View from Manhattan: Bush trades on Nafta as saviour

AMID the sea of swaying placards that greeted George Bush's speech to the Republican national convention in Houston this week was a curiously unjingoistic, hand- written sign - one not advocating 'Peace through strength' or urging the US President to 'Give 'em hell, George,' but simply suggesting that the electorate 'Expand trade. Vote Bush.'

Few topics provoke a greater collective yawn than international trade; Americans instinctively reach for the remote control when they hear the initials Gatt, G7 or EC. Less inspiring still is a treaty, like the North American Free Trade Agreement debated last week, that involves dull neighbours like Canada and Mexico. (An American magazine that offers a prize for the world's most boring headline turned up a column in the New York Times on free trade a few years ago titled 'Worthwhile Canadian Initiative.')

Eyes are already glazing over at the new acronym Nafta. But it now seems clear that a treaty creating a tariff-free zone from the Yukon to Yucatan - or 'from Manitoba to Mexico', as Mr Bush put it on Thursday evening - will have implications beyond loading docks, cargo hangars and border towns, eventually changing the way Americans work, shop and live. This is because creating a new trading bloc - rather than cutting taxes, deregulating industry or further monetary easing - is emerging as the centrepiece of Mr Bush's economic strategy, the President's aides say.

Nafta is shaping up as the panacea for America's lack of international competitiveness, providing US industry with the 'silver bullet' - cheap labour and a huge captive consumer market - that it needs to bring its costs back into line with its rivals. Strict 'rules of origin' will exclude foreign competitors from the bloc, while special deals for individual industries will prop up prices at the expense of consumers.

In the long run, this sort of managed trade within North America will evolve into more multilateral free trade, economists say. But in the meantime, Nafta looks much less like the European Community - or even the looser European Economic Area - than it does a back-door way to drive down American wages and undermine the country's social and environmental standards.

Many of the 'impediments to free trade' the treaty will overcome in its early years turn out to be hard-won and legitimate regulations governing things like the spraying of produce with cancer-causing pesticides, the 40-hour working week and the right to sue firms that knowingly market defective products.

Misunderstanding

Critics of the treaty Mr Bush has negotiated argue that using free-trade agreements to cut costs this way betrays a profound misunderstanding of America's real competitive disadvantages - just as Vice-President Dan Quayle did when he suggested this week that US business can be made more efficient by arbitrarily freezing all workplace, environmental and market regulations.

Nafta, they point out, does little to address bigger American challenges like out- dated infrastructure, disincentives to savings and investment and declining educational standards. If anything, the subsidy provided by cheap Mexican labour will in the short run just delay the country's ultimate reckoning with these problems.

With the Maastricht treaty teetering, it would seem an odd time for nostalgia for the merits of the European system. North Americans were happy enough to ignore the Brussels model when their trade agreement covered two similar economies, but now that they are trying to integrate a far less-developed neighbour, Mr Bush's critics see the EC experience as relevant.

'Although we aren't engaged in forming a common political union, the goal of marrying diverse economies - as the Europeans have discovered - requires agreement on a broad range of issues that have not typically been at the centre of traditional trade negotiations,' says Richard Gephardt, the Democratic leader of the House of Representatives and a politician the Republicans like to label a protectionist.

However, the objections Mr Gephardt raises have little to do with sheltering domestic industries and workers from the rigours of international competition. What he - and a healthy number of Wall Street economists - worry about is the absence of any serious plan to harmonise standards, regulations and laws among the partners, measures necessary not only for the sake of trade efficiency, but to prevent a rush of investment to the worst-regulated areas and to guarantee the new prosperity is shared by the whole continent.

Income gap

Nafta, is short, lacks a 'social dimension' - an accepted precondition for admitting Spain, Portugal and Greece, with living standards a quarter of the EC average, to the Community, but absent in the North American deal, where the income gap with Mexico is closer to 10-to-one. It has taken the EC 34 years, and more than dollars 100bn in transition and regional development transfers, to achieve the economic integration it enjoys today, Mr Gephardt notes.

There is a 'surprising degree of unanimity' among economists on Nafta's potential for job creation, as Carla Hills, the US trade representative, points out. Removing tariffs among the three countries will bring new jobs and new wealth to Mexico's consumers, creating new demand for American and Canadian products.

But without an active transition plan - which serves to harmonise Mexican standards upwards, rather than the reverse - North America faces serious dislocation and social upheaval, says the author Walter Russell Mead, in an essay in the current issue of Harper's magazine. President Bush's scheme may 'jump-start' the economy, but at a huge cost - born principally by lower- paid Americans who are unlikely to participate in November's elections.

If Canada has found its more comprehensive social system and national health plan undermined by the strains of free trade with the United States in the past four years, then one can begin to imagine the stresses Mexican competition will place on America's already fragile public services.

Some of the worst portents of Nafta are already evident along the US-Mexico border, where 'transplant' factories have spawned shanty towns without sewage systems or running water. These colonias, Mr Gephardt notes, are flourishing on both sides of the Rio Grande.

(Photograph omitted)