NAFTA Would Set Course for Economy In Global Competition

DAY after day, senior trade negotiators for the United States, Mexico, and Canada have been struggling over the final sticking points of the politically critical side agreements to the North American Free Trade Agreement (NAFTA).

The side agreements are intended to protect the environment and labor conditions from the possible ravages of more open competition across borders.

They will also govern how NAFTA lands on the political waters this fall, when the Clinton administration plans to take it to Congress as a priority second only to health care.

The debate over NAFTA represents a fundamental choice over how the country responds to the globalization of the economy. Some analysts say that the choice on NAFTA could set the US direction for years to come.

As jobs become less secure, competition with cheap-labor giants such as China more pervasive, and technology more productive, the drive to protect American jobs and markets at the border is likely to intensify.

Economists largely argue that free trade generally causes faster growth in all the economies involved, and that the American economy will be stronger and more efficient if it adapts to the strengths of foreign competitors.

But even optimistic scenarios include some shifting of American workers out of less-competitive industries and the necessity to compete by training and educating the American work force better.

"There's a huge world oversupply of labor," says Edward Leamer, an economist at the University of California at Los Angeles. "Workers of this country are feeling the effects of that."

Dr. Leamer made a study of NAFTA two years ago concluding that once free trade is established with Mexico, protectionist measures against any other country would have no effect on American jobs or wages. In other words, the US would be set on a free-trade course.

The bad news he estimates is that the lower-wage 70 percent of the American work force will earn an average of $1,000 less per year a decade from now due to free trade. The good news is that prices will be lower and the economy more productive.

One of the most wrenching questions behind the free-trade debate is how to protect these workers against competitors working for less than a tenth of the American wage.

"We know how to erect barriers," Leamer says, who prefers the free-trade option. "We're not so sure how to educate workers." Effect on US economy

Most studies are more optimistic than Leamer's. A review this summer by the Congressional Budget Office (CBO) concluded that the effect on American wages would be very small, probably less than 1 percent on all classes of labor, but positive.

Jeffrey Schott, an economist at the Institute for International Economics who co-wrote a book-length study of NAFTA earlier this year, says the agreement's small effect on American wages would surprisingly affect all income levels about equally.

The effect of NAFTA on the American economy overall is likely to be very small, at least for many years. The Mexican economy is only 4 percent of the size of the American, and Mexican access to US markets is already fairly unrestricted.

The impact on the Mexican economy would be much larger, and as Mexico becomes more prosperous in coming decades, it would have greater benefits for the US. Shift of investment

These expected benefits would come through shifting investment and jobs out of less-competitive industries, such as apparel or electrical equipment, and into those expected to expand, such as agriculture or transportation equipment.

The CBO analysts find that under the most credible estimates every shifted job would permanently add about $30,000 a year to the US gross domestic product.

The CBO survey finds that estimates of how many US workers would be forced out of declining industries and into expanding ones because of NAFTA to be in the range of 30,000 to 50,000 altogether over a number of years.

In the American economy, this is a minuscule number. In the normal churning of the US labor market even in a single, high-employment year, about 1.5 million workers lose their jobs.

The politics of ratifying NAFTA will look very different this fall from the just-concluded, highly partisan budget battle. Republican leaders on Capitol Hill are forecasting that President Clinton will have more Republican support, proportionately, than Democratic.

Strong side agreements on the environment and work conditions will help bring more Democrats on board. US Trade Representative Mickey Kantor is now negotiating over sanctions for breaking the agreements.

Senior Clinton administration officials say they expect to have NAFTA ratified in Congress by the end of the year.