Red-hot and Mexican

THIS WEEKEND is critical to the successful completion of a North American regional trading house. United States and Mexican officials are continuing talks on a historic free trade agreement that both nations hope to finalise before the Republican Convention in mid-August. This is the plan of the Bush administration. If all goes well, negotiators could finalise a deal in two weeks.

Backed into a corner by his big slippage in political opinion polls, President Bush is banking on a successful Nafta (North American Free Trade Agreement) to give him a boost as he heads into his own party convention and the confrontation with Bill Clinton.

Indeed, Mr Bush's new world order seems to be centred on building regional houses first. How sound is this new regional trading foundation? Despite enormous progress over the last month, one can only conclude that it is still shaky. There are deep concerns on both sides of the border over the difficulties of integrating a huge Third World country into its big, First World neighbours, something that has never been done before. Canada, also a player in the talks, cites the obstacles that still remain within its own free trade agreement with the US as reason to move cautiously.

The treaty under negotiation is on a fast track. Mexico, only one-twentieth the economic size of the US, would be melded into its North American neighbours faster than Spain or Greece in the European Community, and with only a fraction of the regional development support they received. The gaps among the three economies are enormous. Forty million Mexicans live in extreme poverty, and even among those considered to have good factory jobs dollars 5 a day is an acceptable wage. Mexico's per capita annual income is dollars 3,458, compared to dollars 22,690 in the US and dollars 21,245 in Canada.

As these figures suggest, there are deep concerns in both the US and Canada over the prospect of more lost jobs as cheap labour in Mexico becomes a magnet for foreign companies.

The political stakes over this issue alone are extremely high. Tomorrow Richard Gephardt, the US House Majority Leader, will launch an attack on the Nafta negotiations in the hope of extracting more labour and environmental concessions from the Bush administration.

The President's closest advisers are themselves divided over the impact of a completed treaty on their target political constituents, most notably US blue-collar workers. Some White House advisers fear a completed Nafta will drive away voter support in the big Mid-western 'rust belt' states, where workers contend that an agreement will mean the loss of both factories and jobs to low-wage Mexico.

Preliminary analysis suggests that they are right. Several new studies predict job gains to Mexico of from 500,000 to 800,000 by 1995.

Despite the deep concerns - labour, agricultural, environmental and energy - of integrating regions that are worlds apart, there is no question that Mexico is 'red hot'. This is the view of Richard Feinberg, president of the Inter-American Dialogue, who points to the near-miraculous gains achieved by the President of Mexico, Carlos Salinas de Gortari.

At 43, having solidified his own political support, President Salinas is preaching the gospel of free trade as Mexico's deliverance from poverty, isolation and chronic under-investment. 'Privatisation' is one of his rallying cries after more than 50 years of economic nationalism.

The huge leaps in foreign investment over the last two years and on Mexico's stock exchange, one of the fastest-growing emerging markets, are testament to his success. The dramatic economic gains in Mexico (and in Chile and Argentina) after the debt-induced depression of the 1980s are the reason that many analysts have anointed Latin America as the growth region of the 1990s.

This is certainly the draw for US companies, particularly in the finance and retail sectors. Even US negotiators have been surprised by the big early concessions Mexico has made in agreeing to open its finance industry to US and Canadian companies over the next eight years.

After months of secret talks, Mexico agreed to allow gradual foreign involvement in its banking, insurance and securities industries that would culminate in the virtual elimination of barriers by 2000. At present, with the exception of Citibank, which gained private entry in 1929, foreign banks are barred from doing business in Mexico and foreign insurance and equities firms are limited to minority stakes in joint ventures. Mexico's 85 million consumers are a big draw.

As with most big and complex trade deals, the devil lies in the details, not only in the financial sector agreement but in each of the 22 issues that are under negotiation.

Car assembly is one good example. To placate its 'rust belt' constituency, the US administration has cut an early deal on the assembly of cars in Mexico by European and Japanese companies. To qualify for duty-free treatment under the new agreement, these cars would have to include a higher percentage of North American-made parts than under the 1988 FTA with Canada.

Pollution is another big concern. Still, despite formidable obstacles that could lead to a period of 'dead and wounded', to quote one manufacturer, there can be no question that the Mexico talks are the next step in the building of a new vast North America that would create a market bigger in volume that the European Community and Efta combined.