Be Careful, NAFTA Isn't Expendable
International Herald Tribune
September 13, 1993
Philip Bowring  

Failure of the North American Free Trade Agreement would be more than a disappointing end to a grand idea, a move back to square one. The negative consequences of a failure by Congress to ratify the pact now might be as important as the positive merits that its supporters promised.

The best argument against NAFTA, that it will encourage regionalism at the expense of open global trade, is the one least heard in Washington. That fact, paradoxically, has become one very good reason for approving the pact. This is a situation where the best may be the enemy of the good. Defeat of NAFTA would be a defeat for global trade, a victory for isolation.

The popular argument against NAFTA, indeed almost the only one heard here, is that it will cost American jobs. But what would be the cost to the U.S. economy of its demise?

Mexico has become the United States' fastest growing major market. Exports have soared from $12.4 billion in 1986 to $40.6 billion in 1992. It is now the third-largest U.S. market; the United States enjoys a surplus of $5 billion a year. By comparison, the United States exported only $24 billion to the six member states of the Association of South East Asian Nations last year and had a trade deficit with the six of $13 billion.

The boom in investment in Mexico was prompted by economic liberalization and the promise of NAFTA. It is hard to predict how investors would react if NAFTA failed. Optimists say Mexico's domestic reforms are sufficiently entrenched to keep investment moving ahead regardless. But a sharp reaction is at least equally possible.

An investment slump would particularly hurt U.S. exports of capital goods. Another casualty might be economic reform in Mexico and a retreat to economic nationalism, which would be uncomfortable politically as well as economically for the United States.

A prime benefit of NAFTA for the United States was supposed to be that if economic and social development were spurred in Mexico, Mexicans would be encouraged to stay home rather than come north and undercut American laborers on their own turf.

Failure of NAFTA might set back economic reform momentum in other Latin American countries that are also big buyers of U.S. goods. Chile, Colombia, Bolivia and Venezuela could be especially hurt, because of their bilateral arrangements with Mexico.

If the United States cannot appreciate the merits of more open trade in its own backyard, where it has institutional links, political clout, geographic proximity and a host of other advantages, what hope is there for U.S. trade relations with the rest of the world?

This question has Asians worried. Many remain dubious of the longer-term consequences of NAFTA. At best it may divert trade from Asia to Mexico. At worst North America might grow into an exclusive bloc on European lines; the United States would be seen as economically more comfortable in its own hemisphere.

These concerns have surfaced in concepts like the East Asian Economic Caucus promoted by Prime Minister Mahathir bin Mohamad of Malaysia and tacitly approved by some Japanese, which would exclude the North Americans.

But Asian countries, with much to lose from regional blocs at the expense of global trade, also recognize that failure of NAFTA would be the thin edge of a protectionist wedge against them. Meanwhile, the failure might deprive Japan and Korea, at least, of the benefits of Latin liberalization.

Surprisingly, Latin American demand is second only to that of developing East Asia as a stimulant to the world economy. With China off the boil and some other fast growers worrying about their current account deficits, a NAFTA-inspired blow to Latin growth would be bad for the world and worse for the United States. Anyone who thinks that NAFTA concerns only three countries should think back to the reverberations, especially in other Latin countries, of the 1982 Mexican debt crisis.

There are already signs that Mexico's imports are stagnating due to uncertainty. Brazil and Argentina are not directly affected, but sentiment in favor of freer trade could be upset just when Brazil's tariff reform is leading to a big leap in its imports from the United States.

So, Congressmen, with your sensitive noses, sniff the Rust Belt breezes as you must. But remember, the smell of a dead NAFTA could stick in the nostrils for years to come.

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