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A Free Trade Milestone,With Many More Miles To Go


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A FREE-TRADE MILESTONE,WITH MANY MORE MILES TO GO

There was champagne all around when negotiators from the U.S., Mexico, and Canada finally agreed on a historic free-trade pact in the early hours of Aug. 12. They had been holed up in Washington's Watergate Hotel for two weeks of almost nonstop haggling over everything from auto parts to oil rigs. After the toasts, officials lined a corridor outside the negotiating suite and applauded as the trade ministers, Michael Wilson of Canada, Carla Hills of the U.S., and Jaime Serra Puche of Mexico, filed through to hail the birth of a huge unified market.

But now the Bush Administration team must run a more formidable gauntlet: selling the pact to a suspicious Congress and an electorate worried that the accord will cost the U.S. jobs. Environmentalists, nervous about pollution along the border from Tijuana to Matamoros, also are sounding alarms. And with the President and Congress facing the voters in November, the political climate for the pact may have changed radically by the time a new Congress begins to consider it in earnest early next year.

`GHOST TOWNS.' Over the long run, the North American Free Trade Agreement looks like a winner for the U.S. economy. Building on a 1988 market-opening accord with Canada, NAFTA will sweep away tariffs and other barriers to create a $6 trillion megamarket of 363 million consumers. U.S. exports to Mexico, already America's third-largest customer, could soar. Taking advantage of low wages--a tenth of U.S. levels, in many industries--would allow U.S. companies to cut their labor costs to better take on their Japanese and European rivals. "By sweeping aside barriers, NAFTA will make our companies more competitive everywhere in the world," says President Bush, who can brag about the deal at the Aug. 17-20 Republican convention (page 24).

But Bush is reluctant to note that there will be plenty of pain before the benefits start to flow. Many high-paying manufacturing jobs will disappear as companies shift work to Mexico. And while U.S. producers of wheat and poultry stand to gain, citrus and tomato growers will feel the pinch of south-of-the-border competition. NAFTA "will turn industrial communities into ghost towns by sending good-paying jobs to Mexico," fumes AFL-CIO Vice-President William H. Bywater.

TRUST FUND. Labor and environmental activists also charge that the accord doesn't do enough to prevent Mexico from becoming a toxic dumping ground. Those fears were underscored by a General Accounting Office report that found U.S.-owned plants in Mexico often violate the nation's poorly enforced environmental laws. Administration officials insist that NAFTA is the "greenest" trade pact ever. They also vow to ease the transition by helping displaced American workers. Yet they have not spelled out how that would work or who will pay.

That's not good enough for many Democrats. "A free-trade agreement without environmental protection is like a balloon without helium," says Representative Ron Wyden (D-Ore.). "It's simply not going to fly." House Majority Leader Richard A. Gephardt (D-Mo.) and Senator Max S. Baucus (D-Mont.) want the Administration to set up a fund to pay for cleanup and worker retraining. Baucus says this "free-trade trust fund" could be paid for out of existing tariff revenues, plus a 0.5% fee on cross-border trade for 5 to 10 years.

Congress will have plenty of time to fulminate over the pact. A final text of the agreement won't be finished until September. Then the President must give Congress 90 days' notice before he signs it. After that, Congress and the Administration will consult on implementing legislation. Finally, the Hill gets 90 working days to approve the pact, taking the process well into next spring.

The White House had hoped to wrap up the NAFTA negotiations in time for Bush to sign the pact before Election Day. Indeed, progress was swift earlier in the year. But the talks, which began 14 months ago, bogged down as negotiators grappled with the most sensitive issues: autos, agriculture, and access to Mexico's protected energy market.

For starters, the U.S. wanted stiff rules to prevent Japanese auto makers from slapping Japanese-made parts together in Mexico, then sending finished cars into the U.S. duty-free. The final compromise, which requires 62.5% North American content to qualify for duty-free import, disappointed Detroit's Big Three. "We are concerned that the agreement does not require a 65% automotive rule of origin," says Ford Motor Chairman Harold A. Poling. But the industry's real worry is not the figure itself but concerns about how local content will be defined in the fine print.

BLOC PARTY. Mexican negotiators also resisted U.S. pleas for a crack at Mexico's energy sector. Yet U.S. economists say the final deal, which will let U.S. and Canadian companies eventually bid for 70% of procurement by Pemex, the state-owned oil monopoly, was more generous than expected.

The completed NAFTA bargaining stands in sharp contrast to the stalled six-year multinational trade talks in Geneva. Indeed, some European and Japanese officials fear NAFTA could further a trend toward rival regional economic trade blocs. "Some Japanese companies that have been operating in any of the three countries are very likely to be discriminated against," says Hajime Ohta, director of the international economic affairs department of the Keidanren, a Japanese big-business association. Creating a North American market that could go toe-to-toe with super-Europe and Japan Inc. was the main impetus behind NAFTA. That Japan is howling suggests the negotiators did their job well.THE TRADE DEAL'S KEY PROVISIONS

The North American Free Trade Agreement will create a $6 trillion megamarket by

rolling back tariffs and other barriers to major industries:

AGRICULTURE--Removes tariffs on half of U.S. farm exports to Mexico as soon as

NAFTA takes effect. Remaining tariffs will be phased out entirely within 15

years

AUTOS--Halves Mexican tariffs on autos to 10% immediately and to zero in 10

years. Tariffs on most auto parts will be eliminated within five years. Cars

and trucks must have 62.5% North American content to qualify for duty-free

status

ENERGY AND PETROCHEMICALS--Lifts trade and investment curbs on most

petrochemicals and allows U.S. and Canadian companies to sell goods to Pemex,

the state oil monopoly, and Mexico's State Electricity Commission

FINANCIAL SERVICES--Lets U.S. banks and securities firms open wholly owned

subsidiaries in Mexico. All curbs on services they can offer will be lifted by

2000

TRANSPORT--Lets U.S. trucking companies carry international cargo into Mexican

border states by 1995 and throughout Mexico by 1999

INTELLECTUAL PROPERTY--Boosts Mexico's protection for pharmaceutical patents to

international standards and safeguards copyrights for North American movies,

computer software, and records

DATA: BW

Amy Borrus in Washington, with bureau reports


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