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Despite glitches, NAFTA serves up world of opportunities
Development Business / November 16, 1996

By Larry Luxner

WASHINGTON -- In the last year, dozens of speeches have been made about the wisdom of extending the North American Free Trade Agreement beyond its three founding partners -- the United States, Canada and Mexico -- to include Chile and, by the year 2005, the entire Western Hemisphere from Alaska to Tierra del Fuego.

No one knows whether this so-called Free Trade Area of the Americas will come to pass. What is known, however, is that the current NAFTA has helped the U.S. economy, while giving an enormous boost to the economies of both Canada and Mexico.

"NAFTA is the most comprehensive regional trade agreement ever negotiated by the United States, and the first reciprocal free trade agreement between a developing and two industrial countries of the Western Hemisphere, thus setting an important precedent for trade and economic cooperation," says a report by the United Nations' Economic Commis-sion for Latin America and the Caribbean (ECLAC).

Since 1989, when the Canada-U.S. Free Trade Agreement (the forerunner of NAFTA) went into effect, Canadian exports to the United States have doubled to $73 billion. In 1995, total two-way merchandise trade hit $262 billion -- a 53% jump over 1989, when bilateral trade came to $171 billion. In addition, U.S. companies and their subsidiaries now employ 900,000 Canadians, while subsidiaries of Canadian firms employ around 700,000 Americans.

Likewise, NAFTA has boosted U.S.-Mexican trade volume. Trade between the two countries in 1995 came to $109 billion, up dramatically from pre-NAFTA levels. And the United States remains the biggest single foreign investor in its neighbor to the south. Of the $618.4 million in foreign direct investment reported in January 1996, the United States accounted for 42% of that total, followed by Germany (34%), Britain (7%), Japan (3%) and Canada (2%).

In addition, NAFTA has spurred the development of Mexico's maquiladora industry, with 2,000 border factories employing an estimated 620,000 people in the manu-facture of TV sets, VCRs, auto parts, garments, electrical appliances and other products, largely for the U.S. market.

In the United States, NAFTA's benefits are reflected in recent trade statistics from California, where exports of goods and services jumped by 17.2% during the first quarter of 1996. Julie Meier Wreight, California's secretary of trade and commerce, attributed the boom to stronger-than-expected sales of electronic components to Canada and Mexico.

"Electronics and electrical equipment represented more than half the export growth to Canada in the first quarter, growing by 91.1%," she said, adding that overall exports to Canada increased by 36.6%, while exports to Mexico rose by 20.4%, the largest gain in two years. Wright, whose state leads the U.S. in both population and overall exports, said purchases of California technology reflect the current retooling of the Mexican economy.

That's not to say NAFTA hasn't been without its many problems. Between the United States and Canada, for instance, at least half a dozen issues are currently in dispute. These range from access to diminishing salmon stocks in the Pacific Northwest to Canadian quotas on the importation of milk, poultry and eggs. Canada charges the U.S. steel industry of selling its products below cost in Canada, while Washington accuses Ottawa of imposing unfair Canadian taxes on U.S. books and magazines on the grounds of "protecting Canada's national identity."

With Mexico, disputes over tomato exports, trucking and immigration issues have led to sporadic violence along the border. Labor issues have also soured the U.S.-Mexican relationship. Last year, a decision by Sprint Corp. to close La Conexión Familiar -- a San Francisco long-distance subsidiary -- less than a week before its mostly Mexican-American work force was set to vote on union representation prompted an official complaint, and an appeal from a Mexican telephone workers' union. The case is still pending.

Probably the most contentious issue threatening NAFTA at the moment is Washington's recent tightening of the trade embargo against Cuba. Both Canada and Mexico object to the so-called Helms-Burton law, which threatens action against firms that have invest-ments in Cuban properties confiscated from U.S. citizens following Cuba's 1959 revolu-tion. Two huge Mexican companies -- telecom giant Grupo Domos and cement conglomer-ate Cemex -- have substantial investments on the Communist island, and both could be severely penalized under U.S. laws, while the Mexican government alleges that any such sanctions would violate NAFTA rules guaranteeing free transit in member countries for businessmen and investors.

Nevertheless, NAFTA is highly respected in all three countries, and according to the ECLAC study, was instrumental in preserving trade and investment liberalization following Mexico's peso collapse in late 1994. "Observers hold that Mexico's response to the crisis would not have been the same had NAFTA not been in existence," said the study. "Unlike what had been the norm on previous occasions when Mexico faced a balance-of-payments crisis, the Mexican authorities did not resort to trade restrictions against its NAFTA partners," it said, adding that the Zedillo government accelerated rather than reversed the pace of financial liberalization following the peso collapse.

Despite the potholes on the road to integration, most U.S. corporations continue to overlook the vast opportunities NAFTA offers to improve their global supply-chain costs and overall operations, according to a new 256-page report unrelated to the ECLAC study.

The book, Supply Chain Directions for a New North America, was written by David G. Waller, Robert D'Avanzo and Douglas M. Lambert of Andersen Consulting's Strategic Services practice, in conjunction with the University of North Florida. In essence, it says, NAFTA allows multinational companies to reap significant benefits in three major supply-chain areas: sourcing, manufacturing and logistics. Companies can lower their raw material and component costs by leveraging new sourcing opportunities made possible by NAFTA's duty reductions.

"Many companies think of NAFTA as just a bland mix of lower tariffs and continuing border-crossing headaches," said Waller. "But the reality is that NAFTA changes the very basis of global trade. North America is now a genuine 340-million-member trading bloc. Company economics can be transformed because NAFTA can change how they buy, make, move and sell products in the new North America."

Kal Wagenheim, publisher of Mexico Business Monthly in Maplewood, N.J., says that with dramatic tariff cuts and relaxed foreign investment rules, companies can rationalize production facilities worldwide. He points out that "Kodak, which has long manufactured products in both countries, has shifted some labor-intensive operations to Mexico while transferring some high-tech process operations back to the United States -- giving it a definite cost advantage in film production over Fuji." Similarly, Toshiba has relocated a parts factory from Asia to Mexico to supply components to its TV assembly plant in Nashville, thus saving on tariffs charged for parts made outside North America.

Despite these success stories, "the full impact of NAFTA still lies ahead," says Waller. "While industry leaders, including Braun, Kodak, Hewlett-Packard and Mattel, have gleaned significant advantage by reformulating their sourcing, manufacturing and logistical strategies, major players in all industries must now follow suit or lose competitive ground."

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