COMMENTARY ON FREE TRADE : In the End, Mexico Trade Pact Is a Plus for Orange County : Professor’s analysis shows that while some industries would be hurt, the overall job outlook would be beneficial.

A good deal of analysis and even more published discussion has appeared in the past year or so regarding the pros and cons of a free trade agreement with Mexico. Now that the details have been agreed upon, it will be up to Congress either to ratify the agreement as negotiated, alter it or reject it altogether.

It seems highly unlikely that it will be rejected, since both President Bush and Gov. Clinton favor an agreement with Mexico, albeit with different approaches to help displaced U.S. workers and emphases on environmental standards. Ross Perot, with his “made in America” slant on things is, predictably, against a United States-Mexico free trade agreement.

While much has been written about the likely aggregate impacts on short- and long-term employment on both sides of the border, what about the likely impact of an agreement on Orange County?

Some recent work by UCLA economics professor Edward Leamer makes such an analysis possible.

In a nutshell, Leamer’s conclusions go something like this: A free trade agreement with Mexico would greatly limit the ability of the United States to maintain the wages of its low-skilled workers through import protection in the face of lower “world” wages. The decline in real wages for low-skilled U.S. workers has begun already and will continue regardless. A trade pact with Mexico will simply hasten the process. Under a free trade agreement we would expect increased production in Mexico of certain food products, furniture and footwear, all sectors that use a lot of low-skilled labor. Textiles, apparel, beverages, and printing and publishing are areas of possible increased Mexican exportation in the longer run. Expect Mexico to expand its imports of products that are intensive in highly skilled labor, such as steel, chemicals, aircraft, computers, metalworking and electrical machinery. The United States has already established clear advantages in two of these, computers and aircraft.

Another possible industry Leamer cites for increased Mexican imports is finance and real estate. Other sectors that eventually may result in an export advantage for Mexico include non-metallic minerals and pottery. Currently, Mexico is too small to inhibit the United States’ desire to protect such labor-intensive products, but the future Mexico could be big enough that such protectionism is not sustainable.

Leamer also estimates the effect on earnings of workers in the United States over the period 1972-85 and projects those earnings changes into the future. The historical data shows that during this period annual real earnings of high-skilled workers rose by $1,919 while those of low-skilled workers declined by $465 per year. A lot was happening behind the scenes to cause such changes, in particular advances in technology that raised the amount of capital per worker and a gradual reduction in overall U.S. tariff protection.

In fact, today the tariffs facing Asian countries and Mexico are not very high except for a few products, clothing and textiles among them. Coupled with Mexico’s recent dramatic reduction in average tariffs on U.S. imports to approximately 11%, the point is that much of the adjustment to be anticipated under a free trade agreement with Mexico has already taken place.

If we look closely at some of these key industries for Orange County, we find startling results. Take the vulnerable textile and apparel industries, for instance. From 1972 to mid-1992, Orange County employment in these industries grew over 230%, for an annual growth rate of 11% compared to an average rate of decline in comparable U.S. employment of 1.7% per year. Employment grew in Orange County precisely because the immigrant labor force of low-skilled workers grew. Those workers were willing to accept wages that historically had declined by $465 per year in real terms for American workers. But at something like $7 per hour (or less) in 1990, it still looked awfully good--to them.

From 1972 to 1990, the taxable earnings of Orange County workers in the the textile and apparel industries grew by 860% That can’t be all bad. I would argue that a free trade agreement with Mexico is unlikely to affect this trend since the jobs in question have been created here under conditions of declining real wages and are likely to stay.

In the high-skilled employment area of computers and office equipment, which is likely to benefit enormously from a United States-Mexico agreement, Orange County has again outpaced the nation in job creation, averaging an almost 9% annual rate of employment growth since 1972. The aggregate taxable earnings of Orange County employees in this industry have grown by 1,270% since 1972 and now total more than $345 million.

In the aircraft, missiles and rockets industry the growth rates are less impressive, but again the county has outpaced the nation, and the taxable payroll was $742 million in 1990. Since then, of course, significant declines in the defense-related portion of this sector have occurred that mitigate this trend. But Mexican imports of aircraft from the United States have grown at an annual rate of almost 17% over the past decade and will, no doubt, continue to expand as the Mexican economy matures.

If we apply Leamer’s earnings numbers to look five years into the future, using conservative assumptions about job growth with an agreement, we get something like this: With static employment in the Orange County textile and apparel industries, as if the free trade agreement halted their further growth, “real” payroll would decline by $24 million. If we make the same static employment assumption for aircraft, missiles and rockets, where the effects of increased Mexican demand for aircraft are offset by further reductions in U.S. defense spending, we still get real payrolls growing by $326 million. And finally, applying the historical annual employment growth figure of 9% in computers and office equipment, real taxable Orange County payrolls would grow by $331 million.

Altogether, and with 4% inflation per year, nominal payrolls would be $760 million more in 1997 than they are now. These are big and positive impacts.

By no means have I explored the entire range of Orange County industries that might be affected by the economic dynamics of an agreement with Mexico. We have, for example, a fairly large employment base in paper, printing and publishing that might be hurt, but a much larger employment base in finance and real estate that might be benefited.

With an expanded commitment to free trade we lose some jobs in industries in which our trade partners have comparative advantage, we gain some jobs in industries where we enjoy comparative advantage, and the American consumer wins because we pay lower prices for goods that are now protected.

Because capital and information have become almost completely mobile in this integrated world economy, national borders are fast becoming artifacts of the past. A free trade agreement with Mexico allows for a controlled transition to economic integration to take place over 15 years with our neighbor to the south. Orange County stands to gain much by participating in the process.