Free trade with Mexico will boost America's economy.

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Author: Rutledge, J.

• STIMULATING GROWTH. The Bush administration continued to press Congress last week in an effort to pave the way for a free trade agreement (FTA) between Mexico and the United States later this year. If the White House lobbying succeeds, Mexico will likely join Canada and the United States in the world's largest free trade union, one that will include 350 million people and an annual gross national product of more than $6 trillion. The tripartite marriage could do more to stimulate economic growth than any other event of the decade.

The Mexicans desperately need the free trade agreement. Despite recent progress, the last decade has been a disaster for their economy. Real wage rates, which peaked in 1982 at $319 per month, are $108 per month today. Nationalization, which drove out foreign investors, and a borrowing binge during the oil boom of the early 1980s left a $100 billion debt burden in their wake. And collapsing oil prices in the mid-1980s wiped out the only source of easy money. This led to a currency crisis, shrinking economy and capital flight.

When President Carlos Salinas de Gortari took office in Mexico City just over two years ago, he opposed free trade with the United States. But with real wages declining and Mexico's population soaring, Salinas, a trained economist, needed to improve his nation's finances in a hurry. The only way to quickly raise living standards is to provide workers with new machinery and equipment that will make them more productive. With low savings and no domestic capital goods industry, Mexico had to attract massive inflows of foreign capital. But outsiders -- especially Europeans, who had their choice of high-return investment opportunities on the Continent -- weren't interested in Mexico's story.

• A GOOD USE OF CAPITAL. After being rebuffed by foreign investors, Salinas began to seek a free trade agreement with the United States. Reducing trade barriers, while important, is not at the heart of the FTA. Mexican and U.S. tariffs, averaging 10 percent and 4 percent, respectively, are hardly crippling. And bilateral trade between the United States and Mexico almost doubled from $33 billion in 1985 to $60 billion in 1990 because Mexico opened its borders to foreign capital. These funds have helped the growth of a program called maquiladora, which fuses Mexican labor and American capital. Maquiladora industry currently employs 500,000 Mexican workers in 2,000 plants along the U.S.*Mexican border. Despite the environmental concerns voiced by many groups (U.S. News, May 6), maquiladora's attraction for U.S. companies is cheaper labor costs; for Mexico, it means jobs and a flood of foreign capital goods.

The maquiladora experience has boosted the American economy, and in many ways it foreshadows the impact that a free trade agreement would have on this country. In both cases, stronger real growth in Mexico means rising U.S. exports. Maquiladora industry has had a profound influence on U.S. non-oil trade with Mexico, for example, helping to transform a $1.7 billion deficit in 1986 into a $2.8 billion surplus in 1990.

• SURGING EXPORTS. The real winner from free trade will be the U.S. capital goods sector, which will send its machinery to Mexico. Unfortunately, there will also be losers -- America's unskilled assembly-line workers. But jettisoning free trade won't help these laborers. To succeed, America's unskilled workers must be given tools and training that will enable the United States to focus on sophisticated manufacturing technologies.

Americans should not fear the prospect of free trade with Mexico. Rich in capital, the United States will reap dramatic benefits from the FTA, which will greatly stimulate economic growth. Rebuilding Mexico in the 1990s ultimately will provide this country with the same financial rewards as the postwar reconstruction of Germany and Japan.

America's trade surplus with Mexico will expand even further if commercial barriers on the border are removed.

                            1985   $1.5
                            1986  -$1.7
                            1987  -$2.2
                            1988   $ .2
                            1989   $1.8

Mexico's fast-growing economy will provide opportunities for recession-bound American companies.

                      1988   Mexico      U.S.
                       1     1.4 pct.   5.1 pct.
                       2     1.1 pct.   3.6 pct.
                       3     0.0 pct.   2.7 pct.
                       4     1.0 pct.   2.7 pct.
                      1989
                       1     2.2 pct.   3.6 pct.
                       2     3.9 pct.   1.6 pct.
                       3     3.9 pct.   1.7 pct.
                       4     2.4 pct.    .3 pct.
                      1990
                       1     1.9 pct.   1.7 pct.
                       2     2.4 pct.    .4 pct.
                       3     5.4 pct.   1.4 pct.
                       4     5.8 pct.  -1.6 pct.
                      1991
                       1     4.2 pct.  -2.8 pct.

Free trade with the U.S. will boost foreign investment in Mexico, which declined in the mid-1980s.

                            1986  210.0 pct.
                            1987  113.4 pct.
                            1988  -20.1 pct.
                            1989   17.0 pct.
                            1990  -13.3 pct.
                            1991   29.6 pct.

Note: 1991 investment figure assumes passage of free trade agreement.

USN&WR -- Basic Data: CIEMEX-WEFA, U.S. Dept. of Commerce.

Chart: Booming trade (USN&WR-Basic data: CIEMEX-WEFA, U.S. Dept. of Commerce)

Chart: Expanding markets (USN&WR-Basic data: CIEMAX-WEFA, U.S. Dept. of Commerce)

Chart: Growing investment (CIEMAX-WEFA, U.S. Dept. of Commerce)

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By John Rutledge

John Rutledge is Chairman of Claremont Economics Institute, a California-based management consulting and investment advisory firm.