Mexican President Carlos Salinas de Gortari learned about the fickleness of international capital markets when he was seeking foreign investment in Europe last January.
As the Mexican leader traveled from London to Paris to Bonn, he heard nothing but praise from government and business leaders for his efforts to break his country out of the straitjacket of government controls and introduce a strong dose of privatization and competition.
When it came time to back up their praise with new investments, however, Salinas heard a different message. Sorry, they said, but Eastern Europe is our first priority these days.
By the time the 42-year-old, Harvard University-educated economist returned home, he apparently had decided to cast his country's future with the United States, proposing an agreement that would knit Mexico, Canada and the United States in a North American free-trade pact covering some 350 million people and stretching from above the Arctic Circle to the northern border of Central America.
The issue will play a major role in talks between the Mexican leader, who arrives in Washington today, and President Bush, who endorsed the concept of a North American trade zone two years ago. Bush is expected to give his support to starting free-trade talks during a working White House dinner with Salinas tonight, administration sources said.
Negotiating a free-trade agreement between countries with economies in such widely disparate stages of development won't be easy, however. Generally, free-trade agreements aim at eliminating barriers to the passage of goods and money across borders, creating one large market. But Mexico is likely to want to protect its oil and power industries from foreign investment, while the United States could balk at allowing greater movement of Mexican workers between countries.
Bush made his decision to move ahead -- a decision scheduled to be revealedtomorrow -- despite sharp splits within his administration and in Congress. The splits, however, are concerned more with timing than the wisdom of an eventual agreement.
U.S. Trade Representative Carla Hills and Secretary of Agriculture Clayton K. Yeutter argued for more time to prepare and to make sure there is no conflict with the president's primary trade objective, the successful conclusion of global free-trade talks in December. House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) and the committee's ranking minority member, Bill Archer (R-Tex.), echoed those concerns in a letter to Bush.
Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) said he is sympathetic to a trade pact with Mexico, and his fellow Texans in the Bush Cabinet, Secretary of State James A. Baker III and Commerce Secretary Robert A. Mosbacher, strongly supported moving ahead quickly.
The United States already has an 18-month-old free-trade pact with Canada, and Canadian Trade Minister John Crosbie said Ottawa would consider joining a U.S.-Mexican partnership.
Over the past six months, Salinas has been preparing Mexico for a free-trade agreement with the United States, an idea that only a few years ago would have been political heresy in a country that traditionally reviled America as a warmongering, rich, imperialist neighbor. After a month-long series of hearings around his country, Salinas last month won overwhelming endorsement from the Mexican Senate to start talks with Washington.
"Free trade with the United States is an inevitable step," said Otto Granados Roldan, Salinas's press secretary who was here last week preparing for the presidential visit.
He said Salinas had opened up the Mexican economy, and while it had helped Mexico become more productive "up 'til now we have not seen trade reciprocity from other countries." Further, he said, Mexico was concerned that it would be left out of what it saw as a trend toward the formation of Asian and European trading blocs.
"There is a real war for markets in the international arena," said Granados. "In that kind of battle, we surely don't want to be left behind."
While Mexican business and investor reaction has generally been favorable, leftists and some labor elements are expected to oppose a trade pact, Washington Post correspondent William Branigin reported from Mexico City. Nonetheless, financial analyst Rogelio Ramirez de la O, who heads an independent think tank, believes they will not be able to kill a deal.
Salinas will begin selling the trade pact tomorrow when he speaks to corporate leaders at the Business Roundtable, which Thursday endorsed a free-trade agreement in glowing terms.
The Roundtable report said a comprehensive free-trade pact would increase the sale of American-made goods and services to an estimated 100 million Mexicans in the next 10 years, while strengthening Mexican businesses and providing economic stability on the United States's southern border.
"We've got a confluence of U.S. interests and Mexican interests coming together at the same time," said Kay Whitmore, chairman of Eastman Kodak Co. and head of the Roundtable's working group on Mexico.
One of the sticking points, though, is the question of allowing Mexican labor into this country, an issue that Granados said has to be tackled by the agreement. He added that Mexico doesn't want to export its workers but would rather create jobs for them in Mexico -- a major problem in a country in which 1 million people join the job force annually.
A free-trade agreement is opposed by politically powerful segments of the American economy, including organized labor, which fears a hemorrhage of U.S. jobs to low-wage factories south of the border and "sunset," or declining, industries such as textile and clothing manufacturers. U.S. labor opposition would intensify if low-wage Mexican labor could flood legally into this country.
"U.S. trade and investment with Mexico has already significantly harmed the domestic manufacturing sector," the AFL-CIO Executive Council said last month. "A free-trade agreement will only encourage greater capital outflows from the United States and bring about an increase in imports from Mexico. ... It will also do little to improve the lives of Mexican workers."
All the talk of a U.S.-Mexican free-trade deal would be little more than a vision of a distant future without the sweeping economic restructuring accomplished by Salinas, who took office 18 months ago, and his predecessor, Miguel de la Madrid Hurtado.
Under de la Madrid, Mexico agreed to join the international trading system, a move that in the past had been considered a surrender of national sovereignty. And Salinas started in by sweeping away the cobwebs of one of the world's most protected economies. He ended Mexico's policy of import substitution, removed protectionist barriers and allowed foreign goods to surge in as part of a plan to force domestic companies to become world-class competitors. In the process, Mexico's top tariffs dropped from 100 percent to 20 percent and licensing requirements were removed for 95 percent of its imports.
Consumers have benefited from a much wider choice of goods, but the country's trade balance has been overwhelmed by red ink as a 1987 trade surplus of $8.4 billion fell into a $625 million deficit last year. In the process, though, Granados reported that many Mexican businesses became internationally competitive.
Mexico ran a $2.2 billion trade surplus with the United States last year, after being $2.6 billion ahead in 1988. But U.S. exports to Mexico have been growing, reaching $25 billion last year, as total trade between the two countries surpassed $51 billion. Mexico is the United States's third-largest trading partner, behind Canada and Japan.
Under Salinas, Mexico also eliminated restrictions on most foreign investments; put state-owned airlines, steel mills and phone companies up for sale, with foreign interests allowed to join in the bidding; and decided this spring to denationalize the banking system.
It has been a shock to the Mexican economy, the equivalent of a quick jump into an icy stream. But crippling inflation dropped to 20 percent last year from a 1987 high of more than 160 percent, while Mexico registered 3 percent economic growth and attracted $3 billion in foreign investment in the last nine months of 1989.