North America, Inc

NORTH AMERICA, INC.?
By Lawrence C. Wolken

On January 1, 1989, the Free Trade Agreement between the United States and its largest trading partner, Canada, went into effect. Its main provisions were the removal of all tariffs and virtually all import and export restrictions by the end of 1998. In the spring of 1991, President George Bush decided to expand this idea by entering into negotiations with Mexico to create a similar agreement. (See the article on the Maquiladoras, a related subject, in the ECON UPDATE 1990.) If completed, the free trade agreement will create the largest regional market in the world. Mexico’s President, Carlos Salinas de Gortari, seems to have provided the economic and political stability needed for such an agreement to work. The question now is whether or not Congress and the American people will accept such an agreement.

Based on 1989 data, North America Inc., as it might be called, would have 362 million consumers (250 million in the U.S. 26 million in Canada, and 86 million in Mexico). It would have a combined GNP of $5.9 trillion ($5.23 trillion from the U.S., $201 billion from Mexico, and $463 billion from Canada). Trade among the three countries already amounts to more than $225 billion a year ($52 billion U.S.-Mexico, $171 billion U.S.-Canada, and $2.3 billion Mexico-Canada).

The size of the market created by North America Inc. would allow producers in all three countries to build larger plants and thus take advantage of economies of scale. Free trade agreements normally allow each country to specialize in industries in which it has a comparative advantage. Goods and services are then traded without any tariffs, resulting in lower prices for consumers and a wider variety of goods and services in the participating countries.

An early objection to negotiating an agreement with Mexico, however, has come from environmentalists, who point out that few environmental regulations are enforced in Mexico: the lower Rio Grande is the most polluted river in the United States, and Mexico City is well known for its polluted air. Lax enforcement might encourage American plants to relocate to Mexico, where they could then engage in practices that would lower their costs of production-but that also would pollute the environment. As a part of any agreement, environmentalists want Mexico to enforce standards equal to those in the United States and Canada.

U.S. fear of losing jobs has also raised objections to the negotiations. Mexico’s comparative advantage in low-cost labor has encouraged U.S. companies, along with a few European and Japanese companies, to open more than 1,500 Maquiladora plants in the past 25 years. Maquiladora is the term used for an American plant and a Mexican plant that cooperate in producing goods. Most of this growth has occurred since 1985. These plants employ more than half a million Mexican workers.

Although this growth has taken some jobs from the United States, many jobs have been taken from Asian countries. In recent years low wages in Mexico have encouraged manufacturers to set up plants there instead. In 1989, for example, the average hourly wage in a Maquiladora plant was $1.63, compared with $2.25 in Singapore, $2.94 in South Korea, $3.71 in Taiwan, and $14.32 in America.

U.S. labor unions also fear that Mexican immigrants will take away jobs from their members. As a result, U.S. Trade Representative Carla Hills has promised that any agreement with Mexico will not include totally free immigration. This will contrast sharply with the free movement of labor that will exist in the EC by 1992. (See p. 3 in this issue and the ECON UPDATE for 1990 for discussions of EC 1992.)

To help reduce the impact on U.S. jobs, a transition period is likely to be incorporated into the agreement, as in the agreement with Canada. Such a period would give displaced workers time to shift gradually into other lines of work. In addition, President Bush has agreed to increase unemployment benefits to Americans who lose their jobs to import competition.

Will Mexicans benefit at the expense of Americans? Many economists say no. The United States also has comparative advantages in certain areas, particularly in production requiring large amounts of capital and in service industries. As the Mexican economy begins to develop, Mexican demand for goods and services from its partners will translate into more jobs for Americans. While quantifying these potential benefits is difficult, the impact of Maquiladora plants on Texas provides some insight into how a free trade agreement might benefit America as a whole. Workers in Maquiladora plants spend an estimated $65 million a year in Texas, creating an additional 4,000 jobs for Texans. An additional 16,000 Texans work in the parts of the plants on this side of the border. Purchases by these plants and their workers create an additional 25,000 jobs in Texas. The Mexican Maquiladora plants purchase $6 billion worth of inputs from the United States. Because some of these inputs come from Texas manufacturers, these purchases add another 10,000 jobs in Texas. Thus, the number of U.S. jobs created as a result of a free trade agreement may more than offset the number of jobs lost.

Another potential plus is that, as economic conditions improve in Mexico, U.S. problems with illegal aliens should subside. As more well paid jobs become available in Mexico, there will be less incentive to immigrate to the U.S.

A major concern of Mexico is that it will be economically overpowered by the United States if it signs the agreement. It does not want to become the “51st state.” Although this may sound strange to Americans, similar feelings surfaced during negotiations on the agreement with Canada. Few Americans realize how intimidating the size of our economy is to other countries.

As with any agreement of this type, it has advantages and disadvantages for all three countries. In the end, each country must weigh the benefits against the costs of creating a North America Inc. Unless some serious obstacles surface later this year, it is possible that an agreement will be signed in 1992, with the first measures taking effect in January 1993.

Questions

1. What groups tend to oppose the trade agreement with Mexico?
2. Explain one argument for and one against the Free Trade Agreement with Mexico.