Free Trade Between Rich and Poor: EC Lessons for NAFTA

October 10, 1993|By GILBERT A. LEWTHWAITE

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.

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