Talk of Free-Trade Pact Echoes Snags in US and Mexico

THE prospect of expanding trade ties with Mexico this year, which looks increasingly unlikely, has inflamed debate over what the US can reasonably do to help Mexico without undercutting its own interests. ``This proposed pact has nothing to do with trade, but everything to do with keeping Mexico's government afloat,'' says Christopher Whalen, vice president of the Whalen Company, a Washington firm specializing in international trade and finance.

``Mexico is a domestic US problem,'' he says. ``Its export sector is almost completely tied to the US and it's heavily indebted to US banks. The Mexican leadership is trying to use a trade agreement as evidence of economic progress, when there's been very little.''

Before a trade pact with Mexico is possible, observers like Whalen say President Carlos Salinas de Gortari will have to liberalize exchange rates, lift subsidies, protect property rights from government seizure, and encourage two-way capital flows in order to reach a fair free-trade agreement with the US. Mexico is one of the US's most important trade partners with $50 billion in two-way trade annually.

The Committee for Economic Development, a New-York based corporate group, says the US has a ``huge stake in the evolution of a peaceful, prosperous, and politically stable Mexico.'' Noting the ``political sensitivity'' of the US-Mexico trade relationship, it suggests the US enter negotiations over an extended period with a ``differential pace of liberalization reflecting the two countries' different levels of economic development.''

But reform measures necessary to make Mexican industry competitive in a US-Mexico trade pact - such as closure of inefficient plants - will be politically costly at any time, Whalen says. Within Mexico popular support for reforms has worn thin.

``If Salinas doesn't have the constituency to back him on reforms, what makes him think that he has support for Mexican integration into the US,'' Whalen says.

Doubts about such integration are apparent north of the border as well. US industry and labor groups are unhappy that US auto manufacturers and others have moved much of their production south of the border.

``US companies transfer down to Mexico entire technologically advanced plants,'' says Mark Anderson, an AFL-CIO economist. By combining ``state of the art production processes with cheap Mexican labor, we're taking advantage of their poverty and hurting our US workers.''

Any trade agreement with Mexico is expected to help increase, not limit US investment in Mexico's export sector - oil, agricultural products, and manufactured goods - almost 80 percent of which is aimed at US markets. Foreign-owned assembly plants in Mexico, known as maquiladoras, are responsible for one-third of US-Mexico trade and provide Mexico with important foreign exchange earnings.

But United Auto Workers officials wince when they read the US Commerce Department's list of the top three US investors in Mexico - Chrysler, General Motors, and Ford Motor Company. Auto parts and electric and electronic goods make up the largest portion of maquiladoras trade flows, according to Mexican Embassy officials here.

A US-Mexican trade agreement would have grave implications for US workers, Mr. Anderson says: ``The impact in the current trade relationship is severe.''

He estimates there are more than 400,000 Mexicans producing goods bound for the US market. They work in the maquiladoras, which are ``90 percent US-owned.''

Greater certainty for US investments and open-ended access to US markets on a duty-free basis are two essentials of a trade pact, Anderson says. Yet such incentives would further encourage US business to set up assembly plants in Mexico, where businesses are already free from US minimum-wage requirements, environmental monitoring, and other regulations.

By establishing what he calls a US commercial enclave several hundred yards across the Mexican border, a trade agreement ``would accelerate the buildup of Mexican output for the US market, and further displace US workers,'' Anderson warns.

Border states such as Texas, Arizona, and New Mexico will really feel the impact, he says, noting that ``we've just done them a big favor and raised the hourly minimum wage.'' That increase blunts any competitive edge, he says, when industrial investment is lured by the prospect that Mexican workers just across the border will put in the same hours at one third the pay.

Mexico's President Salinas is scheduled to meet President Bush in Washington in June, but the likelihood of the two leaders advancing on a trade agreement is slim.

``In terms of the timing, there's an awful lot on the US agenda right now,'' says Judge Morris, of the National Association of Manufacturers (NAM). ``We're working on the GATT, the structural impediments initiative talks with Japan, Super 301 trade issues, the US-USSR trade agreement, and US participation in the European Bank for Reconstruction and Development. If we threw in Mexico, we'd undercut all these efforts.''