Free trade with Mexico?

• Author: Moreno, Ramon

The U.S., Mexico and Canada are planning negotiations on a regional North ' America Free Trade Agreement (FTA) this summer. The proposed FTA would join the U.S. with its first-and third-largest trading partners, which account for roughly 25 percent of total U.S. trade. The North American market would have a combined output similar to that of the European Community (more than $6 trillion) but a larger population (365 million, compared to 330 million in Europe).

This article examines why the U.S. and Mexico are pursuing a FTA, its potential scope, the expected effects on the U.S. economy and some concerns expressed on the U.S. side.

Why a FTA with Mexico?

The U.S. is pursuing trade liberalization on several fronts. Although the latest round of global trade negotiations did not achieve an accord last year, efforts are underway to revive these talks. At the same time, the U.S. is pursuing a broad strategy of liberalizing trade in the Americas, and a FTA with Mexico is an important element of this effort. In addition to the 1989 U.S.-Canada Free Trade Agreement, other U.S. efforts include the 1983 Caribbean Basin Initiative (CBI), which exempts certain exports of Caribbean economies from U.S. trade barriers, and the proposed "Andean Trade Preferences Act of 1990" which would grant Colombia, Peru, Ecuador and Bolivia benefits similar to those of CBI. More generally, President Bush's "Enterprise for the Americas Initiative" of June 1990 called for the long-run establishment of a free trade zone in the Americas. A FTA between the U.S. and Mexico is a natural step in the direction of regional free trade because of already low tariffs and the extensive trade links between the two economies.

From the Mexican perspective, a FTA with the U.S. would consolidate the extensive economic reforms (trade liberalization, privatization, reduction of budget deficits) Mexico has undertaken since the mid-1980s. It also would help Mexico achieve two economic objectives. First, a FTA could offset a disturbing increase in Mexican trade deficits apparent since 1989, which resulted from booming imports and lagging export revenues. Improvements in Mexico's external balance are needed to cope with its still substantial external debt of about $80 billion. Second, it could stimulate large increase in direct foreign investment in Mexico, which, in the short run, would also help Mexico service its external debt. But there are important long-run effects as well. At present foreign investment in Mexico is concentrated in the export enclaves (maquiladoras) along the U.S.-Mexican border, which are relatively...