Free trade in the balance

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GOVERNMENT ministers are pouring into Washington from around the world to take the pulse of the Clinton administration's trade policy. Fear of a sea change in US thinking, heralding a new era of destructive global protectionism, is clearly keenly felt in Europe, among developed Asian countries and in the Third World. Last week's arrival was Jaime Serra Puche, Mexico's respected trade minister, who is anxious to preserve the historic North American Free Trade Agreement (Nafta).

On this, there is good and bad news to report. Nafta is under fierce attack in the US from labour and environmental groups that fear that linking the US and Canada to a low- wage developing nation will destabilise the American economy.

Critics, including Richard Gephardt, the US House majority leader, want to amend and delete key provisions of the agreement, which was signed late last year by former President George Bush, Mexican President Carlos Salinas de Gortari and Brian Mulroney, Canada's Prime Minister. The US Congress is scheduled to ratify the accord later this year. In Canada, where opposition is also fierce, the government must win approval before the national elections in November to save the agreement.

Mr Serra's mission was to persuade the Clinton administration to preserve Nafta intact and to keep it on a fast legislative track. During the election campaign, Mr Clinton was largely supportive, but he promised to reopen the labour and environmental provisions in response to critics who feared a massive haemorrhaging of US jobs and a new outbreak of regional pollution. Mexico, which stands to gain the most, is therefore intent on damage control.

Mexican officials had a good case to make in their first meetings with the Clinton team. Numerous new studies seem to agree that Nafta will be highly beneficial to all parties, despite some short-term dislocations in the labour and manufacturing sectors. However, the atmosphere was marred even before Mr Serra arrived in Washington by reports that the Mexican government was involved in a new investment fund whose primary purpose was to buy small US companies. These would then be moved to Mexico to take advantage of its dramatically lower wages. The news ignited new US opposition and forced Mickey Kantor, the US Trade Representative, to place the issue at the top of the agenda.

The fund's prospectus was distributed widely by Mr Gephardt, who denounced it in a letter to President Salinas. 'Funds like this should not be allowed to operate . . . but even more objectionable is the official participation of entities controlled by your government in stealing American jobs,' Mr Gephardt wrote.

Reports of the fund, known as the AmeriMex Maquiladora Fund LP, provided new ammunition for critics of Nafta. The prospectus said it would raise dollars 50m ( pounds 35m) from investors, which included Mexico's largest industrial development bank, to buy nine to 13 US manufacturing companies and move them to Mexico. According to the prospectus, US companies that paid their American workers from dollars 7 to dollars 10 an hour could make the same products with Mexican workers, who earned from dollars 1.15 to dollars 1.50 an hour. There would thus be a saving of dollars 10,000 to dollars 17,000 a year per worker.

US labour officials were predictably outraged. 'The fund is wonderfully revealing of the attitudes behind business enthusiasm for the Nafta,' said Tom Donohue of the AFL-CIO, the largest US labour organisation.

Mr Serra's first act was a face-saving pull-back. He announced that no entity of the Mexican government would have anything to do with the fund. His talks with Mr Kantor were cordial and generally positive. But the bad publicity obscured much of the good news about Nafta. It also provided critics with a new political weapon to use against supporters who want to limit the effect of supplementary agreements on labour, the environment and safeguards.

According to a new study by Gary Hufbauer and Jeffrey Schott, two Washington trade experts, the US will actually gain jobs as a result of Nafta, which will have far-reaching beneficial effects on the economies of North America.

They estimate that Nafta will create 316,000 gross new jobs over five years and result in a gross loss of 145,000 US jobs. For workers who would be displaced, they recommend that the US set aside dollars 335m of existing tariff revenues for worker adjustment prior to qualifying for national retraining programmes promised by the Clinton administration.

As a result of soaring US exports to Mexico, which rose to dollars 43bn in 1992 from dollars 28bn in 1990, it is estimated that as many as 200,000 new US jobs have already been created. The 'growth stimulus' to North American economies from a completed agreement would be in the range of dollars 15bn annually.

To allay the fears of environmental critics, the authors propose a dollars 3bn Nafta fund to finance environmental clean-ups on the US-Mexico border and other work by the US Environmental Protection Agency. This would be paid for by the treaty signatories.

For a free trade agreement that promises so much, it seems a small price to pay.