January 3, 1995
"NAFTA, One Year Afta, Looks Good: Failure Would Have Delivered Body Blow to Mexican Economy"
San Jose Mercury News
By Timothy Taylor
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WHEN THE North American Free Trade Agreement was enacted one year ago, the safest prediction was that it would have no dramatic effect.

After all, the Mexican economy is only about one-twentieth the size of the U.S. economy, and even before NAFTA, trade between the two economies was fairly open. The impact on the U.S. economy of somewhat more free trade with a small, poor neighbor was never likely to be large.

Thus, the main lessons to be drawn from NAFTA's first year aren't about what did happen, but rather what didn't.

Last year brought political turmoil in Mexico. Luis Donaldo Colosio, nominated by the dominant PRI party for president, was assassinated in March. Jose Francisco Ruiz Massieu, the second-ranking official in the PRI, was murdered in September.

In between the killings, Colosio's replacement Ernesto Zedillo was elected president in August. The election occured against a backdrop of widespread civil unrest, in Chiapas and elsewhere.

This instability was bad enough. But just imagine how the year could have looked if Congress had voted down NAFTA late in 1993.

If NAFTA had failed, the PRI would have had far less reason to invite thousands of international observers to monitor the elections. Instead, it would have faced temptation for a harsh military clamp-down on dissident groups.

A failure of NAFTA would have delivered a body blow to the Mexican economy. Capital and investment could readily have fled the country. The result could have been financial chaos, economic turmoil, a new wave of emigrants heading for the United States -- perhaps even civil war.

Of course, the Mexican economy has its troubles. The peso has fallen by more than a third on foreign exchange markets in the last couple of weeks, which clearly discourages foreign investment in Mexico. After all, who wants to invest in pesos if the value of the peso is falling?

But currency markets are prone to severe swings: think of how even the U.S. dollar, the world's most central currency, has leaped about during the 1980s and early 1990s. Before NAFTA, currency devaluations and lack of foreign investment were chronic problems for Mexico and across Latin America. With NAFTA, the peso is at least struggling with the support of a basically healthy Mexican economy. If the U.S. had turned down NAFTA, Latin America would have taken it as a slap in the face. Instead of the friendly Summit of the Americas that happened in Miami in mid-December, which focused on expanding NAFTA to Chile and elsewhere, it would have become difficult for the U.S. to get regional cooperation on dealing with the drug trade, or environmental threats, or Haiti, or anything else.

If NAFTA had failed, the political climate might have been altered so that the push for global free trade under the GATT failed, as well.

Of course, one can never prove that terrible things would have happened without NAFTA. But at a minimum, NAFTA was a cheap insurance policy for the United States against a set of rather unpleasant risks.

Another lesson after one year of NAFTA is that the doomsayers were wrong. I've spent some time these last few weeks re-reading some of the anti-NAFTA tirades published during 1993. They seem even more ignorant and shrill now than when they were published.

Remember how Ross Perot and others talked of the giant sucking sound of jobs crossing the border? Remember how hundreds of thousands of jobs would be lost, leading (quite literally) to the de-industrialization of the United States?

The predictions of job losses never made sense. A job is not a physical resource like a ton of coal, to be lifted up in one place and deposited someplace else. Instead, the growth of jobs is limited by when the Federal Reserve decides to slow the economy, out of a fear that inflation is brewing, as it did throughout 1994. Even with the Fed stepping on the economic brakes by raising interest rates, the U.S. economy added 4 million jobs in 1994.

NAFTA critics claimed the agreement would create secret autocratic tribunals which would sidestep democracy and revoke U.S. environmental, health and safety laws. After a year, such claims have been exposed as sheer hysteria.

NAFTA critics predicted that Mexico would export to the U.S., but wouldn't buy. However, U.S. exports to and imports from Mexico have both risen by about 20 percent. Doomsayers foretold that NAFTA would destroy the U.S. auto industry, but U.S. car exports to Mexico quintupled in 1994.

After one year, the fiercest NAFTA critics should be embarrassed at how wrong they were. This means you, Ross Perot, Jesse Jackson, Ralph Nader, Pat Buchanan. Along with many others, they said that the sky was about to fall. And they felt quite free to accuse those who disagreed with them of being bought and paid for by special interests.

But the U.S. has been signing free trade agreements since the General Agreement on Tariffs and Trade, or GATT, was first enacted back in 1947. Movement toward free trade hasn't brought down the sky for 50 years, and the passage of NAFTA didn't make it happen in 1994, either.

A first birthday is too soon to judge any infant. NAFTA will surely impose some adjustment costs and hardship, for example on some small Southern towns whose economic base is dependent on low-wage, low-tech manufacturing. But like all trade agreements and new technologies, NAFTA will also open up new opportunities. Its overall impact, both here and abroad, seems likely to be definitely, if modestly, positive.

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