Nafta dream turns sour :view from new york

Treaty's future depends on fate of $40bn bail-out
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The Independent Online
Ross Perot, the Texan billionaire, was right. Just over a year after its inception, the North American Free Trade Agreement is producing a "giant sucking sound". However, what we hearis not the rush of American jobs going south of the Rio Grande, as he predicted, but a sharp gasp of horror at the White House.

Faced with opposition from the unions, assorted isolationist voices and the Texan himself, President Bill Clinton put his all during the latter half of 1993 into selling Nafta to Congress. When approval finally came in December, he presented it as the cornerstone of his foreign economic policy.

The President's pitch was straightforward and alluring. With its promise of open trade between the US, Canada and Mexico, Nafta would ensure new markets for US companies in Mexico and generate thousands of new American jobs. The Mexican economy would continue its remarkable expansion and, moreover, the flow of illegal aliens into the southern US would be stanched.

Now look. The devaluation of the peso on 20 December has turned those positives into negatives. Suddenly Mexico can no longer afford US goods. Rather, it once again looks better suited as a low-wage base for a reverse export boom into the US. Joining theoutflow may be a new surge of emigrants, fleeing economic, and soon perhaps social and political, turmoil.

Add the tribulations of the Canadian dollar to the picture - now hovering close to a record low against the US dollar - and the first-year report card on Nafta could hardly be more dismal. At least Canada can also boast booming exports to the US - soaring 65 per cent since 1991.

Even before the academic arguments about the wisdom of Nafta in the first place, an immediate piece of practical business has to be solved. This is the request of the Clinton administration to Congress that a bail-out package of $40bn (£25bn) in loan guarantees be granted to Mexico to help it repay its outstanding short-term debt of about $25bn.

Already snagged in partisan quarrelling on Capitol Hill, the proposal seems at least to be in deep trouble. On Friday, Newt Gingrich, the straight-dealing House speaker, admitted that hopes he had earlier of easing the bail-out package through Congress appeared to be fading. "It is very unpopular in the country and it has not been explained very well. I think it is more difficult than I though it was," he said.

Nafta is not about to be unpicked. However, in asking Congress for the bail-out package, President Clinton finds himself plunged back into the Nafta debate that he thought he had won. All the old antagonists are back in the field, delighted suddenly to be getting a second shot at the treaty they hate. Some reject the bail-out altogether, characterising it as a rescue plan not so much for Mexico but for wealthy investors there and on Wall Street.

More relevant is the effort being made in many quarters to attach conditions to the package and thus to Mexico's membership of Nafta. These range from demands for undertakings from the Mexican government to improve the conditions of its workers and increase their wages, to a requirement that it lay down oil revenues as collateral in the event that it draws on American funds. Others are asking for action from Mexico itself to block the human exodus north.

If the package does win approval - and it is looking increasingly unlikely - some conditions will certainly be included, such as the oil provisions and certainly some pledge from Mexico to render its monetary system more disciplined and transparent. Congress can only demand so much, however, before it risks triggering resentment within Mexico over violations of sovereignty - they might consult Britain's Euro-sceptics on that subject.

Even proponents of Nafta concede that the treaty contributed to the devaluation disaster, principally by reinforcing a false sense of confidence, on Wall Street especially, that all would be all right with the Mexican economy in spite of all the currencydanger signals. There were plenty of other factions - the unattractive interest rates in the US, the enthusiasm among mutual fund investors in emerging markets everywhere in the world since 1990, and the generally-held impression of economic competence in Mexico City. But Nafta gave reassuring legitimacy to the hunch that Mexico was safe.

"It helped raise expectations and discouraged people from focusing on the medium and long-term contradictions in Mexico's economy," suggests David Hale of Chicago-based Kemper Financial Services. "Wall Street investors, who are usually accused of being too short term in their outlook, on Mexico were ironically too long-term". And without Nafta, the devaluation of the peso might have been forced upon the Mexicans much earlier, according to Mr Hale.

Geoff Faux, director of the Washington-based Economic Policy Institute, which vociferously opposed Nafta, is less charitable. He would like to see new conditions appended to the treaty, even without any bailout package. If the US offers the $40bn liferaft, it will be getting itself still deeper into the quagmire, he argues.

"Because of Nafta we now have the notion that the US has to commit itself to saving the Mexican financial system, which is loony, because we have no control over that system. There is an analogy in this with how we got sucked into Vietnam, where at everystage we were told there was light at the end of the tunnel," he added.

What is down the line for Mexico and for the treaty itself will, in part, be determined by the fate of the bail-out package. Mr Hale believes that if the $40bn is approved then the treaty will quite quickly be back on track. "We're going to lose maybe a year or maybe two years," he suggests. If the rescue package fails, then he fears Mexico's banking system will collapse completely.

Whatever happens in Washington this week, Nafta is no longer the gleaming jewel President Clinton thought it was. And to think that it was only last month - just days before the Mexican crash - that the President was in Miami with all his hemispheric counterparts touting an expanded Nafta for all the Americas. It may still happen, but not at the pace he was talking about.