proposed North American Free Trade Agreement trickled out here Thursday, many critics expressed fears that the pact could turn out to be the first step toward the creation of a North American trade citadel.

The draft agreement, unveiled on Wednesday by the United States, Mexico and Canada, is full of special provisions designed to benefit some American industries that lobbied long and hard to influence the outcome, while erecting barriers to competitors from Europe and Asia.

“I am concerned that this agreement has something of a fortress mentality to it,” said William Niskanen, a conservative economist and free trade advocate at the Cato Institute, a Washington think tank. “I would expect that we will get complaints from the Third World and Japan that we are trying to shut them out of things like textiles and auto parts.”

The Bush Administration and major business groups are touting the proposed accord as a bold step toward unfettered markets.

But examples of the opposite are plentiful. For Chrysler, the agreement would open new opportunities in Mexico; for Toyota, it may close them. For Zenith, the pact would be a boon because it limits Asian access to the North American television tube market.

For overseas yarn manufacturers, the agreement would raise new walls to the American apparel market. For U.S.-owned banks, the pact would provide a new edge in the Mexican financial market over European and Asian banks--even those that now have large U.S. operations.

In some critical industries, the agreement appears to limit the ability of Japanese and other Asian firms to use low-cost Mexican plants as a way of gaining easy access to the huge U.S. market.

Japanese officials told reporters in Tokyo on Thursday that they are, indeed, concerned about what they termed a protectionist tinge to the North American trade pact.

“Some of our concerns about the trade agreement have not been satisfied,” a spokesman for Japan’s Ministry of International Trade and Industry said. “I feel some disappointment.”

To be sure, the Bush Administration’s overall objective of gradually eliminating tariffs and other trade barriers among the United States, Canada and Mexico was largely achieved in the 14-month negotiations among the three nations. By sometime early in the 21st Century, most of the 20,000 existing duties and tariffs will have been phased out.

Limitations on foreign ownership of financial institutions and other corporations in Mexico and the other nations will have been lifted, and the integration of the North American continent into a single market now populated by 360 million consumers will become a reality.

But, meantime, the three governments have cut a bewildering array of special deals to protect many of the largest American, Canadian and Mexican corporations from the harshest aspects of the transition to free market status.

Negotiators have had to set aside a separate category of tariffs and other trade barriers involving sensitive industries that will not be phased out as quickly as others--and will instead last as long as 15 years.

What is more, many key industries have exploited the free trade talks to gain an advantage--mainly through new North American product content requirements--over their Asian and European rivals in long-simmering trade disputes. Many of those American firms have, as a result, hailed the agreement as a step toward reviving long-suffering industries.

“This is the first thing of a proactive nature that the government has done to help the television industry in a long time,” said Tim Regan, vice president and director of public policy for Corning Inc., which supplies glass for television picture tubes.

In fact, companies that manufacture televisions in the United States--even those that are Japanese-owned--would be among the big winners under the agreement.

Under current law, Asian and other foreign television set makers can skirt high American import tariffs by assembling sets in Mexico made from Asian tubes and other parts. But the new agreement would close that loophole, benefiting the eight American, European and Japanese companies that now manufacture picture tubes in North America.

The agreement would impose tough new duties and quotas on tubes for television screens larger than 13 inches that are made outside North America. In the future, it would even extend those barriers to such leading-edge products as high-definition television and flat panel television tubes. “This has got all kinds of things in it to revive the North American television industry,” Regan said.

Another big winner would be the American auto industry. The Big Three U.S. auto makers fought hard--and successfully--to impose domestic content rules on the free trade talks to protect them from more open competition with the Japanese.

The agreement says that only cars built with 62.5% of its parts and labor from North America will qualify for duty-free status in the three nations.

Such domestic content rules were designed to prevent Detroit’s worst nightmare: a scenario in which the Japanese would build low-cost Mexican plants to assemble cars mostly with Japanese parts.

But the trade pact goes even further to help Detroit. The agreement would limit, at least temporarily, the duty-free advantages of Mexican auto production only to firms that already have assembly plants there.

That means that General Motors, Ford, Chrysler, Nissan and Volkswagen would be able to ship cars from their existing plants in Mexico to the United States without paying duties. But if Toyota or Honda or other foreign firms build new assembly plants there in the future, they cannot--at least not for several years.

“Chrysler is pleased that the agreement will confer trade benefits only to the three participating countries,” a Chrysler spokesman said Thursday.

“We will review the agreement to see if Toyota will be treated fairly and equitably,” Toyota responded tersely.

The nation’s textile industry--politically powerful in Washington with a strong base of support among Southern members of Congress--obtained even more stringent protection under the agreement that already has come in for strong criticism from free trade advocates.

The new agreement would grant duty-free status only to apparel and other goods made with yarn and fabric produced in America, Mexico or Canada. That means that clothes made in Los Angeles but using fabric from Italy would not be able to avoid duties in Mexico or Canada.

A wide range of special arrangements cover agricultural products, which have deeply entrenched political constituencies in all three nations. Many of the specific provisions covering individual farm products were among the most difficult to resolve for the trade negotiators, and were only wrapped up in the closing days of the talks.

The farm products that represented the biggest political problems would continue to fall under some form of tariff or quota protection for 15 years. Among the most contentious agricultural issues, for example, were American exports of corn into Mexico, which would fall under the 15-year limit.

Millions of poor Mexican farmers depend on small plots of corn crops for their livelihood, and the Mexican government was fearful that an unchecked flood of cheap American corn from the highly efficient farms of the Midwest would result in a vast displacement of rural Mexicans into the cities of Mexico and the American border region.

In banking and financial services, the agreement would also provide an edge to North American-based firms over their overseas rivals. The trade agreement would for the first time open up the Mexican banking market to foreign firms. Commercial banks from the United States and Canada--as well as the American or Canadian arms of European and Asian banks--would be allowed to set up shop there. But the agreement sets limits on how much of the Mexican banking market can be controlled by non-Mexican banks.

As it allocates that foreign market share, the agreement informally calls for the Mexicans to give some preference to American or Canadian firms over the American or Canadian operations of foreign banks, according to Henry Rumpler, a trade expert at the American Bankers Assn.

“All things being equal, U.S. and Canadian banks will get a little better treatment in Mexico than a European bank,” Rumpler said.

And despite the special provisions, supporters of the trade agreement argue that it represents a huge advance over the status quo by destroying barriers that many never thought would come down.

“This agreement is not pure free trade,” said Willard Workman, international vice president for the U.S. Chamber of Commerce. “But with the possible exception of Hong Kong, I’m not sure pure free trade exists anywhere in the world.”

Times staff writer Jeff Leeds also contributed to this report.

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