Free Trade Between Rich and Poor: EC Lessons for NAFTA

One of the most striking aspects of the North American FreeTrade Agreement is that it ties a poor nation, Mexico, to two of the world's richest, the United States and Canada, in one of the most unequal trade partnerships ever proposed.

On this basis alone, the enthusiasm for the agreement in Mexico and the misgivings about it here are understandable.


After all, if you were in the rickety Mexican wagon, wouldn't you want it to be hitched to the powerful U.S. locomotive? But if you were driving the locomotive, would you necessarily want the extra freight?

That, in a nutshell, is what the argument is all about. Mexico has one-third as many people, but its economy is only one-twenty-fifth the size of the U.S. economy.


There is no direct precedent for such economic disparity being tackled, let alone overcome, with the simple act of signing a trade agreement, so it is hard to know precisely what will happen.

The rich West Germans shouldered the economic burden of their poor East German cousins after the collapse of communism and the Berlin Wall. It has proved to be a massive undertaking, contributing to the prolonged recession in Europe.

But the parallel to NAFTA is far from precise. In Germany, two countries that shared a common culture and history until war and politics severed them were forming a reunified nation. There is no suggestion of such commonality between the United States and Mexico, or of any interest by either neighbor in ceasing to be an independent nation. What is at issue here is simply the freer flow of trade and investment.

A closer parallel, perhaps, would be the admission of some of Europe's poorest countries -- Greece in 1981, Spain and Portugal in 1986 -- to the European Economic Community, founded in 1967 by the continent's richest industrial powers.

Here the NAFTA-like priorities of free trade and economic partnership were at play, although social and political aspirations were present too, as indeed they are in the planned U.S.-Mexico embrace. But the Europeans did not simply offer the advantages of association to the poorer among them. They set conditions that had to be met before membership would even be considered.

Funds for regional development, infrastructure improvement, social programs and agricultural support are allocated from the EC budget, which is financed according to the means of each member. The ultimate aim of the redistribution is economic convergence.

House Majority Leader Richard A. Gephardt of Missouri, in declaring his opposition to NAFTA last month, said: "We should take a chapter out of the European Community's integration efforts. Before prospective nations such as Spain, Portugal and Greece were allowed to join the EC, they were required to initiate reasonable political and economic reforms.

"I believe we could follow a similar course. We should ask Mexico to enforce its own laws so that our companies aren't lured away by the possibility of profit through inadequate environmental codes or insufficient work protections. We should seek specific political and economic reforms in Mexico."


Take Spain as an example. It took six years to negotiate Spanish accession to the EC. By the time of its entry, Jan. 1, 1986, its economy was already being converted to a free-market system from a government-controlled model, and its political system was emerging from dictatorship to democracy. It was given a seven-year transition period to bring its laws and regulations into conformity with those of its new Europeans partners. The EC provided financial support.

The benefits of the alliance between Spain and its rich neighbors were quickly evident. Between 1986 and 1991, its gross domestic product grew at an impressive annual rate of 4.3 percent, 1.5 percentage points faster than its partners; unemployment was reduced from 21.4 percent to 15.8 percent; its budget deficit came down from 7 percent of GDP to 2.7 percent; and despite such an active economic pace, inflation dropped from 8.8 percent to 5.9 percent.

From the EC's viewpoint, the advantage of enlarged membership was simply that a more united Europe would be a more forceful presence in the world, both economically and politically. Since Spain and Portugal joined, the EC has overtaken the United States in terms of economic output. In 1985, as a 10-member community, its gross domestic product was $2.5 trillion, against the U.S. GDP of $4.0 trillion. In 1992 the EC output was $6.8 trillion, compared to $5.9 trillion in the United States.

In terms of share of world trade, the EC has maintained the edge. In 1980 its exports as a share of world trade were 18.7 percent, in 1990 22.1 percent. In 1980, U.S. exports represented 13.7 percent of world trade, while in 1992 they were 17.5 percent.

It should be pointed out that the EC is more than just a trading zone. The long-term goal of the federalists among its members ** was, and is, something along the lines of the United States of Europe. The more sovereignty-minded partners have consistently preferred to limit the interdependence to the marketplace but have not been able to stall progress toward wider union.

Before Greece, Spain and Portugal were admitted, the EC was a club of nine nations with broad cooperative structures and far-reaching political aims. But at least they have always had their basic rules, shared standards of membership and a series of development funds targeted toward economic convergence.


This disciplined approach has not been lost on Sen. Ernest F. Hollings, a South Carolina Democrat, who has suggested NAFTA be scrapped and replaced by a Common Market For The Americas. The idea would be to reduce the disparity between the United States and Mexico before their economic troths were pledged.

Mr. Hollings likes to rattle off what he perceives as the failed precedents for Uncle Sam offering the helping hand in vain to Latin American nations: Franklin Roosevelt's "Good Neighbor" policy, Dwight D. Eisenhower's "Operation Pan-America," John F. Kennedy's "Alliance for Progress," and Ronald Reagan's "Caribbean Basin Initiative."

"For 60 years we have had this same thing," says Mr. Hollings. "All promised an idea -- if we could get money down there, the poor would become the middle class and the middle class would bring about democracy -- and we have learned that didn't work."

Mr. Hollings introduced his Common Market legislation this month. Among its major elements:

* A development fund to raise living standards throughout the hemisphere and provide a cushion for job dislocations due to shifting trade patterns, modeled on the European experience.

* A social charter to guarantee workers' rights, health and safety.


* Debt relief to allow export earnings to be used to raise living standards instead of paying interest charges.

* Export incentives to boost the export of North American goods to the Pacific Rim and Europe instead of providing a duty-free "entry platform" to North America for foreign companies.

* Measures to prevent competitive devaluation of currencies, which could destabilize national accounts and undermine wages.

* Reallocation of China's quota of textile sales to the United States to other members of the North American Common Market.

But the primary purpose would be to strengthen democracy in the hemisphere, particularly in Mexico.

"Until Mexico embraces democracy, we should not reward it with the benefits of a free trade agreement," Mr. Hollings wrote in a letter to President Clinton. "Wages and working conditions in Mexico will not improve until Mexico become a democracy whose authority derives from the will of its people."


Mr. Hollings is hardly alone in thinking that Mexico, which has been under single-party control since 1929, is short on basic freedoms, be they honest elections, an independent judiciary or workers' rights to organize.

New York Democratic Sen. Daniel Patrick Moynihan, who chairs the Finance Committee and will be a key player in the disposition of the NAFTA on Capitol Hill, remains ambivalent about the agreement, viewing Mexico as one of the most authoritarian nations in the hemisphere.

The answer from the administration is that reforms are already under way under the administration of President Carlos Salinas de Gortari, that improved trade under NAFTA will boost the Mexican standard of living, and that richer Mexicans will spend more on U.S.-made goods.

Significantly, of course, the rationale for NAFTA is that it will make the United States, Canada and Mexico more competitive against the Europeans, whose success in building a common market of 300 million consumers has given them impressive collective power in the global economy. Under NAFTA, the Europeans and Japanese would face the trade tariffs that the North American partners would lift from each other.

Their likely response, of course, would be to invest in Mexico's low-wage economy themselves to get a bridgehead into the North American market. That is precisely what many U.S. and Japanese companies did to ensure they had access to "Fortress Europe," when it began raising its own drawbridge.

Critics of NAFTA say that U.S. jobs will be exported to Mexico, and that U.S. wages and standards of living will fall. Supporters say trade is not a zero-sum game, that if some jobs go to Mexico others will be created here, that greater trade will produce benefits for all, that it is a win-win situation.


But one of the few indisputable facts of the NAFTA is that it will tie together three countries, in which workers in two of the countries make as much in an hour as workers in the other make in a day.

F: However you look at it, that is quite a gap to bridge.

Gilbert Lewthwaite is economics correspondent in The Sun's Washington Bureau.