WORLD TRADE AT A CROSSROADS : Day of Decision for NAFTA

After years of discussion, the U.S. Congress today takes the first step toward deciding the fate of the North American Free Trade Agreement. *The Basics: NAFTA would tie together the economies of the United States, Canada and Mexico by creating a common trading zone stretching from the Yukon to the Yucatan. However, because the United States and Canada have enjoyed a free-trade arrangement since 1989, NAFTA primarily affects trade between the United States and Mexico and Mexico and Canada.

If approved by the House of Representatives and Senate, the agreement becomes effective Jan. 1. If it is defeated, trade between the United States and its two neighbors will proceed according to current rules, which include, among other things, an average 10% tariff on U.S.-made goods imported to Mexico.

*Impact on Key Industries:

Banking and financial services: NAFTA would lift Mexico’s virtual ban on U.S. banks and stock brokerages by gradually opening the market over the next 10 to 15 years. Banks and brokerages would be perhaps the biggest winners, and U.S. workers face little displacement or competitive threat from their Mexican counterparts.

Agriculture: NAFTA would immediately eliminate nearly 60% of the barriers to agricultural trade between the United States and Mexico. Within 10 years of passage, about 95% would be dropped; the rest would be eliminated within the next five years. The nettlesome issue of farm export subsidies was deferred to future negotiations and global trade talks.

Autos: With automotive products accounting for the largest portion of trade between the United States and Mexico, the stakes are high on both sides of the border. Under NAFTA, tariffs on cars assembled in Mexico and exported to the United States would be dropped immediately. Mexican tariffs on U.S. cars would initially be cut in half, then phased out over the next 10 years. U.S. auto makers could benefit in two ways from NAFTA: Their markets should expand with the liberalizing of trade rules, and their labor costs could drop as they send more work south of the border. The big losers would be U.S. auto workers, including parts makers, who stand to lose jobs to Mexican laborers. Further, the accord could make Mexico a more attractive place for foreign auto makers--notably the Japanese--to open plants to serve the U.S. market and the growing Mexican middle class.

Garment making and textiles: U.S. garment manufacturers stand to gain because NAFTA would immediately eliminate many Mexican tariffs, some of which are as high as 30%, and open the border to increased U.S. exports to that country. However, those gains could be offset as Asian manufacturers set up factories in Mexico to serve the market in the United States.

Transportation and trucking: By the end of the century, both Mexican and U.S. truckers would be allowed to drive anywhere in each other’s country, and U.S. firms would be allowed to own majority stakes in Mexican trucking companies. However, those gains could be eliminated if Mexican firms began opening businesses in the United States and offering a lower-cost alternative. Independent truckers are potentially the most vulnerable to new competition.

Technology and telecommunications: These industries are also potential big winners under NAFTA as Mexican markets are opened to U.S. technology products and services. However, U.S. workers in these industries would face some job losses, as lower-paying electronics assembly operations could move to Mexico.

New Era for Pacific Trade

While Congress debates the North American Free Trade Agreement in Washington today, Secretary of State Warren Christopher will be speaking in Seattle to the first high-level session of the Asia-Pacific Economic Cooperation. The United States hopes its meeting with the 14 other member nations will focus the attention of U.S. industry on the potential for trade with the booming economies of Asia.

The association: APEC does not represent a formal trading bloc; rather, it is a government-to-government association of 15 of the 40 or so independent countries and “economies” that have borders on the Pacific Ocean. The association is based on the idea that nations on both sides of the Pacific have common economic bonds and that cooperation will become increasingly necessary as trade increases. The purpose: APEC was created in 1989 to promote informal, government-to-government discussions of regional economic issues. The group’s stated objectives are to sustain growth and development in the region; contribute to global economic growth; strengthen the open, multilateral trading system, and reduce barriers to trading in goods, services and investment among the participants.

What’s at Stake: For the United States, Asia represents an important vehicle for expanding trade and creating jobs. While the United States maintains important trading partners in Europe, Asia has the world’s fastest-growing and most dynamic economies. In seeking to boost trade in Asia, the United States faces many barriers, such as official protectionism, corruption and cultural differences. For Asia, the APEC forum could be an important first step in forming the first region-wide organization, something the diverse community has never had. The Major Issues:

Eliminating barriers to trade and investment in the region.

Deciding whether to move the organization in the direction of a policy-making body.

Deciding whether to consider establishing a free-trade area in the region.

Next Steps:

Indonesia will assume chair of Asia and will probably influence the organization with its more cautious approach to expanding APEC’s role. Next November, APEC ministers--and perhaps leaders--are to meet in Jakarta.

APEC officials will implement a new trade and investment framework that is expected to be approved in Seattle.

International Business; As a group, the economies of the 15 nations in the Asian Pacific Economic Cooperation group have grown faster than the rest of the world. A look at the numbers. D7