From: sug6@usite-next.uchicago.edu (Patrick Sugent)
Newsgroups: alt.politics.elections
Subject: NAFTA
Date: 17 Aug 92 23:47:59 GMT
Organization: University of Chicago


  This was first published on July 14, 1992, but I thought it might
be of interest to those that missed it and are only now taking a look
at NAFTA.

Pat

P.S. Sorry if this is posted twice.  I had a problem with line-length
I wanted to clear up.

___________________________________

     "Free Trade with Mexico"  by Paula Stern, former chairwoman of
   the Internation Trade Commission.  As published in The Wall Street
   Journal.

     As Presidents Bush and Salinas meet today in San Diego, many
   Americans are becoming fearful of the consequences of a North
   American Free Trade Agreement.  Some fear that cheap imports from
   Mexico will devastate US manufacturing, and that American companies
   in response will build future plants in Mexico, rather than in the
   U.S.

     This gloomy scenario is based on three flawed assumptions: first
   that Mexico will run trade surpluses; second, that investment in
   Mexico by U.S. firms will be targeted at the U.S. market; and third,
   that investment is a zero sum game.

     1.  The assumption of a Mexican trade surplus.  Some of NAFTA's
   detractors fear that foreign companies, especially Japanese
   companies, will invest heavily in Mexico in order to create an
   "export platform" for sales to the U.S. But in order to develop a
   substantial trade surplus with the U.S., Mexico would have to run
   trade deficits with third countries, such as Japan and Germany, to
   offset the assumed surplus.  This is not very likely.
   
     Mexico still relies on the U.S. for close to 70% of its imports,
   and it's showing no sign of shifting to other nations as a source of
   imports.  This is unlikely to change, because of geography, because
   of the established relationships between Mexican and U.S. firms, and
   because of American competitiveness in the capital goods that Mexico
   needs.

     Long-term current account and trade deficits, not surpluses, are
   the norm for successful developing countries.  Korea ran current
   account and trade deficits every year from 1961 to 1985, and is doing
   so again today.  Singapore has also run trade deficits every year
   since 1961.  When Spain joined the European Community, that certainly
   did not convert that country's prolonged trade deficits into
   surpluses.  Trade surpluses mean a country consumes less than it
   produces, something that countries at Mexico's level of development
   are not able to do.
   

     2.  The assumption that companies will invest in Mexico to export
   to the U.S. American companies invested $33.4 billion abroad in 1990,
   of which less that $2 billion went to Mexico.  Three-fourths of all
   U.S. investment abroad is in developed countries, mainly Canada and
   Europe, where wages are not low nor regulations lax.  Developed
   country companies direct most of their investment into other
   developed countries, in order to gain access to their wealthy
   markets.
   
     Market access is likewise the primary motivation for U.S.
   investment in Mexico.  Local sales accounted for 70% of total sales
   by Mexican affiliates of U.S. firms in 1990.  Only one-quarter of the
   sales of U.S. firms located in Mexico were exports to the U.S.  In
   1990, more than 30% of U.S. investment in Mexico was placed in the
   service industry, which is clearly not aimed at exporting to the U.S. 
   Instead, U.S. hotel chains, retailers, banks, and fast food
   franchises are rapidly expanding their presence in the Mexican market
   because its economic growth rate has approached 4%.
   
     Even U.S. investment in Mexican manufacturing is targeted primarily
   at the Mexican market.  For example, General Electric's sales inside
   Mexico in 1991 were $870 million, and its exports to Mexico fro the
   U.S. amounted to another $575 million.  By contrast, GE's Mexican
   affiliates exports to the U.S. were worth only $470 million.  Many
   other U.S. companies, including IBM, General Motors, and Ford, are
   likewise increasing their investment in Mexico in order to meet
   increased Mexican demand.  GE projects that its sales in Mexico will
   rise to between $2 billion and $3 billion by 1996.
   
     Nor should Americans fear that other countries, such as Japan, will
   open plants in Mexico solely in order to export to the U.S.  The U.S.
   share of fixed direct investment in Mexico has consistently been
   between 60% and 70%, and is unlikely to get smaller.  Besides,
   negotiators are busy hammering out rules of origin designed to
   prevent the use of Mexico as an "export platform."
   
     3.  The assumption that investment is a zero-sum game.  Americans
   made $524 billion worth of new, non-residential investments in 1990. 
   They made $1.9 billion worth of fixed investments in Mexico that
   year.  Historically, strong Mexican economic growth has led both to
   increased U.S. investment flows to Mexico, and also to U.S. trade
   surpluses with Mexico, which  encourage investment in the U.S.  After
   all, new U.S. plants in Mexico import U.S. machinery, materials, and
   parts.  And U.S. retail stores, hotels, and franchises in Mexico
   likewise import many U.S. products.
   
     In fact, U.S. investment in Mexico promotes even more exports than
   does similar investment in other parts of the world, because close
   physical proximity increases the likelihood that Mexican affiliates
   of U.S. companies will use the U.S. as their principal source of
   materials, components, and equipment.  The ratio of U.S. exports to
   majority-owned affiliates to the total sales of those affiliates is
   about 30% in Mexico, more than three times the ratio in any other
   area of the world.  And again U.S. exports lead to investment in the
   U.S.
   
     The U.S. gains from co-production arrangements in which
   labor-intensive operations are performed in Mexico and high
   value-added operations are performed in the U.S.  A NAFTA will make
   it easier for U.S. companies to compete in previously closed sectors
   of the Mexican economy and to export from the U.S. to Mexico.  Closer
   U.S. economic ties with Mexico will make U.S. companies more
   competitive not only in Mexico but in other markets as well.
   
   

-- 
Patrick Sugent				"Cry 'Havoc!' and let slip   
sug6@usite-next.uchicago.edu		 the Hogs of Peace."
(708) 447-1771				 --P.J. O'Rourke
Newsgroups: alt.politics.elections