July 4, 1991
"Not Even Close - Heavyweight U.S. Shouldn't Fear Free Trade"
San Jose Mercury News
By Timothy Taylor
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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.
|MEXICO'S PUNCH STRICTLY LIGHTWEIGHT
|The United States would experience only slight changes under
a free trade agreement with Mexico.
|Real wage rate
|Overall trade balance
(*) 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.
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