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NAFTA: Free Trade Bought and Oversold

By Paul Blustein
Washington Post Staff Writer
Monday, September 30, 1996; Page A01

It was one of Vice President Gore's most compelling moments in his 1993 televised debate with Ross Perot over the North American Free Trade Agreement.

Arguing that free trade with Mexico would increase U.S. jobs rather than reduce them, Gore told the story of Norm Cohen, a North Carolina businessman, who years ago had built a textile factory in Mexico to circumvent Mexico's barriers against imported products.

"If NAFTA passes," Gore declared, "Norm Cohen has plans right now to shut that factory in Mexico down and move 150 jobs back to Charlotte, North Carolina."

So where's the factory now? Still in Mexico, it turns out, though NAFTA has been in force since January 1994. And according to Cohen, his company has added only about half a dozen U.S. workers to take advantage of enhanced opportunities in Mexico. Cohen says he remembers telling Gore that his company would benefit from NAFTA, but as for plans to move the factory, "That may have been not quite clear, the way it came across," he said.

It's an example, just one of many, of how NAFTA's supporters oversold its benefits at the same time as critics, such as Perot, were exaggerating its drawbacks.

A look back at the national debate of 1993, as NAFTA was before Congress, turns up numerous instances of administration officials, from President Clinton on down, conjuring up rosy images of an export boom to Mexico that would have a huge effect on the U.S. economy. Those predictions look foolish now, in the aftermath of the 1994 peso crisis that plunged Mexico into deep recession and turned the U.S. trade balance with its southern neighbor sharply negative.

That's a political problem for Clinton, underscored earlier this month when Perot, the Reform Party presidential candidate, introduced running mate Pat Choate, who had opposed NAFTA in defiance of the overwhelming opinion of fellow economists. "Now we know," the Texas billionaire declared, "that he [Choate] was right and they were wrong."

Hold on. Perot and Choate themselves issued forecasts during 1993 about NAFTA's impact that also look wildly overstated today. For example, notwithstanding Perot's famous warning of a "giant sucking sound," which was quantified by Choate as meaning the likely loss of nearly 6 million jobs, 8 million more Americans are employed today than before NAFTA, including 181,000 added to the manufacturing ranks.

NAFTA's full effect, of course, won't be known for years, when its provisions, particularly the elimination of tariffs on goods flowing between the United States and Mexico, have been fully phased in. But considering its relatively modest effects on the U.S. economy, the one thing that seems clear is that both sides went overboard in making their cases to the public.

The result of such hype, said Greg Mastel, a trade specialist at the Economic Strategy Institute, is a twisted public perception of important issues. "The American people end up getting an entirely unrealistic view of the role of trade," he said. "It becomes either a solution for every problem, or a cause of every problem, when in fact it's neither."

Both critics and supporters of NAFTA maintain that events over the past couple of years have proven them right – just not as right as the more extreme claims would have suggested.

Thea Lee, an economist at the Economic Policy Institute who opposed NAFTA, contended that the "thrust" of the Perot-Choate argument has proven correct because the pact has made it more attractive for U.S. companies to shift production to Mexico. "There hasn't been a flood," she said, "but there has been an increase" in U.S. corporate investment in manufacturing facilities in Mexico, which rose to $2.5 billion in 1994 from $1 billion in 1993 before falling to $1.5 billion in 1995. To keep that figure in perspective, businesses invested more than $700 billion in the United States last year.

NAFTA boosters contend that the pact has proven successful because it kept a bad situation in Mexico from getting a lot worse, helping U.S. exporters in the process.

"It locked in [free-market] reform in Mexico, and locked in trade benefits for the United States," said David Rothkopf, a former top Commerce Department official. In contrast to the economic crisis that shook Mexico in the early 1980s, when Mexican authorities virtually slammed the door on U.S. imports for several years, Mexico kept its U.S. trade lines open this time around, so sales of American goods in the Mexican market rebounded fairly quickly.

Rothkopf doesn't deny that the administration engaged in hyperbole, only that the other side was worse. "When you find complex, international topics being discussed on the 'Larry King Show,' " he said, "you should expect a certain degree of rhetorical inflation."

A few examples of the genre:

Free trade with Mexico will generate 200,000 net jobs in its first two years.

Administration officials promoted this figure many times, as did their allies, including Robert J. Dole, now the Republican presidential nominee. The number was based largely on a study by two scholars at the Institute for International Economics, who pointed out that such an increase would be relatively small – "lost as noise in the background of macroeconomic events." The figure actually is smaller than the average number of net jobs that have been added each month this year amid the millions of jobs created and destroyed by the normal churning of the economy.

But administration officials usually spouted the figure without qualification, as if it represented a major potential boon. "They're going to be higher-paying jobs," Mickey Kantor, then the U.S. trade representative, told a caller on King's CNN TV show. "We're talking about something that will have a huge impact on this country."

Even today, the Clintonites often assert that jobs supported by exports to NAFTA partners are up by about 260,000 since 1993, seemingly vindicating their earlier prediction. But the figure is misleading for two reasons: first, the bulk of these job gains are attributable to exports to Canada; second, the figure is not a net figure – it includes only jobs gained from exports, not jobs lost to imports.

Mexico is such a potentially lucrative market that obtaining greater access for U.S. products will trigger an instant export boom.

Gore, among others, sounded this theme during the debate with Perot when he noted that U.S.-Mexico trade had improved to a $5 billion surplus from a $5 billion deficit after Mexican authorities began lowering tariffs in 1987. "If that trend continues for another two years – and NAFTA will, by removing those barriers, greatly accelerate it – we will have a larger trade surplus with Mexico than with any country in the entire world," Gore said.

In fact, things have headed in precisely the other direction. Following the 50 percent collapse in the value of the peso in late 1994, Mexican products became so much more competitive vis a vis U.S. goods in this country that the United States posted a $15.4 billion deficit with Mexico in 1995.

"Under NAFTA, the Big Three automakers expect to ship 60,000 cars to Mexico in the first year alone."

Concerning this promise, which Clinton made Sept. 14, 1993, the administration's best excuse may be, "Better late than never."

U.S. exports of motor vehicles to Mexico rose to 47,000 in NAFTA's first year, and then dipped to 28,000 after the 1995 peso crisis. This year, exports appear almost certain to top 60,000, based on results in the first six months.

The administration ignored the fact that the number of vehicles flowing in the opposite direction is considerably higher and growing fast. Imports of Mexican-made vehicles this year are running at more than double the 1993 level of 338,000.

As for Perot and Choate, here are some of the claims they were making in 1993: Free trade with Mexico will cost "millions of working jobs." It could put nearly 6 million people out of work. Perot made the first prediction in a TV appearance, and a study by Choate estimated that 5.9 million jobs would be "at risk" if NAFTA passed. On the Sept. 3, 1993, "MacNeil/Lehrer NewsHour," Choate explained the term: "Risk means the job will either go to Mexico, or the job will disappear because of competition from Mexico."

NAFTA's precise impact on jobs is impossible to determine. But even anti-NAFTA economists estimate that the net job loss from U.S.-Mexico trade during the past couple of years is considerably smaller than the numbers Perot and Choate were bandying around – perhaps 250,000, according to Lee. Pro-NAFTA economists contend that the effect on employment must be even smaller than that, given the strength of the overall job market.

There will be "a massive shift in the U.S. beef industry from the United States to Mexico as investors rush to take advantage of cheap wages, low safety standards and lax sanitation practices."

Nothing of that sort, which was predicted in a book by Perot and Choate, has happened.

"Northern Mexico will replace Detroit as the car production center of North America." The prediction appears in the Perot-Choate book. In fact, production of cars and trucks in Michigan rose to 3.1 million vehicles in 1995 from 2.8 million vehicles in 1993. As for Mexican production, it fell, to 935,000 in 1995 from 1.08 million in 1993.

Staff researcher Richard Drezen contributed to this report.

© Copyright 1996 The Washington Post Company

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