Welcome to the IMF Visitor Center Economic Forum Program seminar.
I'm sorry, the auditorium today is a bit small.
Due to the large interest in the topic there on the U.S., Mexico, and Canada trade agreement,
we will in three years from now have a bigger auditorium, so maybe we can have a more comfortable
arrangement.
I would like, as it is traditional in our Economic Forum Program, to announce the forthcoming
seminar, which will be, if you want to take note, on May 9, at 2.30, Professor Christian
de Boissier from the University of Paris, Professor of Economics, will speak on the
new banking strategies in the European community for the 1990s, and its very impact on the
U.S. banking policies.
Also on May 21, at 2.30, the same auditorium here, will be a panel discussion on international
capital markets, development as prospects, and there will be participants from the World
Bank, IMF, IFC, and the Brookings Institution.
I would like to remind our audience that the Economic Forum Program provides an open forum
for discussion of international monetary and economic issues.
However, the seminars are not official IMF seminars, and also the speakers, and especially
here today our distinguished panelists, are speaking, expressing their own views.
Today's panel discussion is chaired by Margaret Kelly, who is the chief of trade and payments
division of the International Monetary Fund.
Margaret Kelly will chair the seminar and will conduct also the exchange of views among
the panelists and moderate the discussion and questions from the floor.
Welcome, and Margaret Kelly, please.
Thank you, Mr. Gies.
We are fortunate today to have with us four panelists who, between them, can give us a
U.S. perspective, in fact, maybe two U.S. perspectives, a Canadian perspective and a
Mexican perspective, and in addition, I think that they will give us a view on all of the
other issues that are likely to arise in the context of negotiations of the North American
Free Trade Agreement.
The format of the discussion will be as follows.
Each of the panelists will speak for about 10 to 15 minutes each.
After that, I will give them an opportunity to comment on each other's presentations
or ask each other questions, and then I will open the floor to questions from the audience.
Before I call on our first speaker, I would like to briefly introduce the panel in the
order in which they will speak.
On my left, at the far end, here is Robert Lawrence, who is a senior fellow at the Brookings
Institution specializing in international economics.
He has a B.A. in economics from the University of Wittesrand in South Africa and also degrees
in international relations and a Ph.D. in economics from Yale.
He has taught at Yale and the Johns Hopkins School of Advanced Studies and has served
as a consultant to the Federal Reserve Bank of New York, the World Bank, the OECD, and
UNCTAD, and is a member of a number of advisory committees, including the Institute of International
Economics here in Washington.
Mr. Lawrence has authored a number of books in the domestic and international economic
area.
These include Can America Compete?
Saving Free Trade?
A Pragmatic Approach? and Primary Commodity Markets and the New Inflation.
He has also co-edited some books.
The next speaker will be Mr. William Diamond on my right.
Mr. Diamond is the Minister-Councillor for Commercial Policy at the Canadian Embassy.
He received his education at the University of Toronto and joined the Department of External
Affairs in 1967.
He's had a variety of positions in that department, including First Secretary to the Canadian
Mission to the United Nations in Geneva, Minister-Councillor to the Canadian Commission to the European
Communities in Brussels, Director of the European Community Division, Senior Advisor on the
Canadian and Coordinator of the Canada-US Trade Task Force.
Prior to taking up his current position, he was in the Canadian Trade Negotiations Office.
The third speaker today will be Lee Price, who is on the right at the end of the table.
Lee Price is Senior Economist of the Joint Economic Committee of the US Congress.
He was educated at Stanford University and has followed that up with degrees in law and
economics at the University of Michigan.
His previous experience includes positions with the United Auto Workers, the House Banking
Committee, the Senate Democratic Policy Committee, and the Joint Economic Committee.
Our final speaker will be Manuel Suarez-Mier on my left.
He's Minister for Economic Affairs at the Embassy of Mexico in Washington.
He's held this position since 1989.
Prior to that, Mr. Suarez-Mier was Chief of Staff of the Governor of Banco de Mexico,
the country's central bank, and worked for more than a decade in the financial sector.
Previously, he was associated with the Mexican Ministries of National Properties and Treasury,
as well as the Confederation of Chambers of Industry.
Mr. Suarez has degrees in economics from the University of Mexico and a PhD from the University
of Chicago.
He has published extensively in macroeconomics, public finance, and international economic
issues.
Throughout his career, he has taught part-time at various institutions.
With that, allow me to ask our first speaker, Robert Lawrence, to make his presentation.
You can please yourself if you stay there or move to the podium.
Thank you very much.
Let me begin by giving my conclusion, which is that I am essentially in support of a U.S.-Mexico
free trade agreement.
Although I do believe that there may be some costs to some parts of the U.S. economy and
to other U.S. trading partners, I think that these costs can be mitigated.
I think the result would be an agreement which would provide considerable economic benefits
to Mexico and some small benefits to the United States.
Let me try to explain now how I have reached that conclusion.
In my presentation, I am going to make eight points.
Four of these will be why I believe that the agreement will be positive for the United
States.
Four of them are objections which might be raised with respect to this agreement and
why I do not believe by and large that those objections stand scrutiny.
Let me begin then with what explains my logic for supporting this agreement from an American
standpoint.
My first point would be that on balance, the direction of movement towards freer trade
would in fact tend to raise the U.S. trade surplus, as a first-round effect.
Mexico has made considerable headway in reducing its tariffs over the last few years, but the
barriers in Mexico are typically higher than those in the United States.
In 1989, for instance, average Mexican tariffs were 10 percent, and by contrast, the rates
were 4 percent for the United States.
The result is that when you do an exercise of removing those barriers at a first approximation,
I would emphasize these are just the first-round impact effects, but as a first-round approximation,
the negotiation of this agreement generates trade surpluses for most U.S. major industries.
What you get is an increase in the demand for American products on the one hand and
the benefits that accrue to American consumers on the other.
These are confirmed in the studies done, for instance, by the University of Maryland, who
undertake just such a simulation.
Indeed, I would argue we've actually seen this mechanism in operation over the last
few years, as Mexico has liberalized.
In 1989, the United States had a non-oil trade surplus of about $2.8 billion and has a surplus
in manufactured goods of about $1.6 billion.
So I would emphasize we're not starting from a position with very high protection, and
we should realize this in appraising this particular initiative.
Indeed, I would say that the experience over the last five years shows that a lot of the
fears about the impact on the U.S. economy of liberalization are not well-founded.
Simply, we have in fact experienced more liberalization over the last few years, I would argue, than
we are likely to do subsequently, when you add in addition to that the McIllidora experience.
And what has been striking is that as that liberalization has proceeded, not only because
of it, but associated with it, has in fact been a decline in the U.S. trade deficit with
Mexico.
So from an American perspective, a mercantilistic perspective admittedly, but nonetheless one
which allows us to gauge what the first round kind of terms of trade effects are, they're
positive.
Secondly, I think it's important to emphasize that on balance, even if balanced, U.S.-Mexican
trade actually upgrades the nature of the U.S. labor force.
The kinds of sectors which benefit where American export growth can be anticipated on balance
tend to pay higher wages and provide more skilled jobs than those which are adversely
affected.
In the University of Maryland simulation, the big winners are industries like chemicals,
plastics, and overwhelmingly in the machinery sector.
The losers are in clothing, construction, furniture, and some farming areas.
So what you see on balance then is a mechanism which is what we would expect as we increase
trade between a developing country and a developed country, that the developing country tends
to specialize in the labor-intensive products, the developed country tends to specialize
in the more high-skilled areas, and if your concern is about upgrading the nature of the
jobs available to Americans on balance, this kind of an agreement has a positive effect.
There may well be in the aggregate a negative effect on unskilled labor in the United States,
although it's interesting that it's sensitive to the assumptions behind the different simulations.
To some degree, unskilled labor is hurt as more and more Mexican products embodying cheap
labor can come into the United States.
On the other hand, the prices of products generally are lowered in the United States,
and so the buying power of wages in general in the U.S. is raised, and different simulations
actually show you that this could actually compensate unskilled labor in terms of their
real wages.
Now thirdly, I would add to those kind of microeconomic arguments a macroeconomic perspective.
In essence, I think that if this agreement succeeds, it will be successful by increasing
the confidence of foreigners in the Mexican regime.
Currently, people are skeptical.
Foreigners in particular are skeptical about investing in Mexico.
Their experience has not always been a positive one.
And I think part of the strategy here is to enhance the credibility of the Mexican liberalization
initiative by Mexico in effect tying its hands through a binding and credible agreement with
the United States.
If that agreement is successful, it will induce foreign investment in Mexico.
Well let's think through what that means.
A Mexico which is absorbing foreign investment is a Mexico which is increasing its borrowing
from the rest of the world.
The way a country borrows from the rest of the world is to run trade deficits.
If Mexico is going to run bigger trade deficits as a result of attracting foreign capital,
it must be true that Mexicans trading partners will be running bigger trade surpluses.
Since about 70% of Mexican trade is with the United States, I would argue that the macroeconomic
effects of a credible increase in the attractiveness of investment in Mexico will in fact lead
to reinforce this argument which I made earlier that US trade surpluses will rise.
Moreover, and indeed this is something the Mexicans have to worry about, there will be
a tendency for the Mexican currency to appreciate in the face of this attraction of foreign
capital.
And that will serve to further raise wages in Mexico relative to those in the United
States, an effect which would have a positive effect in raising general welfare in Mexico
but also in stemming immigration from Mexico to the United States.
Finally however, I would emphasize that overall when you look at the impact of this agreement,
it's really very small relative to the overall US economy.
We're looking at an economy which is about 4% or 5% the size of the United States.
And when you look sector by sector, you discover that the overall effects for specific sectors,
even those adversely affected, are relatively small.
The one exception that is mentioned is in the area of fruits and vegetables.
Even for instance, if you look at the International Trade Commission study, take the clothing
sector, a sector which is going to be adversely affected.
The employment consequences of a free trade area according to their estimates are 6,000
jobs.
Compare that if you will to the employment levels, and that's over a period of three
years.
Compare that if you will to current employment levels in that sector of one million jobs.
So when you go through those numbers, when you listen to the rhetoric, you would see
a flood of labor and labor intensive products coming into the United States economy.
When you actually look at the numbers, what is so striking is how small they are and therefore
how small the adjustment problems are likely to be.
So when I sum it up, I see that on balance we have an agreement which would provide benefits
to the U.S. economy, but nonetheless there would be some adjustment issues that have
to be dealt with.
They are relatively small.
At the same time, and we'll hear later, I believe that the benefits to Mexico could
be considerable.
Given the choice facing the U.S., we have the ability to confer a major benefit on our
trading partner and a neighbor with relatively low cost for ourselves, I believe we should
do it.
Now, there are numerous objections that have been raised.
Specifically, I think that the most vocal opponents to the agreement come from organized
labor.
I believe that their concerns reflect much more a concern for preserving existing jobs
than for actually upgrading and creating new jobs in the United States labor force.
And I have tried earlier to indicate the way in which I believe that you can defend this
agreement as a mechanism for creating more good jobs at high wages.
On balance, I think that's the direction it takes, the composition of employment in the
United States.
So I don't find in general the labor argument is convincing.
Labor has always argued, in fact, that the way to solve problems in developing countries
is to raise wages there.
And that's exactly what a free trade agreement would accomplish.
And as I indicated, that would have the effect of slowing down immigration into the United
States.
Labor is also concerned about migration of plants.
But by and large, I would emphasize that that concern is today is already present there
today with the maquia d'orus.
So at the margin, we are not really enhancing the incentives for immigration by very much.
We are to the degree that we improve credibility.
But we're not doing very much.
We've already seen what that would take, what would occur.
But from an American perspective, what we are gaining now is access, a greater increased
access to the Mexican market.
And that means more exports for the United States.
I think labor is also, and here I would agree with them, legitimately concerned about some
of the adjustment problems.
And I personally would favor accompanying this agreement with specific forms of trade
adjustment assistance and targeting those, perhaps, on workers who are likely to be displaced,
specifically in the kind of areas, in the farm areas, where I think there could be some
adjustment problems.
So I think it's not an argument for not undertaking these.
I think it's much more an argument for associating this measure with some adjustment.
A second set of objections comes from people who actually have non-trade concerns.
We have environmentalists, conservationists, those concerns about worker rights and human
rights.
I would simply argue that in my view, these concerns are better addressed in a situation
in which the United States has something to offer Mexico, in which relations between the
United States and Mexico are improving and deepening than they would be if we basically
slapped the Mexicans in the face and refused their proposals.
I think we can advance those very concerns.
I would not recommend doing it in the agreement itself.
But parallel with the agreement, I think trying to advance those concerns would in fact be
more beneficial, we could get more results in the context of discussing a free trade
area than we would if we reject one.
So if you believe those are important arguments, I would suggest it's a reason for supporting
this agreement rather than for rejecting it.
There are concerns of other countries who are left out.
Some fear trade diversion.
There are two kinds.
One kind of diversion is the traditional trade diversion.
Most of the studies again suggest these effects are relatively small.
Primarily a lot of Caribbean countries already have tariff-free access in certain of their
products to the United States.
I would still favor the United States indicating a concern for those countries and indeed giving
them some sort of compensation.
I think it would be very useful if this precedent was set, and I think we should call on the
Europeans to do similar to countries that are adversely affected by trade diversion
in those negotiations.
I also think there are those who fear diversion because Mexico is becoming a more attractive
location for investment.
In a sense, that's a diversion of a competitive kind.
I think this competition is very beneficial, and I think we're seeing the kind of benefits
of that sort of competition now moving throughout the whole of Latin America, that increasingly
we are seeing that this sets in motion a momentum for liberalization as others seek to prove
to foreign investors that their markets are also attractive as a location for foreign
investment.
I think this kind of competition is extremely good because it is giving rise to a liberalization
momentum.
We're also seeing some concerned about the excessive influence of the United States forming
free trade areas of their own.
I think, again, these are all very positive effects for Latin America.
So finally, let me just say there are those who believe that the multilateral system is
going to be threatened by this kind of initiative because it accelerates the formation of blocks.
I think that's an open question.
I think the real question we have to look at is whether these are going to be stumbling
blocks or building blocks.
Are these blocks who are going to erect new barriers to outsiders, or are these going
to be integrated blocks that then enable us to build a harmonized global system?
I think that's an open question still today.
My own reading of the United States position is, firstly, we have made it very clear that
this is an open block, that other Latin Americans are free to join, that it is not an exclusive
club.
Secondly, I still think while Western hemisphere trade is important to the U.S., 80 percent
of its trade is not, well, less than that, but almost 80 percent of its trade is taking
place outside this hemisphere.
The United States, and indeed, I believe, Europe as well, and indeed, Japan, all those
countries have most of their trade outside their regional blocks.
They cannot afford to allow those relationships to wane.
Self-sufficiency is not viable in the global economy.
So I remain open on that final question, but I think on balance, we should look at these
as building blocks.
We should also see this agreement as pioneering.
I guess only after the Portuguese affiliation with the EC are we seeing a very low-wage country
and a high-wage country.
The ratio of Portugal's wages to Germany's wages are about the same as Mexico's wages
to the United States.
These are really pioneering agreements because the central message that we're seeing is that
free trade is not something simply for developed countries or like countries to achieve, but
indeed the benefits are even greater when it occurs between countries who are very,
very different in numerous respects.
So that's on balance why I believe this would be a good agreement.
Thank you very much.
Thank you very much.
Our next speaker is William Diamond.
Thank you.
I'll share my watch with you.
Well, I see there's one here.
Fifteen minutes.
Okay.
Perhaps as a result of the economic benefits of this agreement, I'll be able to afford
a watch, but I generally travel without one.
I want to do two things.
One is to tell you why Canada wants to negotiate a free trade agreement with Mexico.
And secondly, on the suggestion of Mr. Gis to explain some or set out some very preliminary
evidence of the impact of our free trade agreement with the United States, which is now two years
and a bit old, upon the Canadian economy.
For an economy like Canada, a small open economy, highly dependent upon international trade,
to the extent of 30 percent plus of our national income, to the extent that half of everything
we produce in Canada is exported, trade liberalization and reduction of barriers to trade is almost
a national theme and indeed has been of most governments we've had in Canada since the
Confederation.
What happens to Canadian firms in a trade liberalization or a free trade agreement?
Well, it rewards those producers who are prepared to restructure and modernize by subjecting
them to the competition of imports in their market and by giving them open and more secure
access to export markets, in particular the United States.
Now, with Mexico, we want to expand our trade with Mexico.
Our trade currently is small, it's only about $2.5 billion and that is small compared to
U.S.-Mexican trade.
But MEXO is Canada's largest trading partner in Latin America and there have been quite
remarkable results since Mexico began an ambitious program of domestic reform.
Our trade with Mexico has been growing at about 17 percent annually and clearly we want
to expand it.
We believe in Canada that you cannot make progress in world trade by standing still.
We do not believe that entering into an agreement with Mexico, a North American free trade agreement,
does constitute the first move towards a trade bloc.
We need to find, we constantly look for avenues of trade liberalization, bilateral, trilateral
or whatever kind of lateral you want to talk about.
My ambassador says we can demonstrate that we can walk and chew gum at the same time.
Now, there is opposition in Canada to a free trade agreement with Mexico, just as there
is opposition in the United States and much of it comes from the same sources.
There is an element of opposition which is left over from the great national debate that
we had on the free trade agreement with the United States and that we are still having
in Canada.
We are like the United States in the midst of a recession and that is not the best time,
politically or economically, to talk and attract a favorable audience for trade liberalization.
The concerns about labor issues, the concerns about environmental issues are real.
We think to the extent that these concerns relate to the rules of trade, they should
be addressed and they can be openly discussed, but clearly they should not be obstacles.
Just as trade problems should not prevent progress on other issues.
Here I want to offer a little bit of evidence that you may find helpful from the Canada
and the United States experience.
During the 1980s, we had two great issues with the United States.
One was trade and we did manage to resolve that through a free trade agreement entering
into effect in 1989.
The other was acid rain, where we mounted a 10-year campaign, private diplomacy and public
diplomacy to persuade the United States to enter into an acid rain abatement program.
Last month, the President and the Prime Minister signed an acid rain accord, a bilateral acid
rain accord in Ottawa.
So it demonstrates that we can, if you like, walk and chew gum at the same time.
We can negotiate on trade on its own merits.
We can negotiate on environment on its own merits and we can make progress in both.
Implementation of any agreement with Mexico is not going to be easy.
Implementation of the Canada-U.S. free trade agreement has not been easy.
But we need to remember that we face the challenge of adjustment with or without a trade agreement
with Mexico.
We cannot stop trading with countries, I think as Bob Lawrence has suggested or implied,
because their wage levels are low.
We need to look and see where our comparative advantage is and we need to build on that
through a trade agreement.
Clearly we are not going to build on our comparative advantage by standing still and clearly not
by saying no to trade agreements with countries whom we believe in some respects are more
productive than we are, more competitive than we are.
Well with that, let me turn to some preliminary evidence of what has been happening as between
Canada and the United States or in the Canadian economy as a result of the free trade agreement.
And let me emphasize that this is very preliminary evidence.
Indeed it is anecdotal.
I said once, if I may digress, to our chief negotiator, Simon Reisman, who asked me for
some evidence.
He said, Simon, all I have is anecdotal evidence and he said that is the best kind, so I am
going to offer some of that to you.
What should be happening in a free trade agreement is a good question to ask.
Should for example trade between the two countries be going up?
Should it be going up at a more rapid pace?
Well the first point I would make on that, and this is a personal view, is that the purpose
of trade agreements is not necessarily to increase trade.
Trade after all will move according to its own dynamic and in response to many factors
operating in the economy.
But in fact trade has been going up.
Since the free trade agreement came into effect in January 1989, Canadian exports to the United
States have reached...
Do I have to start over?
They've reached... have grown by 8% and have reached in Canadian dollars 105 billion.
That's somewhere 90 plus American billion.
Our trade surplus with the United States has been growing, merchandise trade surplus reaching
$17 billion and that is an increase of 50% over the 1988 surplus.
Normally between Canada and the United States you should expect that Canada will enjoy a
surplus on merchandise trade and a deficit on invisibles and in fact that's what's happening.
So I would argue that that basically is what is supposed to be happening.
There's an awful lot to be derived from that.
More interesting question it seems to me is what happens to industries which operate on
both sides of the border and which if government policy is favorable can operate in an integrated
market or in two separate markets.
And one of the things that you expect to happen when you remove trade barriers is that the
industries will become more integrated and that will be reflected in the export orientation
and the import penetration of industrial sectors.
So you say well has that been happening?
Well clearly I can't tell you whether that has been happening with just two years of
experience and the numbers are fragmentary.
But I can go back to sectors where we've had free trade in the past.
One is the automotive sector.
In 1965 Canada and the United States concluded an automotive agreement which incidentally
was not phased in.
We went cold turkey from rates of duty in Canada of 17% plus to zero and there was a
massive shakeout in the Canadian industry particularly the parts industry.
But what has happened?
Let me bore you with a couple of numbers.
One is in 1966 the export orientation of the transportation equipment industry was 31.2%.
In 1984 it was 85%.
In 1966 imports supplied 39% of the Canadian market in this sector.
In 1984 84%.
That's kind of what you expect to happen and that's been happening in the automotive
sector where we've had free trade.
If I take another sector I find the same result.
We didn't move to free trade with the United States but we adopted a tariff device in Canada
in the machinery sector which had the same effect.
And there we went from 33% export orientation to 60% over that same period, 66, 84, with
only a slight increase in import penetration from 64% to 79%.
So if you're looking for evidence say 10, 12 years from now one of the things you want
to look at is in sectors particularly manufactured goods has the same effect happened.
That is has your dependence on exports and imports risen and if it has that's good.
That's what we expected to happen.
I should add that the automotive industry in Canada and the machinery industry in Canada
are among the most competitive of our manufacturing sectors and those sectors which are among
the least competitive are as you would expect those least dependent on exports and most
sheltered from import penetration.
The preliminary evidence that is available after two years which is now beginning to
emerge partly anecdotal, partly whatever can be derived from the statistics shows quite
remarkable increases in exports to the United States in a number of sectors including those
sectors which we've always thought have been weak and which would take more of a hit, would
face a greater burden of adjustment than the strong sectors.
The furniture industry is one that in Canada that was protected by a 17% tariff, sorry
a 16 plus tariff that is being eliminated over five years so there have been three cuts
already in that tariff.
Exports in the United States increased by 50%.
Machinery only by 10.
We might say why?
Well because it is already a very competitive industry fostered by a tariff policy adopted
more than 20 years ago.
Chemicals and chemical production which is not an industry which has undergone a great
deal of trade liberalization as a result of GATT rounds, not for want of effort I might
add, increases in the cosmetic sector of 93%, pharmaceutical products by 65% and so forth.
So we are beginning to see in these preliminary figures that companies which didn't export
much before, sectors which didn't export much before are either choosing or are being led
to or are being forced to look to exports as the area where they are going to grow.
Again that is the kind of effect that you are looking for.
What has been happening on the investment side?
What has been happening on the investment side is very interesting because you have
to bear in mind that we have had a very high dollar in Canada maintained by the bank as
an anti-inflationary, the principal anti-inflationary device and you would expect that that would
have a depressing effect on investment.
Well I think it has but clearly not to the extent that would be occurring were it not
for the free trade agreement because companies again are investing, they are positioning
themselves to take part in an integrated market with the United States.
We run through the sectors, primary metals, machinery up above 50%, petroleum industry
investment up by 100%, textiles and clothing again some of our allegedly weaker industries
up by 24% and 17% respectively.
Paper and allied industries showing plus 100%, that is a broad category.
I suspect most of that is in the fine paper industry in Canada which is traditionally
being uncompetitive and well protected by tariffs against American competition again
investing to take advantage or to position themselves for the new environment.
Last figure out that I will bother you with and I will conclude with is something that
is again I find quite interesting and to use a Washington term is counterintuitive.
The study produced by Pete Marwick published the other day has shown that Canadian investors
have not only, we have known this from other studies conducted past year by the Royal Bank
among others, have not only reversed an investment outflow which had reached quite staggering
proportions and very damaging for economy of our structure and turned it into an investment
inflow.
What has happened is that they have remarkably increased their domestic investment compared
to foreign investment.
Last year the study showed that Canadian firms were investing $30 in domestic industry for
every dollar spent on foreign mergers and acquisitions and that compares with $10 spent
domestically for every dollar spent abroad in 1988, the year before the free trade deal
was realized.
That suggests to me that the free trade agreement is having a major positive impact upon the
goods producing sector in the economy.
There's evidence to show that much of that investment and the investment flowing into
Canada from the United States is going into the manufacturing sector.
So what you expect to happen is in fact happening in the Canadian economy.
Now I emphasize that that is preliminary and as you will see, anecdotal.
But the interesting area, one of the interesting aspects of making a career in trade policy
is it's in my opinion one of the few branches of economics where experience and theory meet
in a common place.
You can in fact look back at sectors which have undergone major trade liberalization
like automotive, I'm talking about the Canadian market, like automotive, like machinery, like
one or two others.
You can predict what happens, what will happen, you can look at the numbers and you will find
out indeed that has been happening.
In the fog of statistics that is produced by recession and by high interest rates, those
effects will be obscured.
I'm confident though that we will be able to make a more serious analysis five or seven
years down the road which shows that what we expected to happen and what the government
sought to make happen, that is the restructuring of Canadian industry through a free trade
agreement has in fact been occurring.
Will that happen by, will that impact be accelerated by entering into an agreement with Mexico?
Well yes, clearly it will be but I think to a much lesser degree partly because it will
take time for trade between Canada and Mexico under the impact of a free trade agreement
to develop to that point.
But I think the reasons which led us into a free trade agreement with the United States
are the reasons which have led the government of Prime Minister Mulroney to enter into negotiations
and free trade agreement with Mexico and I'll stop.
Thank you.
Before I call on our next speaker maybe I could ask our final two speakers to try and
keep strictly to ten minutes so that I leave you enough time to question each other and
for the audience to ask some questions.
Lee Price.
That's always a risk when you accept talking later.
You get the advantage of responding somewhat to the other people but you can get it cut
short and not have time to respond.
As I was introduced they were saying that we were going to be expressing our own views.
I want to make clear that I, given the rest of the audience, given the audience rest of
the panel, I thought it would be worthwhile if I made a presentation of the kinds of arguments
that people are raising or they're questioning or opposing either free trade negotiations
with Mexico, free trade agreement with Mexico or fast track treatment by Congress of such
an agreement.
Those are not necessarily the same people or the same arguments but there is some overlap.
I found it interesting just hearing about the Canadian situation.
It seemed to me that we were hearing a speech that was better presented to a Canadian audience
than the U.S. Congress about how effectively the Canadian trade surplus has gone up 50%
and the U.S. Congress would not be quite so pleased to see those results.
I took a look at slightly different numbers here recently.
I looked at what happened to U.S. exports between 1988 and 1990 and it turns out the
U.S. exports to Canada rose by 17%.
But then you pull out Canadian exports from our world exports and you find out our exports
to the rest of the world grew by 24%.
So it means that free trade isn't panacea.
I also found intriguing his presentation about the Canadian auto agreement of the mid-60s
and how the view was that the Canadian auto industry is very competitive now and they
went cold turkey from 17% tariff to zero tariff in 1966.
In fact, there's some fairly controversial agreements that the Canadian government reached
with the major auto companies, butters of undertaking that required them to maintain
their production in Canada.
So the tariffs may have gone down but there were requirements that they maintain the same
levels of production.
They were able to produce, close down smaller scale factories and build larger scale factories
but total production.
To my knowledge, I left the auto workers six years ago, but to my knowledge six years ago
those agreements were still being enforced and those 17% tariffs were going to be charged
if companies didn't maintain their production in Canada.
So that's not the usual notion of cold turkey free trade.
The kinds of concerns that members of Congress have about domestic economic developments,
political developments that get brought to the forefront when you talk about free trade
with Mexico need to be put in some perspective.
So before we start talking about Mexico, let's be useful to talk about what is seen as some
troubling trends in the U.S. that a possible agreement with Mexico might exacerbate.
One is that over at least a decade, some would go back closer to two decades, there's been
a polarization of income of wage earners that higher paid workers tend to be getting higher,
faster growing pay than lower and middle paid workers.
There has also been a concern that we have not maintained increases in our environmental
standards and not been enforcing our environmental standards well.
There's also a concern that both labor relations and management view of productivity have not
been what they should be, that companies are more apt to seek lower wage, more apt to compete
on the basis of finding lower wage workers than to improve their labor relations, their
management structure, their efficiency of their plants, the technology used in their
plants to compete.
Finally, there's a concern that the biggest, Robert was talking about 80 percent of our
trade with other industrial countries, that those are where we see big barriers and bigger
opportunities for trade gains.
There are in Europe, Asia, Japan in particular, there remain barriers, remain problems to
our trade and we are not doing enough there.
Really one cannot talk about Mexican free trade talks without talking about the larger
enterprise for Latin America proposal.
Robert talked about this as not being exclusive to Mexico and he proceeded to talk about Latin
America.
It still is more a block kind of mentality that we're talking about here and a US focus
on liberalization of trade with the Western Hemisphere to the south, Latin America and
the Caribbean.
Talking about the kinds of issues I'm going to be talking about, I'm reminded of a time
I was invited early in the Reagan administration, they set up a cabinet council between the
commerce and trade ministers here and the commerce and trade ministers in Mexico.
The first meeting was in Mexico City and each side was going to have five advisors that
they would bring along, private sector invitors.
The USTR Bill Brock invited Doug Frazier, president of the UAW to come and he couldn't
make it and he sent me in his place.
We had three days of negotiations about the various problems between the US and Mexico
at the time.
There was a great deal of concern that someone from a union would be at such a meeting that
a union was not sector privado or what we would call private sector.
That was sector social.
It was a social issue that should be kept out of.
I find some of the discussion that we're having here today about what belongs in a pre-trade
agreement, what issues belong here is a problem of conceptualization of what is commercial
of sector privado kinds of concerns and those should be kept separate from social concerns
and that is we in the United States tend not to have, or at least those raising questions
about agreement with Mexico tend not to have that kind of bifurcation.
When it comes to labor issues or environmental issues or conservation issues or worker rights
issues, those are part of the economic negotiations from the standpoint of Bill Brock.
I wouldn't say all of those issues, but the fact that a union would be there is different
from, as I often hear the Mexicans talk about, what belongs in negotiations and what doesn't,
or that matter what Carla Hills may or may not put into an agreement.
Many of the studies on whether this benefits the U.S. or not are very, remind me of the
old economist joke that somebody comes along and finds a person looking on the ground and
asks, what are you looking for?
He says, I'm looking for my keys.
Can I help you?
He says, where did you last have them?
I was over there by my car in the dark.
The person asks, why are you looking here in the lamp post?
This is where the light is.
These studies tend to do is they make assumptions so that they can make it tractable, they can
get an answer, plus or minus, or do something quantifiable.
Those assumptions are like the lamp post.
They take you out of what is realistic.
Oftentimes they'll say, what is the effect of lowering tariffs?
When in fact that is not really what you end up talking about when you talk about the benefits.
It is a state of mind, it is an institutional relationship between businesses in the two
countries, their governments, and their labor force.
Those change as the institutional and legal dynamics change.
Those are very hard to model.
Which industries benefit, which industries lose in five years' time of changing that
business government bilateral relationship.
It's very difficult to model.
Especially the pattern of investment and which workers win and lose are not going to be determined
by the tariff levels and the changes in the tariff levels.
It's much more complicated than that.
Many of the models essentially assume full employment of labor and capital, and they
assume technology being fixed when in fact those are the interesting issues.
What happens to capital, what happens to labor, what happens to technology?
Once you become more realistic about what could happen, you have possibilities of greater
... The ITC model I think says the US output could be output as opposed to trade.
Just because our trade goes up doesn't mean our output goes up by the same amount.
US output is up like a tenth of a percent of GNP.
It's not much to think about in many years' time.
Whereas if you start to think about major changes in labor capital, labor relations,
and technology, you could have bigger gains, but you could have real losses to sectors
and the economy as a whole.
I tend to draw a distinction between skilled workers and workers without transferable skills.
Many workers who have been doing poorly in the pay performance of the last decade have
real skills that they have in their job now.
If they were to lose their job, they don't get very well paid.
We call them unskilled because they don't have skills they can take to another job,
but they may do their current job with a lot of skill.
They are productive in that job.
They're getting paid because were they to lose their job, they wouldn't be very well
paid and their employer can pay them poorly because they don't have competition.
They don't have an opportunity for higher wages elsewhere.
Those are the kinds of workers.
Depending on what your view of the labor market is, the ITC says unskilled may be high school
workers in their model, according to some, may be over half of the workforce.
But surely close to half of the workforce has been doing very poorly in the last 10
years.
The baby boom of the 70s entered the labor market.
The women, particularly wives and mothers, entered the labor market in much greater numbers
than in the past.
In the 70s, that could help explain the depression of wages of those without transferable skills.
In the 80s, both of those greatly slowed down.
The baby boom ended in terms of entry into the labor market.
My view we had was the trade boom succeeded the baby boom in depressing those wages.
Further integration of trade with Mexico would exacerbate that.
There is also this notion that raising investment and wages in Mexico would reduce immigration
as if the only explanatory issue in U.S. immigration for Mexico is the wage level in Mexico.
In fact, it is much more complex than that.
If you look at who has immigrated, it isn't the lowest income people in Mexico.
It is people who have moved from rural areas to urban areas, have already become separated
from their traditional position.
They learn about the United States and they are prepared to move.
They can be making much more than they were in their rural peasant condition, but in their
urban Juarez position, Tijuana position, they start to move to the United States.
It is simply not necessarily the case that to raise pay in Mexico will reduce U.S. immigration
if it is the same time you are bringing more workers into urban areas where they might
immigrate to the United States from.
I have been accused of saying that the USTR can't chew gum and walk at the same time when
I make this argument, but I think there is nonetheless the case that there is a limit
to how much our Washington political scene, our USTR interagency process can focus on
trade with Japan and Europe and Latin America at the same time.
We are about, it appears to me, to launch into a five-year program to integrate more
with Latin America.
Were we instead to say we are going to work on the barriers that separate our trade with
Europe and Japan, we would have the opportunity to have trade with a higher-wage, higher-technology
areas of the world that would lead to more dynamic gains from trade.
The trade gains you get with a poor, low-technology area are going to be cheaper imports.
They are not only lower pressing of wages, but the real gains are just cheaper imports.
Whereas if you intensify trade with a higher-technology area, not only do you gain from the technology
competition, but management here is encouraged to compete on the basis of technology, whereas
if the direction of our trade opportunities and trade expansion is with Latin America,
the competition is on the basis of wages.
You can compete, make a profit as a company by finding lower wages as opposed to making
things more, better technology.
I had more arguments to make, but I will have to wait until questions, I guess.
Okay.
Thank you very much.
Well, one of the advantages is that you are left with fewer minutes and fewer arguments.
As you might imagine, I agree with half of what has been said, about two-thirds, and
disagree with about two-thirds of what's been said, with some overlap there.
Now, let me try to give you in about four minutes what is the perspective, why did Mexico
began by proposing a free trade agreement?
And we began doing these noises about a year ago, to the surprise of many Americans who,
in the past, had proposed such a thing.
Well, the reason basically is that it is part of the structural reform program that we have
been pursuing in the last eight, nine years.
We began opening up trade in 85, unilaterally, and vis-a-vis the rest of the world.
We have pursued what you could call the Lone Ranger model, which is, let's go by ourselves
and let's trade with everyone without any distinctions.
And in that relation, I think that that's the best possible solution, assuming the rest
of the world does the same.
Unfortunately, the Ceteris Paribus doesn't hold in this case.
President Salinas went to Europe last year, and he was very well-received.
And at the end of that, he came back home with a conviction that there was not much
interest in Europe about Mexico, or for that matter, the rest of Latin America.
And then he went to Japan, and he did the same, and the conclusion was similar.
We have tried integration with Latin America in the past in the context totally different
of what we have today, in the context of countries that were inward-looking and very protectionist.
We didn't get beyond first base.
We negotiated after the signing of the Treaty of Montevideo in 1960.
We negotiated the first tranche of 25 percent of the trade, which no one produced.
We were negotiating stuff like nuclear reactors and really, really interesting stuff.
The next 25 percent tranche got into trouble, because there we were getting into where it
hurt, and the third tranche never got negotiated.
It made for nice traveling throughout Latin America, but not much beyond that.
The situation is quite different today.
We are pursuing serious negotiations with Central America, in which Mexico has proposed
a unilateral opening on our side and a phased-in opening on their side, with the addition that
we are strengthening the terms of the San Jose Pact, by which they can buy oil from
Mexico at preferential prices, and the payment will go to the IDB, to specific projects in
the region.
We are pursuing a free trade agreement with Chile, which is very advanced, and we should
be able to finalize that this year.
We are pursuing – and this was announced in Bogota yesterday – a free trade agreement
with Venezuela and Colombia.
So we have abandoned temporarily the Lone Ranger model to look for a several-band model
in which Mexico intends to belong to several bands.
The idea behind this is that we intend to correct the imperfections that the markets
or the trade arrangements in existence provide and get as much as we can from a freer trade
set of arrangements.
The case of the proposal to the U.S., it's interesting, because on the one hand, you
feel that the U.S. is reacting as a threatened, weakling neighbor who's terribly afraid
of this mighty neighbor to the south, which is – it's flattering in a sense.
This is the first time we've felt like that in approximately 143 years.
On the other hand, a horror story has been portrayed about what Mexico is and what is
not.
We certainly would not dare to dream to get involved in a fight between the executive
and the legislative branches of this respected U.S. government.
That's not proper, or it's not a good idea.
Unfortunately, some of the mods linking going back and forth happens to portray my country
in a very peculiar light.
Let me address some of the issues that have been raised, which are clearly untrue or grossly
exaggerated.
In terms of the environment, we have done our share to do some environmental damage.
I welcome you to come to Mexico City, and you will have a firsthand experience of that.
But we're working to improve that.
Obviously, there is a general consensus that poorer countries tend to worry a bit more
about eating tomorrow than about the quality of the air, or the quality of the water, or
the quality of the natural resources around them.
However, we're trying, and we will try harder in the future.
There is one point here that we should address.
We are not willing to become a country in which businesses can move into just to pollute,
and we are not willing to use that as a comparative cost advantage.
Second, you hear some very peculiar things about labor legislation and child labor.
If I were Mr. Charles Dickens, I would be moving in my grave because the AFL-CIO has
used complete chapters out of David Copperfield, Oliver Twist, and others to portray working
situations in Mexico.
That's preposterous.
Our labor legislation has been in existence since 1917.
It's widely applied, and the fact that it is not widely applied in all of the economy
simply means that there are sectors of the economy which are underground or not within
the reach of institutional parameters.
And that tends to happen everywhere.
Let me tell you that I have lived in a ghetto in Chicago, and I can tell you some horror
stories that you can see there, in which the institutional network of social elements that
help in this country doesn't reach.
Then you have the immigration element.
Let me ask a simple question to this panel and to you, the audience.
During the last years in which we had a massive immigration problem, we were also having a
very bloody war, civil war, and that was the times of the Mexican Revolution.
There was a small movement outward during the religious wars of the 1930s, and that
was it.
It is not until the late 70s, the early 80s, in which we start seeing movement again on
the labor front.
And this happens to coincide with the first extended period in which the Mexican economy
is not growing.
So given the fact that I agree that we have a process of migration from the rural areas
to the cities, that doesn't necessarily mean that people want to migrate to the states.
If there are jobs being offered in Mexico created at reasonable wages, they will remain
back.
But this, of course, cannot be proven.
I agree that the econometric models are not all that precise.
But let me please finish with the statement that Mexico is pursuing a new path in economic
policy.
We want freer trade, in this case with Canada and the U.S.
Canada, by the way, is an unexplored side of this.
Mexico knows very little about Canada and trades even less.
And I think that this is something we should work hard to correct.
But whatever happens, we are going to remain in the same continent side by side.
Whatever happens, with or without a free trade arrangement, there is going to be increased
trade and there is going to be an increasingly intertwined relationship between our two countries.
So let's work towards having a better functioning, increased relationship with or without a free
trade agreement, because we both are here to stay.
And the fact that we might poison the atmosphere with all this mud slinging going back and
forth doesn't help the long-term solidity of our relationship.
Thank you.
Thank you very much.
Let me now ask each speaker in the order in which they made the presentations if they'd
like a follow-up statement, question on what the other speakers have said.
Robert Lawrence.
Well, I'll just make a comment relating to lead prices statements, which are the troubling
features of the U.S. economy that are of concern in the Congress.
And simply ask, if we look at several of those, he mentioned, for instance, an increasing
polarization of wages.
He mentioned a concern about companies seeking lower wages elsewhere.
He mentioned the concern about the real barriers which are in Europe and Asia.
And I would simply comment that, in my view, and indeed in terms of the analysis that I
tried to present, I think that a U.S. free trade arrangement with Mexico, in fact, helps
ameliorate some of those concerns.
And what I found conspicuous in his analysis was tying back how it was that the free trade
area was going to hurt those concerns.
Let me first mention the question of the wage incomes.
In my view, one depressant on wages has been immigration.
I think this would paliate that impact.
Secondly, as I indicated, the patterns of specialization will, in fact, be to, I think,
create more opportunities for the upgrading of the U.S. labor force.
On balance, I think we will create more high-paying jobs than we will lose low-paying jobs, as
I indicated earlier, because of that macroeconomic effect, which is likely to make our surplus
with Mexico larger.
As for the migration to that American firms apparently feel compelled to move to get lower
wages, you will not stop that with Mexico.
In fact, the real choice will be, will they go to Hong Kong or will they go to Mexico?
And what are the implications of that?
If they go to Mexico, by and large, the feedback effects on the U.S. economy, in my judgment,
are much, much greater.
And then finally, as to those barriers in Asia and elsewhere, I think they are of concern,
but there's a dynamic process here.
And I think that a more attractive Latin America, the formation of an integrated unit here,
will raise the bargaining power of those countries in dealing with other countries.
Thank you.
William Diamond.
Yeah, just one comment.
I don't want to make this the Lee Price attack.
There were three, four, and one that seemed to be against, so that explains it, I think.
The point on automotive is correct in a sense.
The reason why I regard it as a legitimate example is that the auto companies have for
many years, at least 15 years, considerably exceeded those commitments by a very sizable
amount.
I think the correct way to look at those safeguards is the safeguard clause in any free trade
agreement, which is essentially a surge mechanism.
There's one in the GATT.
We have one in the Canada-U.S. free trade agreement.
I would be astounded if there were not a clause of that type, which clearly will have to be
carefully negotiated in a new agreement involving Mexico.
Thank you.
Lee Price.
You may need a second turn if you get it.
Well, I don't view that as a Lee Price attack round.
It was more Lee Price rebuttal, since I had commented on their statements.
I'd like to criticize Manuel on immigration.
It may well be that people have talked about immigration more in the 1980s than they did
in the 1970s, but I remember well a presentation by the head of the INS in 1978 when he was
talking about—which was one of the more prosperous years and periods of Mexico, where
they were talking about returning a million Mexicans back to the border from the United
States.
We had at least the U.S. perception among many people, the Lord knows what the truth
is.
We don't keep good numbers on this.
But there was a perception in the late 1970s of the most prosperous period in Mexico of
already sizable immigration.
On the wage issue, I don't doubt that greater trade will increase more high-wage jobs.
That's not the point.
The point is that the trade is a substitute for immigration or vice versa.
To the extent that you have imports reflecting the types of labor that are in most supply
in Mexico—import from Mexico reflecting the products that are in most supply—then
that would affect the demand for labor here and the pay of labor here that has fewer transferable
skills.
I would think that their jobs, their pay, would go down.
In many cases, it's not a question of a company going to Hong Kong or Mexico.
It is a question of whether it would take maquiladora kinds of industries, electrical,
auto, whatever.
It's a further integration of larger economies of scale in Mexico with the United States.
They're not going to go far-flung to Hong Kong there.
I would just give another—in the UAW experience, in 1965 they reached an agreement.
In 1966, there was zero tariffs in auto between the U.S. and Canada.
In 1967, in fall, the UAW and the auto companies had negotiations.
At that point, Canadian workers were paid 70 percent of what U.S. workers were paid.
They negotiated 100 percent pay phased in over the three-year contract so that by the
fall of 1970, Canadian auto workers got paid the same.
Nobody is talking about that kind of wage closure in the Mexican case, although what
had happened between 1965 and 1967 was dramatic integration of the Canadian industry.
Canadian industry had been very low-scale, high-cost producer, and they were in the process
of integrating, raising the scale.
In some industries, that will happen with Mexico with sizable effect on the pay and
bargaining position of workers in the United States.
I think it is quite legitimate for organized labor and other workers in industries that
are not organized to be concerned about what's going to happen to their pay scale.
Thank you.
Almost as far as me.
I have three brief comments.
First of all, in relation to something that I forgot to mention earlier of not including
the so-called social sector with the private sector, one thing is to have a trade negotiation,
and the other thing is to demand from the country to rewrite the Constitution and all
of its laws.
They are quite separate and different, but we have no objection in discussing all of
the issues.
What we don't want is to have everything on the table, because that would make it untenable.
There is certainly no objection in having the labor unions in this country or in our
country getting together and discussing the issues, or them with other groups arguing.
As a matter of fact, a large group of U.S. labor representatives is today in Mexico with
our labor union leaders.
That's going on all the time.
What Lee Price mentions in relation to the 70s is precisely my point.
In the 70s, we had a very fast rate of growth, which was highly capital intensive.
We allowed to have an overvalued exchange rate, and the only export we had virtually
was oil and fruits and vegetables, which we have a sizable comparative advantage, but
that was about it.
Therefore, that means that all the investment that was being generated in Mexico created
very few jobs, and that in its turn provoked and produced a large outflow of migrants,
basically because we had a very closed economy.
At the time, everything was subject to import permits.
The tariffs were beyond 100 percent, et cetera.
The sort of growth that we are going to have now, that we have started having now, is totally
different from that.
In that sense, it is a very different situation.
And finally, on wage differentials, I think that the evidence is quite interesting here.
The real wages in Mexico have been going up fast in the last three years.
The brunt of Mexico's trade opening has already occurred between 1985 and 1991.
And since Leah and I met last week, and we had an initial argument on this, I went to
look for the evidence on U.S. wages in this same six-year period, and I couldn't find
an abrupt drop in U.S. wages.
So if the argument that opening trade between our two countries leads to a downward pressure
in U.S. wages, that has not happened in the last six years.
Thank you.
I think now I'll openly floor to the audience.
You could direct your questions to one of the panelists or all of them.
Yes.
I'd like to ask Mr. Price if he would tell us a little bit more about this interesting
phrase, workers without transferable skills.
You distinguish them from unskilled, but you say they don't have transferable skills.
I don't know exactly what that means.
Perhaps you could give us a couple of examples and tell us whether it means essentially older
workers who are maladaptive or who have paid off mortgages and don't want to move or change
in some way.
Just what does it mean?
And second, would you respond to Mr. Lawrence's suggestion that this trade agreement, like
some in the past, should be accompanied by an ameliorative dose of trade adjustment assistance
so these very workers that you speak of might not be brutally disemployed?
Well, I'll give you two examples.
In many cases, textile workers are doing work that is work that they are become very adept
at.
They're living in a rural community.
They lose their job.
The plant closes down.
The jobs that they could do there don't use the skills that they have developed in that
job.
Another example, often people talk about auto workers.
I don't know what the situation is today, but I know 10 years ago, despite the higher
than average pay of auto workers, in those days they had a 90-day probation period for
which two-thirds of workers did not survive.
The work on the assembly line is very difficult work.
You can call that unskilled if you want to, but most people can't do it, and I couldn't
do it.
If you visit an auto factory, you can see that that takes a certain aptitude to do that
job day in and day out.
Workers have designed something that's very productive that some workers can do.
It's very productive to be able to do.
They lose that job, and their job as a checkout, they can do other jobs, but without the auto
plant there for them to be very productive at, then they are not so productive.
They're not as profitable for another company that they can get a job at to justify the
pay they've been getting.
They can justify the pay that they were getting in the auto plant because they called on skills
and aptitudes that they had.
Without that job opportunity, the other job opportunities, they can't economically justify
the same pay.
They have a skill to do a textile job or to do an auto job that other people don't have,
but they lose the opportunity to do that job and go in their community to find another
job and the pay that they can justify is less.
I wouldn't call those unskilled workers.
Their tendency is just to write them off unskilled workers.
They need skills.
They've got skills in the job they've got, but they lose that job and they don't have
skills that they can transfer to another job.
Isn't that where trade adjustment assistance might come in?
Trade adjustment assistance is a very difficult program to administer because it's hard to
distinguish jobs lost from imports and not from Mexico versus someplace else or not.
In the auto pack case, it was a clearer case and we did have some adjustment assistance
in the 60s and the Canadians did, I think, as well.
You could trace it down, but here, trade with Mexico is very hard to track down.
Just as he was saying, it's hard to show the wage effect.
I can show you that the wages haven't gone up very well for production workers in the
last 10 years.
How much of that is due to Mexico's expansion and how much is due to other things, technology
and trade with Asia or whatever, it's hard to separate.
One were to propose a good trade adjustment assistance proposal, I would think you could
justify it, but I think it's hard to make it work.
What really you've done is you've had a generalized pressure on the wages of workers without transferable
skills.
They've lost wages.
The biggest effect is wages, not specific people losing jobs.
They lose jobs in isolated areas for a myriad of reasons, one of which is trade with Mexico.
It's not a certain effect and a certain government spending program to deal with it.
Yes.
Thank you.
Much has been said or written lately about the privatization throughout Latin America,
and indeed, in Mexico, this is occurring.
But in fact, the majority of markets are controlled by monopolies.
If the panel could comment on that, what effects does that have as far as the free trade agreement?
I might try a crack at that one.
I don't know what you mean.
There are certainly some clear cases of monopolies like in the case of the telephone industry,
and that makes it tougher because we built a very good case in the economics profession
to have public monopolies as a public good.
We haven't made such a compelling case to privatize or how to privatize a public monopoly.
What has happened in the case of the telephone company in Mexico is, first of all, that the
rules of the game in the regulatory environment were very clearly spelled from the beginning.
It was part of the agreement that the monopoly would remain so for only a limited period
of time.
In this case, it was six years, which is a monopoly far less compelling than it used
to be, given the fact that you have now other means, alternative means of telephone communication.
And after that, it would be opened up for more open competition.
Now, in the case of the airlines, we have privatized the two national airlines with
a clear advice that a more open skies policy will follow and is going to be phased in a
period of years.
That's the case sector by sector.
Now, in the case of privatizing hotels or restaurants, I don't think you have any problem
with monopolies.
That's at least the experience that we have had.
Yes, up to that.
Yes.
About the question of walking and chewing gum, which I think really should be phrased
more as walking in one pack and walking in another pack and are they both able to go
in the same direction.
I'd like to get this addressed more seriously by the friends of free trade.
I think it is a more difficult question because it's not just a matter of concentration of
effort, but it's also a matter of harmonization of efforts, harmonization of policies.
The more two economies become linked, interdependent, the more they have to harmonize policies or
else the proverbial elephant rolls over in bed and someone gets crushed.
Are all of these intertwined harmonization efforts compatible or are they moving in different
directions and incompatible?
Is it more effort than can be made since it seems so hard just to keep up one G7 harmonization
effort at a time?
And finally, what about the adjustment period, which requires tremendous efforts?
We're not just talking about harmonization at the end.
And Mr. Price put it in terms of the benefits working in one area, working in the other.
What about the dangers?
The real danger to world trade is a collapse of the trilateral or G7 or OECD trading system,
which could break up gap.
If we concentrate on trade with Mexico, do we increase that danger?
I think that is a very important question.
And I think in my judgment, the answer remains open.
There is a multi-track strategy which can stimulate an emphasis on the multilateral
concerns.
As I said, I believe that a single Europe, which is a genuine market, once it is a single
market is much easier to handle in a world trading system.
And in that sense, the building block argument comes into play.
And so I think you can make a credible argument that you could move down that road.
Unfortunately, you can also make an argument that a Europe that is self-obsessed, a Europe
which is preoccupied with its common agricultural policy, is one which is unable to adequately
deal with the demands in the Uruguay Round context.
I don't think it's a...
I think the arguments clearly go both ways.
I think it is up to those who are administering the policies to be sure, and indeed the interests
involved, to be sure that they appreciate the importance that they ultimately have in
the single entity, the global block, which they have to build.
I see actually in terms of the effects on many developing countries, a very positive
dynamic at work, because I think that if you take Mexico, for example, once you open up
your economy to the United States, once you open it to American firms to enter, you have
to undertake all of those adjustments, which actually mean you might as well open it up
to everybody.
You simply get benefits from there.
You've borne a lot of the adjustment costs.
But I think it's still an open question.
Is that the comment on that?
Yes, briefly.
As the first one to use the phrase, walk and chew gum, I am compelled to rush to its defense.
I believe the question is fundamentally false.
We've had this debate in Canada, and the debate was by going with the bilateral agreement
with the United States and now with Mexico, were we not fatally weakening the multilateral
system?
The agreement is false because it represents triumph of means over ends.
Now the answer that you have to that choice will be different depending on your viewpoint.
When you depend to the extent that we do in Canada upon trade and trade with one country,
and you have the opportunity to do a bilateral free trade agreement, which will go farther
and get there faster than anything, it is remotely conceivable in the gap for the foreseeable
future, you cannot say no to that for the sake of preserving a system.
I appreciate that the United States might have a different answer.
Can we do both at the same time?
I think the evidence is there, the evidence not only in the negotiating effort, but a
careful parsing of the problems that were addressed in the free trade agreement and
the problems that were not will show that the latter lay principally in those areas
where a deal between Canada and the United States did not address the problems of the
sector, and I think particularly of grain subsidies.
We would be delighted, our two countries, to do a deal on grain subsidies, but to leave
the Europeans free run of that market for whatever price they need to dispose of their
inefficiently produced grain is not an option that is open to us and not something that
will be negotiated bilaterally or trilaterally.
I think you have raised a number of issues you could write a book about, I suppose, but
one that prompts me to make one point that I didn't get a chance to make earlier, and
that is on the issue of fast track.
I think that in the consideration of whether to have a specific period of time for Congress
to make a decision up or down no amendment, that kind of context, there is a lot stronger
argument to do that in a multilateral context where you are trying to get 100 other countries
to agree, and if the Congress were to make an amendment, it might unravel ever getting
an agreement to go back and try to rejigger things with the other 100 countries is much
more difficult than when you have essentially, all due respect to Canada, essentially with
the U.S. and U.S. respect, it is perceived as a Mexican problem and the issues that are
most of concern are issues that would be raised with Mexico.
Those amendments, congressional concerns, renegotiation would be much more likely.
I am taken by the comment about Salinas' trip to Europe and to Japan and deciding, well,
their fate is tied to us.
It is a lot different situation than the U.S. where the U.S. had an agenda to try to pursue,
not exactly the best agenda in my opinion, but it has an agenda in the Uruguay Round,
and it wants to get others to do it.
In this case, Mexico wants to have a deal with us.
We shouldn't have the same imperative that we have to, that Congress has to tie its hands
in dealing with such a negotiation.
It is on a bilateral, foreign-initiated agenda that seems to me a much harder case to make
for a fast track.
On the issue of blocs and whether we should be harmonizing in a broader area, it seems
to me that we let Japan take its block, East Asia, and the Europeans, the East Sea get
the rest of Europe, and the U.S. gets Latin America.
That raises sort of some historical concerns about the predecessor history prior to World
War I and World War II, but also just economic advantage, whether it is to our advantage
to focus on this backyard, whether we shouldn't be trying to keep open for economic advantage,
increasing the trade with the other industrial countries, but also their backyards.
For us to focus on Latin America is to encourage them to focus on their backyard, and we may
not have the most prosperous backyard.
This is obviously an interesting question.
We have one more comment here from Mamo.
Yes, I refuse to be characterized as anyone's backyard by all means.
Mexico's agenda, as I began saying by the long-ranger model, is clearly multilateral,
and we've been very actively pursuing a constructive role within the GATT negotiations.
We are so keen on the long-ranger model that we don't belong to any subgroup, not even
the non-aligned.
We are not aligned to the non-aligned.
We are not part of the current group in the agricultural discussions of GATT.
We have followed a truly multilateral strategy, but I think Bill Diamond's argument is very
compelling and true for Mexico also, that since 75% of our trade is done back and forth
with the U.S., it does make some sense to have an agreement which is perfectly compatible
with that multilateral agenda that I was mentioning.
That's one other point.
If the U.S. does insist in having negotiations of every sort, going back to Congress and
then Congress not ratifying them, it is going to be very difficult to negotiate with them
anything.
We have a mutual assistance, legal assistance treaty that was blocked because the distinguished
senator, senior senator of North Carolina, put some additional caveats into something
that had been negotiated and had been approved.
If that's a choice that the U.S. wants to make, it's fine.
That's going to be a redefinition of the long-ranger model because that is not going to be a long-ranger
trying to open up things with everyone else, but a long-ranger trying to close everything
from coming into the country.
We have exceeded our time.
I'll take one more quick question.
Yes?
The issue of plant relocation received a significant amount of discussion during the fast track
hearings.
I was just wondering if Mr. Lawrence could expound on his assertion that it would be
minimal.
Well, my statement is that what we already have are the maquia doris.
That implies that already the tariffs are rather low on the side of electronics and
automobiles, for instance, which are the major sectors.
The stimulus towards locating those plants is by and large already there.
When we look at a free trade area, we are making an incremental decision.
We have to ask what its effect is taking the maquia doris as already given.
Indeed, there is nothing to stop without a free trade area.
Mexico going the whole way, unilaterally opening its marketplace, and indeed taking other measures
which would make investment attractive within Mexico.
We have to look at the full context.
I was saying that in my judgment at the margin, the effects were not extremely large because
we've already seen the dominant liberalization and so on already having taken place.
Then, when we look at the free trade area, we have to bring into account the fact that
now from the standpoint of American automobile manufacturers and other engineering firms,
they are now given access to the Mexican market.
Offsetting that tendency for those plants to move now is much greater access for American-based
plants to enjoy exports.
Robert, you mentioned yourself early on that there is the psychological effect of what's
going on that's important.
It's also whether the US... Surely, Mexico can do things unilaterally, but when the US
joins in and is concretized, and the US also has zero tariffs, it's a wholly different
matter than when Mexico does things unilaterally.
American business would respond very differently.
Well, I agree.
The US would respond very differently.
Unilateral action on behalf of Mexico.
Much of what I've been hearing is almost like a theology of free trade, but I haven't heard
the discussion of the fact that we're dealing not with a Portugal with a small population
and an unemployment of 10 or 12%, but we're dealing with a Mexico of 75 million going
on 100 million that has an unemployment and an unemployment approaching 40% or more.
We're dealing with a US situation where we have 6% unemployment, another 6% part-time
workers who don't want part-time work, and so there is a question of what is the reality?
The employer who's thinking like General Electric says, automate, migrate, or die.
When he sits down and negotiates with the workers, he says, I can't give you more because
I can go over here.
That definitely happens in all the industries.
When you spoke about labor-intensive industry, and now you've just spoken about auto industry
and electronics, do you consider auto industry a labor-intensive industry?
We have found out that anything can move, and everything has moved.
Then we have to face up to the fact that in the discussions with Portugal, there were
conditions put on politics, social legislation, and economic legislation if you want to move
into a free trade in the European communities.
They set motion to these things.
I don't think it's unfair to say to the American taxpayers and citizens, we want to have a
better enforcement of labor legislation that's currently there.
We want to see a wage level that's above 50 cents to a dollar an hour going up to $2
an hour when we're paying $20 an hour in our industries, especially the organized industry.
I do believe that Mr. Price has been very diplomatic, but I think if you were listening
to employers and the way they speak to the trade unions in a collective bargaining situation,
you would find out that much of what is taking place here today is not the reality of what
happens in those negotiations.
I know we're out of time, but I cannot resist simply saying that what your remarks totally
ignored was the prospect of those 90 million people as a market.
The key strategy here is to induce economic development within Mexico, and I believe that
is the major effect of the free trade area.
It is extremely beneficial in helping the Mexicans develop in order to thereby ameliorate
the problems which you have indicated.
I think it is really the Mexico as a market that I think is behind the long run strategy
and benefits for the United States.
I'm afraid.
Okay, one more.
Just a point of clarification here.
We are 85 million.
The rate of open unemployment is 3.5%.
You might believe it or not.
The difference is that we don't pay people to queue up to receive unemployment compensation.
If you are willing to say that someone who washes 25 cars a day is underemployed, go
and ask him to see what he thinks.
And Portugal entered a common market arrangement with the rest of Europe.
We don't intend to have a common market.
This is a free trade area.
That is why they were willing to accept all sorts of additional conditions, including
a supranational government.
And as for the U.S. taxpayers, Mexico is not asking anything from the U.S. taxpayers.
Mexico has not accepted any U.S. aid in the last 30 years.
Mexico did not get any break from our foreign debt.
What we got was a negotiated agreement with the banks.
We have paid 100 percent of our official debts and continue to be current on that.
One final comment.
Well, the last remark was such that when I compare it with the average level of the U.S.
tariff of about 4 to 5 percent on manufactured goods, I wonder what kind of a world we're
living in.
That was a defense or an argument for a tariff of 40 to 50 percent.
We've been down that track before.
I mean, if everything that you say is true, let's close up shop and go home.
Thank you.
That concludes this discussion on free trade issues.
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