SYNOPSIS:

Enthusiasts for a North American free-trade agreement forecast a great new era of continental prosperity; opponents warn of lost American jobs and an undermining of environmental standards. Both are wrong: The overall economic impact of the NAFTA on the United States will be small.

The reason is that the nations of North America have already moved toward free trade. The United States and Canada signed a free-trade pact three years ago, for example, and the average U.S. tariff against imports of manufactured goods from Mexico is only 4 percent. Mexico used to have very protectionist policies, but under President Carlos Salinas de Gortari it has opened its markets. Mexican tariffs against U.S. manufactures now average only 10 percent, and Mexican imports from America have doubled since 1987. In other words, the unification of the North American market is already well advanced. The NAFTA will just add a few finishing touches. The NAFTA will gradually eliminate the low tariff walls that remain, a move that will do slightly more for U.S. exports than for those from Mexico. Remaining non-tariff barriers -- Mexico limits imports of cars, while America has some restrictions on imports of apparel, fruits and vegetables -- will also be phased out. Overall, the effects will be limited: We will sell a few more minivans; Mexico will sell a few more tomatoes.

Reassurance. The big effect of the NAFTA, if there is one, will be on business confidence. Right now the U.S. market is wide open to Mexican products, but multinational firms may hesitate a little about building factories in Mexico because they worry that a future American administration might slam the door or that a future Mexican government might return to old-fashioned economic nationalism. A pact may help reassure these firms that the policy changes of recent years will last.

If the NAFTA encourages investment in Mexico, will the fears of its opponents be realized? Concerns that large numbers of American jobs will be lost to Mexico, raising U.S. unemployment rates, are certainly wrong. Some jobs will be lost as plants move south or face new competition. But other jobs will be created, through indirect channels. Investment in Mexico will require capital goods, many of them made in America. Growing Mexican markets will offer new export opportunities. And if there is a whole lot of investment, Mexican wages will rise, reducing the cost advantage of Mexican production in many industries. The best guess is that the NAFTA will have almost no effect on U.S. employment.

What about claims that the benefits of the NAFTA will go to U.S. investors and highly skilled American workers, while low-skilled workers who must compete more directly with Mexicans will be hurt? An honest economist must admit that this fear is justified. Growing trade and investment links with Mexico will further depress U.S. demand for low-skilled workers, who have already seen their real wages fall about 30 percent over the past 15 years. The question is not whether the NAFTA will hurt the unskilled but how much. The good news is that it will hurt them only a little. More than 80 percent of low-skilled workers in the United States work in the service sector, not in manufacturing jobs that can be threatened by foreign competition; and most of our low-skilled manufacturing industries are already shadows of their former selves. Any surge in imports of labor-intensive goods from Mexico will come mostly at the expense of imports from other countries, not low-skill U.S. jobs.

That leaves the touchiest issue: the environment. There is no question that Mexican industries are, on average, much more polluting than are more tightly regulated U.S. plants. The contrast is especially obvious near the border, where Mexican plants set up to take advantage of special export zones are often major sources of pollution. But this does not mean that free trade will lead to an increase in pollution. The reason is that the growth of the Mexican export industry will come not at the expense of U.S. manufacturing but through a reorientation of Mexico's own manufacturing base. So the right comparison is not between Mexican and American factories but between the factories Mexicans will work in under the NAFTA and the factories they will work in if there is no agreement.

Moreover, it is virtually certain that the NAFTA will help Mexico's environment, for one overwhelming reason: It will help slow the growth of Mexico City. Most Mexican industry is still concentrated in and around Mexico City, the country's largest market and transportation hub. It is a terrible place for industry: a city of more than 20 million people that is more than a mile above sea level and ringed by mountains that trap air pollution. As Mexico begins to focus on the U.S. market, industry is shifting to the northern border states, relieving some of the pressure.

It will be a long time before the Mexican export sector that grows up under the NAFTA reaches American environmental standards. But from the Mexican point of view, that export growth will be a breath of fresh air.

Originally published, 8.17.92