When it is negotiated and if it is approved by Congress, the North American Free Trade Agreement between the United States, Mexico, and Canada may prove to be the most important foreign economic policy achievement of President Bush's first term in office.  This is especially true if there is a failure in the Uruguay Round negotiations to repair the world trading system under the General Agreement on Tariffs and Trade.  The North American agreement, known as NAFTA, will create a free-trade zone nearly equal in population to the European Community and nearly double that of Japan's emerging ``yen bloc'' in East Asia--and larger than either in economic terms.  Administration officials hope that NAFTA will form the basis of a free-trade community of market democracies encompassing the entire Western Hemisphere, and will help promote capitalism, democracy, and free trade globally.  That would make it a veritable pillar of Bush's New World Order.

Ironically, though, Bush was not the driving force behind NAFTA.  It was, instead, President Carlos Salinas de Gortari of Mexico, who in February 1990 was scheduled to be the star of the World Economic Forum in Davos, Switzerland, a glittering annual gathering of international bankers, businessmen, and politicians who spend part of their time at economic policy seminars and the rest socializing and skiing.

The previous year, thanks partly to a speech by Senator Bill Bradley, Davos had been abuzz with conversation about Salinas' courageous economic reforms--his sell-off of nationalized industries, his opening to foreign investment, his reduction of government spending, and his crackdowns against corrupt labor union officials, businessmen, and drug dealers.  In 1990, the Davos program called for Mexico to be the centerpiece of discussion.  Salinas delivered a major address.  Mexican food was served at banquets and Mexican music was played at receptions.

Accompanied by key members of his government, many of them fellow American-educated free marketeers, Salinas went to Europe hoping that investors would be impressed with his reform policies.  Mexico needed large-scale capital inflows to provide jobs to a population that had been suffering five years of austerity-induced reductions in its standard of living.  But, instead of willing investors, Salinas found Europeans preoccupied with the fall of the Berlin Wall and the liberation of Eastern Europe.  As happened the previous year in Japan, he received lavish praise but no commitments of cash.  Europeans, and especially West Germans, told him that whatever risk capital they had they would have to reserve for Eastern Europe.

Shortly after Davos--by some accounts, on the ride home--Salinas decided to reverse his previous position that negotiating a free-trade agreement with the United States was premature.  In October 1989, on a visit to Washington to sign a partial tariff-reduction pact with President Bush, he had told the press flatly that the disparities in size and wealth between Mexico's economy and that of the United States precluded an agreement of the kind that the United States and Canada had put into effect that January.  The reason for that statement, associates say, was more political than economic: Despite disparities--Mexico's GNP is $200 billion, compared with $5.5 trillion for the United States, and its per capita GNP is $2,000, a tenth of that in the United States--Salinas wanted Mexican industry to face world-class competition in order to improve its efficiency.  But he feared that the press, leftist political foes, and a public subjected to decades of anti-U.S. rhetoric would accuse him of opening up the Mexican economy to a buy-out by ``the gringos.''

At a meeting of his economic cabinet a few days after his return from Davos, associates say, Salinas reported that while inflation was down, a debt-reduction agreement with the United States was working, and economic growth was resuming, progress was not occurring fast enough to impress investors.  He declared that dramatic action was necessary, and announced to the cabinet that he intended to privatize Mexico's banks, state-owned since 1982, and seek a full free-trade agreement with the United States.

Within days, he placed a phone call to President Bush to discuss the possibility.  Bush asked him to send aides to Washington, and on March 8 and 9, 1990, Salinas' chief of staff, Jose Cordoba, and his minister of commerce, Jaime Serra Puche, met with the top economic and foreign policy officials of the Bush administration--Secretary of State James Baker, Treasury Secretary Nicholas Brady, Commerce Secretary Robert Mosbacher, National Security Adviser Brent Scowcroft,  Special Trade Representative Carla Hills, and Michael Boskin, chairman of the Council of Economic Advisers.

Bush and his team needed little convincing about the fundamental desirability of a U.S.-Mexico agreement.  Bush supported the idea during his 1988 presidential campaign, and he also wanted to support Salinas, whom he had come to respect personally as a modernist reformer beset by an old guard hostile to the U.S.  In August 1990, Bush's support for Salinas grew even stronger when the Mexican president increased oil production to support the U.S. embargo of Iraq (while the leader of Mexico's leftist opposition, Cauhetemoc Cardenas, called for an oil embargo against the United States).  Two other influential Texans in the administration shared Bush's special interest in Mexico--Mosbacher, who had recommended a U.S.-Mexican free trade agreement in 1989, and Baker, who favored the agreement for both geopolitical and domestic policy reasons: a prosperous Mexico would insure stability on this country's southern border and would reduce the flow of drugs and illegal immigrants across the border.  The only hesitation in the Cabinet came from Carla Hills on the grounds that negotiating the Mexican agreement, which would be the responsibility of her office, might interfere with achieving the administration's top trade priority--the conclusion of the Uruguay Round of GATT, designed to lower tariffs and non-tariff barriers among all countries in the world.

The Big Picture

By the end of March, the administration had decided to pursue the Mexican pact.  This was leaked to the Wall Street Journal on March 27 and caused an immediate stir among opponents of free trade in both Washington and Mexico City.  On June 10, Presidents Salinas and Bush met in Washington.  Their communique declared that the two ``are convinced that free trade between Mexico and the United States can be a powerful engine for economic development, creating new jobs and opening new markets.''

Almost uniformly, President Bush's statements about NAFTA emphasize its economic benefits, but key officials at the State Department see it in much larger terms.  One is Robert Zoellick, who is both counsellor of the State Department and undersecretary for economic affairs and is one of the few genuine strategic thinkers in the Bush administration.  Zoellick sees NAFTA as an important building block in the entire post-Cold War global strategy of the United States.  Bernard Aronson, assistant secretary for Latin America, similarly sees the Western Hemisphere as ``a model for the new world order.''

As U.S. leaders are fond of pointing out, Latin America has undergone a dramatic transformation over the past decade.  Formerly filled with military dictatorships and beset by violent Marxist insurgencies, the region now brims with popularly elected civilian governments striving to establish permanent democracy.  Simultaneously, Latin countries have moved from statist economic models toward experimentation with free markets, and the attitudes of elites toward the United States have shifted from fear and hostility to some measure of cooperation.  Aronson says that if democratic, market-oriented, and pro-U.S. regimes in Latin America succeed in solving their endemic problems--notably poverty, debt, and authoritarianism--other regions of the world can as well.  The Bush administration is endeavoring to help, he says, through debt relief proposals and the 1990 Enterprise for the Americas Initiative (designed to reduce trade barriers and spur economic reform), as well as efforts to salvage environmentally important areas like the Amazon rainforest, to block the spread of nuclear weapons and missile delivery systems, and to control narcotics.  For both ideological and practical reasons, the Republican administration favors trade expansion over foreign aid as a means of assisting developing nations.  Trade benefits a country's private sector rather than its government, and there is neither money in the tight U.S. budget nor support in the public for foreign aid.

The administration's hope, according to Zoellick and others, is that the Western Hemisphere will ultimately form one huge free-trade zone.  This could happen either as a result of other hemispheric nations gradually joining the U.S.-Canada-Mexico Free Trade Agreement, or by a gradual melding of bilateral and regional agreements.  If NAFTA contains an accession clause, Chile will probably join reasonably soon.  Other groups of nations are already discussing regional common markets, including Argentina, Brazil, Uruguay, and Paraguay; and five Andean, six Central American, and thirteen Caribbean countries.

The United States, Canada, and Mexico represent a combined population of 360 million (85 million for Mexico, 26 million for Canada), compared with 365 million for the twelve members of the EC and 200 million for Japan and the East Asian ``tigers'' (South Korea, Taiwan, Hong Kong, and Singapore).  North America's combined GNP is nearly $6 trillion, compared with $5 trillion for the EC and $3.5 trillion for Japan and the tigers.  A free-trade zone encompassing all or most nations in the Western Hemisphere would total more than 650 million people and be richer than even the EC plus Eastern Europe (at 400 million people), or Japan plus the tigers and the ASEAN nations.

In the post-Cold War era, it is widely expected that history will be made through exertions of economic rather than military power.  Wars will occur, of course, but they will not involve the major powers, who instead will compete economically.  Some analysts and politicians (among them, Edward Luttwak and House Majority Leader Dick Gephardt) expect this competition to be every bit as fierce and zero-sum as old-style geopolitical maneuvering was, and some (among them, Margaret Thatcher) see the world's major nations forming into three eco-political blocs, denominated by their dominant currencies: the EC, plus Eastern Europe and Scandinavia, would be the ``deutschemark zone''; Asia would be the ``yen bloc''; and the Western Hemisphere would be the ``dollar bloc.''  Especially if the dominant players cannot come to terms through the GATT, it is feared that trade wars will erupt between the blocs, as each tries to keep out the other's products.

If this is what the future holds, it will be indispensable for the United States to form its bloc.  Indeed, it is close to conventional wisdom in Congress and elsewhere that preparing for a trade war is the best reason for forming a Western Hemisphere ``dollar bloc.''  But the Bush administration has other ideas--it urgently wants to avoid trade wars if at all possible.  Ideally, according to Zoellick, blocs won't even form, as American, Asian, and European nations trade freely and cooperate politically.  To this end, the administration is pushing GATT, is institutionalizing ties with the EC, and helped form the Asian-Pacific Economic Cooperation Group.  Realistically, though, a nascent hemispheric free-trade zone is a good lever in the GATT talks, enabling the United States to say to Europe and Japan, in effect, "If you want to play bloc warfare, watch out.  Our bloc is bigger than yours."  This strategy may not work, however, as Europe and Japan seem determined to maintain subsidies and import restrictions on agriculture, threatening to collapse the Uruguay Round.

If this happens, the administration has another fall-back strategy, in which a hemispheric agreement would also play a vital role.  Bush aides want to link Europe, Asia, and the Western Hemisphere through inter-bloc trade agreements that would set the standard for the rest of the world.  By one strategy or another, Zoellick thinks it should be possible to avoid having the Cold War era devolve into the trade war era, and instead to build a community of market-oriented democracies that encompasses key areas of the globe.  NAFTA is thus a vital piece in the administration's world strategy.

The Labor Lobby

Grand schemes, however, are often confounded by mundane realities, and NAFTA is being challenged by a coalition of U.S. interest groups--led by organized labor and including environmentalists and some industry groups--which fear that free trade will severely damage their constituents.  The first attempt to block the agreement was mounted in early 1991, when the administration asked Congress for a two-year extension of so-called ``fast-track'' authority to enable it both to commence NAFTA talks with Mexico and continue the Uruguay Round negotiations.  ``Fast track'' is Congress's guarantee that when a trade pact is negotiated, it will either be approved or disapproved by Congress, and not subjected to an endless amendment process.  Mexico served notice that it would not begin NAFTA talks except under fast-track authority.

In May, the administration won the fast-track fight--by the strong margin of 59-36 in the Senate, but by only 231-192 in the House, with the Democratic majority splitting 170-91 against the administration.  Some opponents argued that fast-track authority constituted an abdication of congressional prerogatives, but the fundamental argument revolved around the substantive effects of NAFTA on U.S. employment and the environment.  This battle will resume when NAFTA is signed by U.S., Mexican, and Canadian officials and submitted to Congress for ratification.  It is likely to be bitter.

The timing of an agreement is a matter of no little importance.  Carla Hills ritually tells interviewers that ``there is no timetable.  We will take as long as necessary to negotiate the best agreement that we possibly can.''  On the other hand, it is widely reported that the administration is pushing to have an agreement signed by late 1991 or early 1992, so that it can be debated and voted on by Congress before the national political conventions in July and August and the fall presidential campaign.  The administration would like Democratic presidential candidates to debate NAFTA among themselves in early presidential primaries, but to have it approved in time to list it among President Bush's accomplishments for the fall campaign.  (Among the president's likeliest Democratic challengers, Senator Al Gore and Governor Bill Clinton of Arkansas supported Bush on fast track, while Senator Tom Harkin and New York Governor Mario Cuomo opposed him.)

If approval is not possible by early 1992, it would be put off until 1993, but then it is likely to become an issue in Canada's national elections.  If Conservative Prime Minister Brian Mulroney loses the election--which current polls indicate is a strong possibility--the successor Parliament might well refuse to ratify NAFTA.  Timing is less a factor in Mexico, where Salinas, elected in 1988 for a single six-year term, will serve until 1994.  With Mexico's economy improving, Salinas currently enjoys a 75 percent approval rating and is expected to strengthen his legislative majority in parliamentary elections on August 19.  However, Mexican officials say that Salinas still wants an early agreement so that its economic benefits will allow his successor to continue the liberalizing program he has set in motion.

In the United States, the central battle over fast track was about jobs, and so will be the battle over ratification of NAFTA.  The agreement is virtually certain to be opposed by the American labor movement regardless of what the pact says about the key issues under negotiation--such as market access provisions for various products and services, rules of origin to prevent Europeans and Asians from using Mexico as a platform for penetrating U.S. markets, and methods of dispute settlement--and regardless of what promises the Bush administration makes about programs to compensate and retrain workers dislocated by NAFTA.  During the fast-track fight, the AFL-CIO argued that NAFTA ``would be an economic and social disaster for U.S. workers and their communities.''  A February 1991 AFL-CIO publication declared that

under current trade arrangements, tens of thousands of U.S. workers have lost their jobs, and tens of thousands more have seen employment opportunities vanish, as U.S. companies transferred production to Mexico, taking advantage of the poverty of Mexican workers and the absence of any effective regulations on corporate behavior.  A free trade agreement will only encourage greater capital outflows from the United States, bring about an increase in imports from Mexico, reduce domestic employment...and accelerate the process of deindustrialization that has confronted this country during the 1980s.

For labor, the central fact about U.S.-Mexican trade relations is that Mexican wages average one-tenth of those in the United States.  The legal minimum wage in the United States is $4.35, but continuing devaluation of the peso (from 600 to the dollar in 1986 to 3,000 today) has dropped the dollar value of the Mexican minimum wage to 49 cents an hour.  ``Why should firms invest in the United States,'' the AFL-CIO asked rhetorically, ``if they can move across the Rio Grande and dramatically reduce their labor costs?''  As a foretaste of things to come, the AFL-CIO cited experience with the maquiladora program established in the 1960s to allow U.S. industries to set up plants on the Mexican side of the border where U.S. parts would be shipped without duty, assembled by Mexican workers, and shipped back to the United States with duty charged only on the value added in Mexico.

In twenty years, the number of maquiladora plants has grown from 120 to 1,800 and the number of workers has gone from 19,000 to 500,000.  According to the AFL-CIO,

tens of thousands of workers across America in companies like Electrolux, Tyco, Zenith, Westinghouse, Farah, [cm;1]ge[cm;0], [cm;1]at&t[cm;0], [cm;1]gm[cm;0], Ford, Chrysler--to name only a few--have seen their jobs disappear to Mexico.  They, better than any model or projection, can describe the employment impact of this type of trading relationship.

Besides low wages, according to union spokesmen, U.S. industries will also move to Mexico to take advantage of lower worker-safety and environmental-quality standards.  In sum, NAFTA will cost ``hundreds of thousands'' of Americans their jobs, according to the AFL-CIO.

The administration's counter-argument is that it is simply inevitable that some American industries will locate plants abroad, especially those involving lower-skilled labor, but that the net outcome of NAFTA will be to create far more employment opportunities in the United States than are lost.  According to Carla Hills, tariffs on Mexican goods entering the United States now average only 3 percent, and 45 percent of Mexican goods enter duty-free, so that if American industry were inclined to move massively to Mexico, it would already be doing so.  It does not, she says, because of advantages that outweigh wage differentials--such as higher education and productivity levels of U.S. workers, superior infrastructure in the U.S., and closer proximity to markets.  According to Hills, if U.S. industries were not able to move labor-intensive, low-skill assembly plants to Mexico, they would move them to Asia instead, and locate high-skill management and research facilities there as well.

On the positive side, administration officials argue, increased investment in Mexico will create prosperity there--and expanded markets for U.S. goods, thus creating jobs in the United States.  According to testimony by Robert Zoellick before the Senate Foreign Relations Committee, more than 100,000 jobs have been created in the U.S. to support maquiladora facilities, and during the period of Mexican economic liberalization since 1986, U.S. exports to Mexico have increased from $12.4 billion to $28.4 billion, manufacturing exports have increased from $10 billion to $24 billion, and capital goods exports have increased from $4.6 billion to $9.1 billion.  The U.S. trade deficit with Mexico has shrunk from $4.9 billion in 1986 to $1.8 billion in 1990.  Not counting Mexican oil exports, the United States had a trade surplus of $2.7 billion with Mexico in 1990.  The administration claims that the prosperity associated with Salinas' reforms has created 264,000 new American jobs.

In September 1990, in an effort to resolve the economic dispute over NAFTA, the chairman of the House Ways and Means Committee, Dan Rostenkowski, and the chairman of the Senate Finance Committee, Lloyd Bentsen, requested a study of the subject from the U.S. International Trade Commission, an independent government regulatory agency.  In February 1991, the ITC reported back that

an FTA with Mexico will benefit the U.S. economy overall by expanding trade opportunities, lowering prices, increasing competition, and improving the ability of U.S. firms to exploit economies of scale.  Since these gains are likely to outweigh the costs, the U.S. economy will probably gain on net.  However, there are likely to be shifts in production so that certain U.S. industries--such as horticultural products--will be disproportionately affected.

The ITC added that the effects of an agreement would be much greater in Mexico than the United States, owing to the difference in the size of the two economies and the fact that Mexico accounts for only 7 percent of U.S. exports, while the United States accounts for more than 70 percent of Mexican exports.  The AFL-CIO hotly disputed the ITC's report, but it was extensively cited by the administration in congressional debate and the two legislators who requested it both strongly supported the extension of fast-track authority.

The second major point of contention over fast track involved the environmental effects of NAFTA.  The AFL-CIO, various environmental groups, and several major newspapers pointed to severe pollution problems in the maquiladora region along the U.S.-Mexican border, including the dumping of toxic wastes and sewage into rivers and ground water.  Shortly before fast track was voted on, however, some environmental groups withdrew their opposition in response to administration assurances that it would work with the Mexican government on a pollution-control plan and in response to evidence from the Mexican government--notably, the closing of a major oil refinery in Mexico City--that it was prepared to enforce its comprehensive environmental laws.  Influential environmental lobbyists warn, however, that they will oppose NAFTA unless the administration mounts a significant clean-up program for the border area and guarantees that Mexico will not provide a haven for corporations fleeing U.S. pollution standards.

The Gephardt Factor

A pivotal figure in the fast-track debate--and certain to be one, as well, in the ratification process--was House Majority Leader Gephardt, a 1988 Democratic presidential candidate, and often regarded as one of his party's leading exponents of trade protectionism.  Gephardt disputes this characterization, however, contending that his purpose has always been to open up foreign markets to U.S. exports and to promote trade agreements that are ``fair to American workers.''  In an interview, he said he doubts that free trade with Japan is possible ``because our societies and philosophies are so different'' and he favors trade quotas instead.  With Mexico, however, Gephardt said he does believe that an equitable agreement is possible, if the right terms are negotiated.  He supported fast track, but only after inducing the administration to prepare a detailed ``action plan'' covering job training, environmental protection, worker rights, rules of origin, and other issues.  Gephardt told me that he "might well" oppose NAFTA if the administration fails to propose a plan for training American workers to make them productive enough to compete with third world workers earning $1 an hour or less.

Much to the unhappiness of labor and environmental groups, jobs and the environment are to be handled separately from the main trade negotiations over NAFTA and will not be part of the official agreement.  Negotiators have formed seventeen working groups to handle specific trade issues, with serious problems to be passed up to chief negotiators (for the United States, Carla Hills's deputy, Julius Katz) and to cabinet ministers who confer at least weekly by telephone and monthly in person.  Negotiating teams have only begun drafting their opening positions, but trade officials and outside observers in Congress and various industry groups expect the most contentious issues to include protection for U.S. agriculture, glassware, and apparel, rules of origin for autos, U.S. efforts to enter the constitutionally restricted Mexican energy industry, investment rules for U.S. entry into the Mexican financial services industry, and methods of dispute settlement.

If principles from the U.S.-Canadian free-trade agreement are transferred to NAFTA, tariff and non-tariff barriers will be lowered on various products on four different schedules--immediately, gradually over five years, ten years, and more than ten years.  The United States is likely to seek more than ten years of protection for its most vulnerable industries, notably fruits and vegetables.  Horticulture will also be the subject of intense negotiation over national and state pesticide and fertilizer standards.  In the auto field, the U.S.-Canadian agreement provided that at least 50 percent of a vehicle's content had to be manufactured in one of the two countries in order for it to be traded duty-free.  Labor is pressuring the administration to seek a 60 percent requirement in NAFTA.  Besides the percentage of required North American content, there will be extensive discussion on how the percentage is to be calculated: Are indirect costs of production (such as advertising and insurance) to be counted toward a Japanese manufacturer's 40 percent?  Should an auto be counted as wholly or partly North American if a major component (say, its engine) contains parts 50 percent fabricated in Japan and 50 percent in North America?  How do the parties police for compliance with such rules?  In negotiations, each nation will seek rules that facilitate Asian and European investment within its borders, but bar the use of the others' territory for ``unfair'' penetration of its market.

Mexico's constitution reserves ownership and exploitation of the nation's petroleum reserves for the public, which has translated over the years into a government monopoly over all phases of exploration, refining, and marketing of energy products--and into inefficiencies such as lagging oil production and an inability to take advantage of natural gas reserves.  U.S. negotiators will press for means to allow American companies to involve themselves in exploration, extraction, refining, petrochemical production, pipelines, and retailing.  Mexican negotiators want to gain the benefit of U.S. efficiency without sacrificing control or stimulating internal political criticism that Salinas has allowed Mexico's patrimony to be exploited by the United States.  One matter as politically sensitive in the U.S. as energy is in Mexico--rules on ``labor mobility,'' i.e.  immigration--has simply been ruled out as a matter for discussion.

Another complexity lies in dispute settlement.  The U.S.-Canadian agreement created a binational commission to handle appeals, but it is empowered to evaluate only whether the countries' own trade laws were fairly administered.  Canada and the United States, however, have similar English legal systems, whereas Mexico's is based on Napoleonic tradition and its judiciary is accused (especially by U.S. opponents of NAFTA) of being subject to political influence and bribery. 

Richard Gephardt and others point out that the U.S.-Canadian agreement--220 pages long and nearly two inches thick--required three years to negotiate and then was the central issue in Canada's 1988 national election campaign.  Gephardt doubts that it will be possible for three countries that do not share a common language, standard of living, or political system to conclude such a complex agreement within six or nine months.  However, other observers--such as Timothy Bennett, a former U.S. trade negotiator now representing the Mexican private sector--believe it is entirely possible, given the precedents established in U.S.-Canadian negotiations.  Carla Hills is endeavoring to speed the process along by conducting close consultations with dozens of industry advisory groups and with Congress about what positions to take in negotiations.  She is, in effect, lobbying for ratification of NAFTA even as she negotiates it.

Assuming that Hills is successful in satisfying industry, and that other administration officials can work out adequate programs on the environment and worker training, there is one final set of issues that opponents of NAFTA conceivably could raise in a ratification debate (although they did not in the fast-track debate): human and political rights in Mexico.  In 1988, Salinas and his Institutional Revolutionary Party (PRI) were declared to have won the presidential election with 51 percent of the vote, but it is widely believed that he actually received fewer votes than his leftist opponent Cardenas and that only PRI domination of the government and of Mexico's electoral machinery allowed him to take office.  Salinas is far more popular today than he was in 1988 and Cardenas has faded as a political force.  Also, Salinas has instituted a number of political reforms, including the holding of primary elections in some states.  But the PRI continues to be accused of voter fraud and U.S. human rights groups such as Freedom House and Americas Watch allege that the PRI and police agencies still use violence to put down labor and political dissidents.  Before a final vote is taken on NAFTA, Salinas is likely to be called upon to make assurances to advance glasnost in Mexico to match his unquestioned record on perestroika.

Whatever he does, however, President Bush is likely to support him.  When Salinas expanded Mexican oil production to support Bush's embargo against Iraq, Salinas became a partner in Bush's New World Order and Bush wants to help him all he can.

Morton Kondracke is a senior editor of the New Republic and host of PBS's "American Interests."