NEWS ANALYSIS : NAFTA Likely Would Be Small Force in State

Supporters say the proposed North American Free Trade Agreement would give recession-ravaged California a new lease on life, boosting exports and creating thousands of new, high-paying jobs.

Detractors say it would siphon thousands of good-paying manufacturing jobs south of the border, where poorly paid Mexican laborers would assemble goods that in turn would flood the state’s markets, drive firms out of business and lower wages for California workers.

The truth will probably be a lot less dramatic than either prediction. The effect of NAFTA on California’s economy, despite all the emotion and rhetoric expended on the debate, is likely to be more symbolic than significant--assuming the treaty passes Congress this week.

Consider:

* In terms of jobs, the best projections are that the treaty would result in a net increase of anywhere from 9,600 to 34,330 new California jobs over the next few years. The figures are barely enough to dent the recession that has cost the state well over half a million jobs since 1990.

* Despite jeremiads to the contrary, there’s little evidence that plants would be any more motivated to relocate south of the border under NAFTA than they are now. Over the last decade, and despite a clear wage advantage, a lower percentage of the total firms leaving California have gone to Mexico (22%) than have moved to Texas, Nevada, Arizona, Oregon, Colorado and Utah (36%), according to a survey by the state’s major utilities.

* As for immigration, most studies suggest that pressure would be reduced as the Mexican economy improves, although some foresee a short-term boost in immigration pressure. But no one seriously believes that the problems of illegal immigration would vanish simply because the treaty is approved.

All in all, “NAFTA is a symbol of the shift of production, particularly manufacturing, to low-wage countries,” said Richard Rothstein, a research associate at the Economic Policy Institute in Washington. “But I don’t think passage of NAFTA will make a difference one way or another to a problem that exists in any event.”

You wouldn’t know it from the political heat being generated on both sides of the debate as the congressional treaty vote on Wednesday approaches.

Press releases have been flying off the fax machine, and Clinton Administration officials from U.S. Trade Representative Mickey Kantor to Secretary of State Warren Christopher and Secretary of the Treasury Lloyd Bentsen have made the pilgrimage westward to win over voters.

“California is the most critically situated state . . . to take advantage of this new trading regime,” said Kantor. “It sits as . . . a hub between the two fastest-growing economic regions in the world: Asia and Latin America. It is stunning that any Californian, given that situation, could take the position that the NAFTA is (not) . . . in our self-interest.”

On Friday, the Treasury Department released a study suggesting that Southern California stood to benefit greatly from NAFTA, and adding that failure to approve the treaty could imperil as many as 70,000 California jobs if Mexico retaliates by raising tariffs.

But even executives who are among the most ardent supporters of NAFTA admit that it would have modest effects on the state’s economy or their own businesses. Some with existing operations in Mexico said NAFTA would not spur them to move further operations south.

“There won’t be any appreciable change in our position,” said William Clayton Jr., head of an El Monte-based maker of industrial boilers and automotive emissions testing equipment.

Clayton Industries already has taken advantage of Mexico’s low wages by moving two plants for low-skilled assembly and other operations to Mexico. But Clayton said the company’s remaining U.S. operations--including engineering, machine work, final assembly and testing--would probably remain in the United States.

Tariffs on equipment that Clayton now sells to Mexico, meanwhile, already have begun to fall, and exports are up. NAFTA would remove the last of those tariffs, making Clayton’s products that much more competitive, although it is unclear whether that would translate into more jobs.

The story is much the same around the state. “The first thing you have to recognize is that Mexico is a relatively small (factor) in the California economy,” said Raul Hinojosa-Ojeda, a professor of planning at UCLA and co-author of a study of NAFTA’s effects on California.

To be sure, California and other border states such as Texas stand to feel the effects of any treaty much more than the rest of the country, by virtue of both their proximity and long-standing ties with Mexico. NAFTA would remove most trade barriers among the U.S., Mexico and Canada over 15 years.

But it’s an open question how much the treaty would affect the relationship between Mexico and California. California firms have been moving plants and operations to Mexico for years.

Meanwhile, Mexican trade has grown since the 1980s, when trade barriers were first liberalized. Merchandise exports from California to Mexico nearly tripled between 1987 and 1992, to $6.6 billion from $2.3 billion, the Commerce Department reported. Economists believe that trend is likely to continue, with or without NAFTA, although the Clinton Administration argues that failure to approve the treaty could send import levels back to 1987 levels.

In a study for UCLA’s Lewis Center for Regional Policy Studies, Hinojosa and his colleagues estimate that NAFTA would create 59,870 new state jobs and displace another 25,540, for a net gain of 34,330 jobs by 1995, compared with no treaty.

The pro-treaty business group USA-NAFTA--citing research by the Washington-based think tank Trade Partnership--predicts even fewer net jobs in California: 9,600.

As it stands, the Commerce Department estimated that the total number of state jobs attributable to exports to Mexico amounted to about 90,000 in 1992--a tiny fraction of the state’s 12 million total non-farm jobs.

That’s mainly because Mexico’s economic output is roughly the same as Los Angeles County’s-- despite having about ten times the population.

There are certainly loud dissenting voices who argue that NAFTA would indeed cost California and the rest of the country jobs.

The Manufacturing Policy Project, a Washington think tank, concluded that California is the state with the most to lose if NAFTA indeed results in a giant “sucking” of high-wage manufacturing jobs from the U.S. to Mexico, as direly predicted by Ross Perot and other critics.

The state, which already has been seeing manufacturing jobs decline faster than the rest of the nation, has 747,600 jobs at risk under NAFTA--jobs in industries where labor costs account for more than 20% of total production costs, a Manufacturing Policy Project study argued. Wage rates for Mexican manufacturing workers average a little more than $2 an hour, compared to about $15.50 an hour for Americans.

The California Fair Trade Campaign, a network of labor, environmental and small business groups opposed to NAFTA, released a study Friday that argued that the treaty would result in the loss of 100,254 direct jobs in the state and another 100,000 in related fields, with declining wages for the jobs that remain.

The Fair Trade Campaign and other critics, including the Economic Policy Institute, argue that NAFTA supporters have underplayed the jobs to be lost as U.S. investment is diverted to Mexico under the treaty--by one estimate, 30,000 lost U.S. jobs for every $1 billion of diverted U.S. investment.

California manufacturers who rely heavily on low-skilled, low-wage, mainly immigrant workers are the likeliest to see jobs leave for Mexico. That could affect employment in apparel, furniture-making, low-end assembly and food processing--a lot of which has already fled to Mexico or neighboring states.

“If NAFTA passes, we will probably lose 50% of the work in the first couple of years,” said Patrick Cheung, president of the Northern California Chinese Garment Contractors Assn. in Oakland, which represents about 85 shops that sew apparel for clothing manufacturers.

By eliminating duties, NAFTA would make it easier for the big manufacturers to send work to Mexico and ship it back to California for sale, Cheung said.

By increasing wage competition, NAFTA could also affect wages for unskilled jobs remaining in California. UCLA economist Edward Leamer has conjectured that NAFTA might reasonably be expected to reduce annual wages of low-skilled workers by an average of $1,000 over the next decade, although he admits that such a conclusion is speculative. Other researchers have argued that NAFTA would have only a modest effect on wages.

Union workers who labor in the frozen food processing plants of Watsonville, at the head of the Salinas Valley, worry that NAFTA would accelerate the trend to move their jobs to Mexico.

Local 912 of the International Brotherhood of Teamsters has lost 5,000 members to Mexican plants since the 1980s, said President Joe Fahey. NAFTA would threaten the remaining 3,000 by eliminating tariffs on frozen foods.

But others doubt that NAFTA would result in significant dislocation. Hinojosa argues that the apparel industry in Los Angeles probably would not see major job losses, since much of the industry depends on close ties with design, production and marketing operations in Southern California.

In the food processing industry, “The migration of jobs . . . has already taken place,” said Byron Johnson, president of Richard A. Shaw Inc. in Watsonville, which packages frozen broccoli, cauliflower and other vegetables. Johnson, whose plant employs 1,000, said that passage of NAFTA would not make his firm relocate to Mexico.

Indeed, supporters argue that California would prevail over Mexico in keeping most of its production jobs because the state’s highly developed transportation and communications infrastructure, high-skilled work force, network of suppliers and other benefits outweigh the simple wage advantage, some researchers argue.

NAFTA could also stimulate the Mexican appetite for California-made goods such as computers, transportation and electronic equipment, fabricated metal products, chemicals and other capital goods and processed raw materials, Hinojosa said. That would result in the growth in high-paid, generally union jobs, he added.

Once tariffs were removed, certain California crops could face stiff competition from Mexican imports. That’s due in part to more favorable growing seasons in Mexico, Hinojosa said.

For other growers, however, NAFTA could open up markets.

NAFTA eventually would eliminate tariffs and quotas on table grapes and other fresh fruit, said James R. Llano, export sales manager for Sacramento-based Blue Anchor Inc., a cooperative of 750 California growers of peaches, plums, nectarines, apricots, table grapes and other fruit.

“You’re going to see increased demand for the product, and hopefully that would sustain or in some cases raise prices, which would certainly help the growers and the overall farm economic climate in California,” he said.

Of particular significance to California and the rest of the country would be NAFTA’s effect on immigration.

The Clinton Administration, referring to a study by the Wharton Econometrics forecasting group, argues that failure to implement NAFTA would result in an annual average increase of 549,000 illegal immigrants over the next decade.

But Hinojosa and his colleagues argue that the removal of tariff protections for Mexican agricultural products, combined with ongoing agricultural reform in Mexico, could result in the displacement of thousands of Mexican farmers, who are likely to migrate to Mexican cities and--failing to find employment there--to the United States.

Since California is the destination for half of all Mexican immigrants into the U.S., it would bear the brunt disproportionately of such increased immigration.

Such immigration could be offset if NAFTA results in Mexican economic growth, as hoped, which would create new jobs and lessen the pressure on displaced farmers to come to California.

A study by the Institute for International Economics argues that NAFTA would result in a net decline in immigration from Mexico over the next 15 to 20 years after a modest increase in the short term.

Study author Philip Martin, an economist at UC Davis, argues that NAFTA would set the stage for economic growth in Mexico necessary to reduce the poverty that motivates immigrants to leave for the U.S.

* INTENSE NAFTA LOBBYING: Only 72 hours before the vote, NAFTA’s friends and foes worked to sway opinions. A13