NEWS ANALYSIS : Mexico Won’t Take Kindly to NAFTA Failure : Trade: Publicly, the government refuses to speculate on a U.S. rejection. Privately, it says the consequences would be grim.

Last month, within hours of White House budget director Leon Panetta saying that prospects for congressional approval of the North American Free Trade Agreement looked bleak, the Mexican government was faxing reporters multiple copies of a press release with assurances from both the U.S. Commerce Department and the Clinton Administration that NAFTA was alive and well.

Last week, President Carlos Salinas de Gortari’s chief of staff, Jose Cordoba, told the corporate members of the Council of the Americas that the agreement to ease trade barriers among Mexico, the United States and Canada must and will pass. The administration here refuses to publicly consider any alternative.

Privately, however, officials are warning of dire consequences to U.S.-Mexican relations if NAFTA fails, and they say congressional rejection will taint relations so deeply that the stain will spread throughout Latin America.

After decades of U.S. admonishments that Mexico should be more open to foreign trade and investment, the Salinas administration has taken enormous political risks to make the economy more open, said Richard J. Salvucci, an expert on Mexican economic history and a professor at Trinity University in San Antonio.

If the United States now decides it is not interested in free trade, he said, “I’d be madder than hell. How could it not have a significant effect on the relationship for years to come? This is the centerpiece of where the country is going for the next quarter-century.”

Mexicans are banking heavily on foreign investment to make their country’s economic reform program work. Mexico must sustain the billions of dollars in foreign investment that has poured into the country in anticipation of NAFTA. The money is needed to make up for a trade deficit resulting from liberalizing its markets.

Without continuous foreign investment, “the current exchange rate will not be sustainable,” Salvucci said. The economy, already crawling as a result of anti-inflation policies, will slow even further.

Mexico City economist Rogelio Ramirez de la O argues that his country could minimize the negative effects of losing NAFTA by continuing its reforms as if the agreement were being implemented.

Indeed, 98% of the businesses surveyed by the American Chamber of Commerce said a “more receptive environment to foreign investment” is the most important factor in attracting capital from abroad.

However, sustaining such policies could be politically difficult if Congress rejects NAFTA.

Business people worry about a backlash that would reverse the free-market policies of the last eight years. At the very least, foreign investors could expect less favorable treatment than they have received in recent years.

“Mexico can become uncooperative about a lot of things that people in the United States would like them to be cooperative about,” Salvucci said. As examples, he mentioned the battles against illegal drug trafficking and immigration.

Moreover, failure to pass the agreement could tarnish U.S. relations throughout Latin America, senior Mexican government officials say. Chile and other countries that have undertaken economic reform programs are eagerly awaiting the approval of NAFTA with the hope of joining in the agreement or negotiating a similar deal.

NAFTA’s rejection would dash those hopes and diminish the incentives for continuing free-market reforms in the region, officials say.

“It doesn’t take much to sour relations between two countries,” Salvucci said. “If this doesn’t go through, it’s going to be a big, big blow.”

Meanwhile, Mexico is clearly counting on pressure from international business people, such as the group Cordoba was addressing, as well as a stable of well-paid Washington lobbyists to get the agreement through Congress.