Timothy T. Taylor Home Page
Journal of Economic Perspectives
Articles and Writing
Economics Textbook
Classroom Teaching
The Teaching Company
High School Pedagogy

Articles and Writing

July 4, 1991
"Not Even Close - Heavyweight U.S. Shouldn't Fear Free Trade"
San Jose Mercury News

By Timothy Taylor
<< Back to 1991 menu

WHEN YOU think of free trade between the United States and Mexico, consider a boxing match between a heavyweight fighter and a newborn infant. The physical proportions of those two combatants are roughly 25:1, which is the proportion between the U.S. economy and Mexico's.

While a number of economic studies show that the U.S. economy as a whole would benefit from free trade with Mexico, Mexico is too poor for the U.S. economy to benefit much. One study done by researchers at the University of Maryland concluded that over five years, free trade with Mexico would create 45,000 new U.S. jobs and raise U.S. gross national product by one-tenth of 1 percent. Similar results from a second study are detailed in the accompanying table.

The gains come from each country pursuing what it does best. If U.S. consumers have better access to less expensive products from Mexico, their dollars stretch further and their standard of living rises. If U.S. businesses can sell more to Mexico, seek out profitable Mexican investments, and use lower-priced Mexican labor for some purposes, they become tougher competitors in world markets.

But free trade talks with Mexico should be conducted at a muted volume, because an agreement just won't make that much difference. Besides the relative sizes of the two economies, U.S. trade barriers with Mexico are already quite low. The average U.S. tariff on Mexican imports is a bare 3.8 percent, while the average Mexican tariff on U.S. goods is 6.2 percent.

In addition, the United States already takes most of Mexico's exports. More than 80 percent of Mexico's exports head for the United States right now, while the U.S. is the source for 73 percent of Mexico's imports. Mexico is America's third largest trading partner, after Canada and Japan, responsible for about 6 percent of U.S. imports and exports.

There are two major arguments against free trade with Mexico: that low-wage Mexican competition will injure the U.S. economy, and that additional economic growth in Mexico will lead to environmental damage.

There's no denying that some U.S. workers will suffer from free trade, with Mexico or with anyone. Among those U.S. workers likely to suffer in this case are those involved in growing and processing fruits and vegetables, textile and apparel makers, assemblers of computing equipment and electronic components.

On the other hand, U.S. jobs will also be added in other industries, including optical instruments, motor vehicles, machinery and equipment, and chemicals.

For all of these industries, though, according to a recent study by KPMP Peat Marwick, the effects on U.S. jobs in all these industries will be measured in fractions of a percentage point.

In addition, importing from Mexico is probably better for U.S. jobs than importing from other nations, because the dollars spent on Mexican products usually flow right back into buying U.S. products. Remember, Mexico spends almost three- quarters of its foreign trade dollars on U.S. products.

A free trade agreement with Mexico will certainly cause painful disruption to some communities. But if the U.S. economy allows itself to be frozen in place, for fear that all change inevitably involves some loss, it might as well just give up the battle for international markets.

In fact, the fear of losing jobs to Mexico seems to me overly defensive, even paranoid. Do labor unions and others who have lobbied against a free trade agreement really believe that Mexican workers can just step in and do their jobs?

American labor is well-paid by global standards because it is made up of highly educated, trained, skilled workers. Worrying about the Germans and Japanese and other industrialized competitors is one thing, but Mexico is a Third World country, where the average person has only four years of schooling and nearly half the population doesn't go past elementary school, according to U.N. statistics. If low wages were enough for success in the brutal competition of world markets, then India and China would be the economic superpowers of tomorrow.

The environmental argument against free trade with Mexico is a bit twisted, as well. Granted, Mexican industry has had fewer environmental controls and has been dirtier than U.S. industry. But an attempt to keep Mexico poor, behind trade barriers, is no way to clean up the environment.

Around the world, poor countries face problems of water contaminated by sewage, industry and agriculture; problems of deforestation and destruction of habitat; problems of air pollution and soil erosion. Isn't it fairly obvious that national poverty is no guarantee of environmental purity?

Actually, Mexico has a number of fairly tough environmental and labor safety laws, but it lacks resources for enforcing those laws. Economic ties to the United States can help Mexico clean itself up.

Mexican economic policies of the 1970s were based on ideas that seem outmoded today -- that foreign trade is a sign of weakness, that growth comes through economic isolationism. Mexico's current eagerness for a free trade agreement is an admission that those policies were wrong-headed.

The U.S. economy would recognize only small direct gains from a free trade agreement with Mexico. But U.S. firms, workers, and the government could benefit a great deal from adopting Mexico's mindset, and seeing trade all around the world as an opportunity for greater prosperity.

The United States would experience only slight changes under a free trade agreement with Mexico.

on U.S.
on Mexico
Real income +.04% +4.64%
Real wage rate +.03% (*)
Employment (*) +6.60%
Overall trade balance +.07% +59.10%

(*) not estimated

Source: KPMG Peat Marwick Policy Economics Group, "The Effects of a Free Trade Agreement Between the U.S. and Mexico: Executive Summary," February 27, 1991. Tables 6 and 7.

<< Back to 1991 menu