The New North American Order: A Win-Win Strategy for US-Mexico Trade
The Low-Wage Challenge to Global Growth: The Labor Cost-Productivity Imbalance in Newly Industrialized Countries
US Jobs and the Mexico Trade Proposal
Fast Track, Fast Shuffle: The Economic Consequences of the Administration’s Proposed Trade Agreement with Mexico
In Southern California during the 1960s, twirling the AM radio dial could be an adventure. In addition to the mainstream stations, like KNX and KFI, broadcasting at the normal “clear-channel” power of 50,000 watts, every now and then you would hit a station so powerful that it could make the whole radio shake, like a boom box before its time. When this happened, it meant that you had encountered the “Big X,” a station that blasted English-language programming from towers in Tijuana to the huge market north of the border. There must have been some schedule and regularity to the Big X’s broadcasts, but at the time it seemed that they would show up at unpredictable hours and positions on the dial, drowning out stations that were normally there. In its heyday the Big X had featured the legendary disk jockey Wolfman Jack, who was later depicted at a station in central California in the movie American Graffiti.
I took the existence of this station as an early lesson in the difference between what governments can control and what technology can achieve. The US Federal Communications Commission had its master plan for keeping order on the airwaves, by assigning positions on the broadcast spectrum, limiting emission power, and even classifying call letters by region. (The familiar regional scheme generally has “W” stations east of the Mississippi and “K” stations west of it. The Big X’s very name seemed to be a mockery of this system, or perhaps an extension of its riverine logic, with “X” stations south of the Rio Grande.) The FCC’s writ did not reach across the border to Tijuana, but the Big X’s signals easily reached back the other way.
The sensible way to deal with the Big X, of course, would have been through some kind of cross-border agreement, so that each country’s stations would abide by common rules and not blow each other off the air. A grander version of such logic lies behind proposals for a US-Mexican free-trade agreement, toward which the Congress took the first step last spring.
The impetus for such an agreement actually came from the Mexican side. After his election in 1988 at the age of forty, President Carlos Salinas de Gortari began a series of economic reforms that were in their way as remarkable as the economic changes in Eastern Europe at the time. He sold state-owned industries to private investors; he had a famous showdown with a corrupt labor boss who had in effect run the state petroleum industry; he reduced government spending, lowered tariffs, and generally applied market-style reforms like those he had studied at the Kennedy School at Harvard. Shortly before Salinas took office, the Mexican inflation rate had been 200 percent per year; this year it is about fifteen. Eight years ago, the Mexican economy was one of the weakest in Latin America; now it is probably the strongest.
Salinas is far from solving Mexico’s endemic problems of corruption, rapid population growth, and poverty but his administration has so far been less corrupt and more imaginative than its predecessors. Mexico’s economic policies had long been influenced by fear of domination by outsiders, especially the gringos to the north. The Mexican constitution, for instance, prohibited foreign interests from investing in or controlling the country’s natural resource industries, especially petroleum. Salinas, by contrast, began issuing invitations to foreigners and making public gestures of friendliness toward them. He enrolled his children in the Japanese school in Mexico City. He traveled to Japan and Europe in search of investment, and he was invited as the featured speaker at the World Economic Forum in Davos in February of last year.
As it turned out, the Davos meeting was dominated not by discussions of Mexican economic reforms, as had been planned, but by the changes in Eastern Europe that had immediately preceded the meeting. On the final day of the Davos gathering, when Mexico was supposed to be at the fore-front of the conferees’ minds, there was a dramatic panel discussion in which the new prime ministers and presidents of all the Eastern European countries appeared together for the first time. According to one report, it was on the long flight home from Davos that Salinas decided he couldn’t count on attracting the immediate attention of European investors, who would for the foreseeable future be engrossed in their own continental affairs. Japanese investors also seemed apprehensive about putting their money into an economy that had long been chronically unstable. Salinas decided instead that Mexico’s best hope lay in the Americas, and that Mexico should try to be included in the free-trade agreement that had just been negotiated between Canada and the United States.^1
This represented a significant change for Salinas himself, as well as for his country. In the fall of 1989, as the US-Canadian agreement was about to be signed, Salinas said that Mexico should definitely steer clear of it, because of the obvious differences between its economy and the other two. He later told a French reporter that he had altered his position “because the world is changing so quickly, and I’ve had to follow the rhythm of the world.”2
Salinas sent representatives to Washington in the spring of 1990 to discuss the possibility of a North American Free Trade Agreement, which would remove most of the tariffs, import quotas, regulations, and other restrictions on trade and investment among the United States, Canada, and Mexico. Each country has announced that certain policies and restrictions are off-limits, and won’t be touched by treaty negotiations. Mexico, for instance, says that it must stand by its constitutional prohibitions on foreign entry into the oil business, along with other parts of the Mexican legal code. The United States has emphasized that it will try to extend its environmental protection policies into Mexico. Otherwise, chemical plants, paper mills, and other potential polluters could simply move south of the border and avoid cleanup costs. But the general intent of the agreement is to permit businesses to move more freely across borders. Under current Mexican laws and policies, American high-tech firms that want to sell in the Mexican market usually have to take on Mexican partners, build research centers in Mexico, and otherwise pay to enter the market. Under current American policies, Mexican citrus growers and some other farmers are simply forbidden to sell in the US during certain seasons, and garment makers and other manufacturers are subject to tariffs. The idea of a free-trade agreement is to remove these encumbrances over a period of several years.
The Bush administration responded favorably when Salinas suggested free-trade negotiations. Such a plan seemed to represent an extension of free-market principles, rather than protectionism; supporting it was a way of rewarding Salinas for his economic reforms. After Iraq invaded Kuwait that summer, Bush was additionally grateful to Salinas (as Morton Kondracke pointed out in The National Interest) for pumping more Mexican oil and thereby supporting the embargo against Iraq.
In response to the Mexican initiative, therefore, the Bush administration began to argue that region-wide free trade was the way for the US, Mexico, and Canada all to prosper. Administration officials have also implied, rather than explicitly stated, that any plan that made Mexican society more stable and prosperous would be good for the United States. In response to frequent predictions that Europe and East Asia were evolving into trade blocs dominated, respectively, by Germany and Japan, the United States, administration officials have said, could take satisfaction in the formation of a New World trading zone potentially stretching from Alaska to Argentina. With a trading bloc of the Americas in prospect, the US would seem to be prepared for whatever surprises the international economy might hold. Ideally (according to prevailing reasoning in Washington), the US could use the prospective bloc as a bargaining tool, to keep the Europeans and Asians from walling themselves off: if they wanted to sell in the Americas, they would have to keep their home territories open to US trade. And if the others nonetheless persisted with trade-fortress plans, the US would have a comfortable base in this hemisphere.
Unfortunately, this bargaining-tool concept of an American trade bloc ignores some crucial questions of scale. The economies of Western Europe are together larger than the US and Canadian economies combined, and they may eventually integrate many of the East European economies. Mexico’s entire economy adds only 2.5 percent to the current US-Canadian total. The economies of Japan, Korea, Taiwan, and the Southeast Asian nations are together roughly as large as that of the USâ€”and are growing so much more rapidly that Japan’s economy alone may be larger than the economy of the US within fifteen years. During the last decade, Asian economies as a group have grown five times as fast as those of Latin America. A bloc-by-bloc division of the world that ties the US economic future much more tightly to the Americas is not so promising for the US.
This spring, Congress gave the President “fast track” authority to negotiate a treaty with Mexico. This is a commitment by Congress to accept the treaty as the administration negotiates it and to vote for or against it, instead of amending or revising its terms. Republicans voted almost unanimously in favor of granting this authority. The Bush administration urged them on with the argument that a vote against “fast track” negotiations would be a “vote of no confidence: no confidence in American farmers, American workers, American entrepreneurs.” Most Democrats in the House voted against it, arguing simply that American workers would lose their jobs to Mexicans. But Hispanic Democrats from the Southwest were enthusiastic about the plan, as a step toward closer US-Mexican relations. With their support and that of the Republicans, it carried in the House, and won easily in the Senate. Negotiations are now under way, with both the Mexican and US administrations eager to get the plan through Congress by next spring, before it can become an issue in the US presidential campaign.
Entirely apart from whether the proposal might help the US economy, the political debate over it is useful simply because it will concentrate attention on issues of trade policy that are usually neglected. Most economic decisions boil down to questions of how to balance theory and practicality. According to the economic theory that is now dominant in the US, governments should never interfere with business, since regulation always costs someone money. But in practice, governments always have other goals besides sheer economic efficiency in mindâ€”protecting the Arctic environment, for example, rather than opening it for oil exploration, keeping children in school and out of factories rather than leaving this decision to market forces, protecting some inefficient industries rather than letting the communities that depend on them collapse all at once.
During the last five years the European community, to a degree many once thought impossible, has been able to combine its economic and non-economic goals. Its leaders have acknowledged certain interests that are not economically “rational,” such as France’s desire to keep relatively inefficient farmers on their land, but has still moved ahead toward economic integration and deregulation.
Interview with Jacques Jacquet-Francillon, Le Figaro, August 1, 1991.↩
Interview with Jacques Jacquet-Francillon, Le Figaro, August 1, 1991.↩