HOW NAFTA WILL HELP AMERICA The new trade treaty will keep U.S. exports to Mexico booming and create more good jobs. Want evidence? Here's a look at the consequences for three key industries.
By Louis S. Richman REPORTER ASSOCIATE Ani Hadjian

(FORTUNE Magazine) – THAT OMINOUS NOISE you hear threatening the North American Free Trade Agreement isn't what Ross Perot fears -- the sound of jobs being sucked south of the Rio Grande. It's the sound of foot dragging by the Clinton Administration and Congress in getting the treaty ratified. Prospects that NAFTA will be ready for its planned debut on January 1, 1994, are diminishing. It's even possible the deal could unravel. That would be most unfortunate. Apparently influenced by NAFTA's noisy critics, who foresee U.S. companies stampeding south to take advantage of Mexico's $2-an-hour labor and looser environmental standards, public sentiment is running more than two to one against the treaty, according to a Wall Street Journal poll. But virtually every serious effort by economists to model NAFTA's effects has concluded that freer trade between the U.S., Mexico, and Canada will lift all three economies. For the U.S. that will mean adding roughly $30 billion a year to GDP once the treaty is fully implemented. Those low Mexican wages aren't the bargain they appear to be. Employee turnover in many maquiladora plants -- factories along the U.S.-Mexican border that receive preferential trade treatment -- runs as high as 20% a month. George Baker, a consultant to firms operating maquiladoras, calculates that replacing and retraining these job-hopping locals, combined with high nonwage expenses, can raise the total cost of employment to $10 an hour -- far above that $2 subsistence wage Americans worry about. NAFTA naysayers should also keep in mind that America's economy, which is 20 times larger than its southern neighbor's, is already fairly open to Mexican goods. Tariffs on Mexican exports average just 4%, and many enter almost duty- free. Customs duties on merchandise made in maquiladoras, for example, are charged only on the value added by Mexican workers, typically less than 20% of a product's cost. Says economist Gary Hufbauer of the Institute for International Economics in Washington: ''NAFTA's critics forget that U.S. trade policies will have to change very little to meet the agreement's goals.'' THE MAIN impact of NAFTA will be felt in Mexico. The decision by President Carlos Salinas de Gotari and his predecessors to open their long-protected market to international competition is forcing wrenching change on sheltered Mexican companies. But it also promises big gains. Hufbauer estimates that removal of trade barriers could sustain GNP growth at an average annual rate of 4% to 5%, after inflation, over the next 25 years. Faster growth, in turn, ensures a continued expansion in U.S.-Mexican trade, which since 1988 has nearly doubled to $76 billion a year. A boom in U.S. exports accounts for much of the increase. In 1991 the U.S. ran a merchandise trade surplus with Mexico for the first time in nearly a decade, and that surplus swelled to $5.5 billion last year. NAFTA is crucial for such trade buoyancy. Hufbauer and economist Jeffrey Schott project that if the treaty passes the U.S. will maintain an annual current account surplus with Mexico of about $10 billion throughout the 1990s. ''No other people in the world have a greater propensity to buy American than the Mexicans,'' says economist Sydney Weintraub of the University of Texas. The average Mexican consumes $380 worth of U.S. products a year -- $20 more than the average Korean, whose income is twice as high. The payoff, though many workers won't realize they should thank NAFTA for it, will be more jobs -- and better pay -- for Americans. Though estimates of the employment effects of NAFTA vary widely, almost every study agrees that there will be gains. The Commerce Department's thumb rule is that each extra $1 billion in exports creates over 19,000 net new U.S. jobs, implying an additional increase under NAFTA of some 60,000 jobs by decade's end. Such export-oriented jobs will likely command higher wages than occupations that service or supply only the domestic economy. David Walters, chief economist for the Office of the U.S. Trade Representative, calculates that in 1990 workers who made goods exported to Mexico enjoyed a 12.2% hourly pay premium over the average $10 an hour earned by nonagricultural workers in the private sector. Yes, there will inevitably be job losses in specific industries -- makers of household glass products and brooms, among others -- as some labor-intensive work shifts south. Hufbauer and Schott estimate that freer trade with Mexico will have eliminated about 145,000 jobs between 1990 and 1996. But remember that these losses, painful as they are for the individuals affected, will be more than offset by the new jobs that expanded trade will create. Here's a close look at the opportunities NAFTA offers three key sectors of the U.S. economy:

-- MOTOR VEHICLES AND PARTS. To American autoworkers, NAFTA appears to be a job killer. Employment at the U.S. plants of General Motors, Ford, and Chrysler plunged from 845,000 in the late 1970s to 485,000 by 1991. The Mexicans, meanwhile, have proved that they can build cars Americans want to buy. Between 1986 and 1992, vehicle exports from foreign-owned factories in Mexico surged 400%, making cars and trucks the country's largest export earners after oil. Foreign carmakers and parts suppliers are expected to invest another $4 billion in Mexico between 1990 and 1994. Looks like blood on the streets of Motor City, right? Wrong. That muscular-looking Mexican automotive production has been pumped up by the steroids of a tightly protected market. Mexico's so-called import- balancing rules require foreign-owned vehicle builders to export $2 worth of product for every dollar's worth they bring in. Imported cars face a 20% tariff, and in any event foreign manufacturers cannot bring in goods worth more than 15% of the value of what they produce in Mexico. With a few exceptions -- notably Ford's Hermosillo factory and a new Nissan facility in Aguascalientes -- Mexican car plants that produce mainly for the domestic market are a mess. Most are decades old and extremely inefficient. A requirement that vehicle assemblers source at least 36% of their parts from Mexican suppliers further drives up costs. By gradually lifting such barriers over the coming decade, NAFTA promises carmakers unlimited access to a market yearning for wheels. Today only one Mexican in 16 owns a car, vs. one of every two Americans. A survey by the Economist Intelligence Unit forecasts that annual car and truck sales in Mexico will rise from 706,000 in 1992 to over two million by the end of the decade. James P. Womack, an auto consultant at the Transactions Group in Cambridge, Massachusetts, projects that in roughly 30 years the market could expand to 5.5 million a year. Says he: ''There aren't many growing car markets like Mexico's in the world, let alone ones that share a common border with us and love U.S. products.'' Detroit's Big Three predict that their combined exports could rise from 1,032 cars to over 60,000 in NAFTA's first year, though many obstacles will remain. No longer required to produce in Mexico, carmakers will begin to shift production of some upscale models to more efficient U.S. factories. Ford, for example, would likely end Mexican production of some 10,000 Mercury Cougars and Ford Thunderbirds and manufacture them for export at its plant in Lorain, Ohio. GM is considering moving assembly of its Mexican-built Chevrolet Cavaliers back to Lansing, Michigan. Says Mustafa Mohatarem, GM's senior economist: ''With NAFTA, for the first time in the company's long history with Mexico, we will be able to make sourcing decisions on the basis of what makes commercial sense.'' NAFTA's so-called rules of origin will also be a boon to Allied-Signal, TRW, Dana, and many others in the struggling $100-billion-a-year U.S. auto parts industry. The treaty requires that 62.5% of a vehicle's content must originate within the region to be counted as a North American-made car -- and thus avoid higher tariffs. Womack expects this will gradually encourage some small-car production -- and thus parts-supply business -- to move from East Asia back to North America. But won't U.S. parts makers migrate to Mexico to avoid losing ground to low- wage competitors there? Not likely. Mexico's 600 or so parts suppliers cannot begin to match U.S. efficiency. And since wages account for less than 15% of production costs -- often less than the cost of transporting the goods -- few U.S. auto component companies see a need to move. Says Dennis Gormley, CEO of Federal-Mogul, a parts supplier with plants on both sides of the Rio Grande: ''Companies that can't compete in the U.S. will find no safe haven in Mexico.''

-- TEXTILES AND APPAREL. No American industry has been more torn apart by < foreign competition. By 1991 imports accounted for 60% of U.S. clothing sales, vs. 20% in 1980. In the 1980s America's 29,000 textile and apparel companies, which still employ 9% of all U.S. industrial workers and are the largest employers of women and minorities, saw their total employment fall by 800,000 to about 1.4 million. So, who needs NAFTA? Believe it or not, the textile and apparel industries do. While cheap imports and the quest for productivity gains will continue to shrink employment like an un-Sanforized shirt, NAFTA is likely to put some starch in the healthy firms that remain. A key provision in the treaty penalizes Asian exporters by allowing only yarn spun and woven within North America to qualify for NAFTA's lower tariffs. While this so-called yarn-forward rule is hardly an economics textbook model of free trade, it perfectly complements aggressive restructuring moves these two industries have made since the mid-1980s. U.S. textile producers -- the companies that spin, knit, and weave the fibers -- are the world's most efficient. So, too, are the 400 or so largest apparel makers, which employ a majority of their industry's workers. The producers' major challenge has been to know just which goods to make, in what quantities, and to move them speedily to retailers' shelves. A study in the mid-1980s by Kurt Salmon Associates, a consulting firm in Atlanta, found that poor coordination among textile mill, garment maker, and retailer slowed production and piled up goods in inventory for 66 weeks. That delay cost the industries a combined $25 billion. Over the past five years textile and apparel makers have developed a strategy called ''quick response'' (QR) to squeeze out waste. A new industry standard for electronic data exchanges now allows retailers to send design and order specifications to garment makers, who in turn communicate electronically with fabric suppliers. Result: Quality and sales are up, and inventory costs have been slashed. By reducing the time it takes to produce and ship an order from an average of two weeks to just one day, Pennsylvania's VF Corp., the maker of Lee and Wrangler jeans, regained five percentage points of market share in 1992, much of it from importers, and hired 4,500 new employees. Under NAFTA, Mexico will gradually remove its average 17% tariff on American-made clothing, which should allow U.S. companies to spread the advantages of QR over an enlarged market. Retailers such as Wal-Mart, J.C. Penney, and Dillards are leading the way. Currently, Mexico has only 550 square feet of store space for every 1,000 citizens -- mostly in tiny tiendas. That compares with 19,000 square feet per 1,000 mall-happy Americans. Penney plans to open five Mexican superstores, each with between 150,000 and 180,000 square feet of space, over the next two years. Lower tariffs mean 60% of the goods on their racks, Penney executives say, will bear the MADE IN THE U.S.A. label. How will the marriage of NAFTA and QR affect textile and apparel employment? Surprisingly little. A 1990 study for the U.S. Department of Labor by economists at the University of Maryland estimated that only 6,000 apparel workers' jobs will shift to Mexico. Again, many more jobs will likely migrate there from East Asia -- mostly from Hong Kong, Taiwan, and Singapore, where wage rates are rising. Many Asian producers will be unable to overcome the combined efficiencies of QR and the still high tariffs they would face by continuing to manufacture outside the region. Increased Mexican demand for fabric should also benefit U.S. textile workers. Low Mexican wages offer little lure to this capital-intensive industry. The 25% higher cost of electricity in Mexico more than outweighs the benefit of cheaper labor. Walter Elisha, CEO of Springs Industries in Fort Hill, South Carolina, anticipates that new business from Mexico will expand his 20,000-person work force by some 900. Says he: ''NAFTA is one of those rare times in life when what makes sense for the business is also the right thing to do.''

-- TELECOMMUNICATIONS. The U.S. boasts the world's most competitive producers of telecommunications gear -- everything from network switches to satellite networks to the software that makes it all work. NAFTA will help these companies to widen their lead and support the growth of the high-wage, high- tech jobs that the Clinton Administration says it wants. Since 1990, when the Salinas government opened Mexico's telecommunications market to more foreign suppliers and privatized Telmex, the antiquated state- owned phone company, Mexican telecom investment has been on a tear. U.S. exports jumped 50% in 1991 to some $650 million. Today, Mexico is the industry's second-largest export market after Canada, accounting for 12% of foreign equipment sales. That's just the beginning. Telmex -- 10% of which is owned by Southwestern Bell -- plans to spend some $8 billion through 1995 expanding and upgrading its network. By 2000 it expects to have 35 million phones wired in an all- digital network, up from 12 million today. AT&T will likely supply much of that new equipment. Until recently, Mexican subsidiaries of Ericsson of Sweden and Alcatel of France had a lock on the market, partly because they guaranteed local jobs and partly out of traditional antigringo xenophobia. Since gaining certification as Telmex's third supplier, AT&T has won a $150 million three-year contract to connect 54 Mexican cities and towns with over 8,300 miles of fiber-optic cable and switching equipment, manufactured in Atlanta. AT&T will also supply Telmex with central office switches that sell for $5 million apiece. Passage of NAFTA will phase out Mexico's current 20% tariff on imports of U.S. telecommunications equipment over five years. That should lift AT&T's sales by making it easier to export private branch exchanges built in its Shreveport, Louisiana, plant. Business customers can't wait up to a year as Telmex hacks away at its gigantic order backlog for phone service. Many companies are choosing to bypass the terrestrial network by purchasing private networks that carry voice, data, and images by satellite -- and which will be even less expensive if NAFTA is enacted. Georgia's Scientific-Atlanta is the private network market leader in Mexico. It has already installed systems ranging in cost from $500,000 to $20 million for the Mexican Navy, Mexico's largest retailer, its biggest cement company, and a leading commercial bank. Oscar Espinoza, Scientific-Atlanta's vice president for international marketing, expects annual industry sales in Mexico will rise by double digits once NAFTA is ratified. Similar growth will occur in niche markets for products such as digital pagers and cellular phones. McCaw, Contel, Motorola, and Mtel Corp., a nimble company in Jackson, Mississippi, with 1992 sales of $112 million, have already won licenses from the Mexican government. Noe Kenig, the Argentina-born chairman of Motorola International, expects that as tariffs fall on U.S.-made goods, NAFTA will give him an advantage in the cutthroat competition he faces from Japanese rivals. Says he: ''As we gain market share in Mexico we will also gain experience that will facilitate our expansion into the rest of Latin America.'' NONE of this potential good news means that the Clinton Administration should drop its pledge to negotiate new side agreements with Mexico and Canada * governing worker safety and environmental protection. Clarity will mollify the concerns of the treaty's more reasonable skeptics and help avoid future conflicts with trading partners. But Trade Representative Mickey Kantor should not allow these talks to derail a deal, as he has threatened they might. This landmark treaty liberalizes trade in agriculture, protects intellectual property, and expands trade in services beyond what any other multilateral trade pact has ever achieved. Most important, by locking in reforms that Mexico has already undertaken, NAFTA is America's best assurance that its large neighbor to the south will continue to develop into a stable and prosperous nation. It's past time for U.S. policymakers to end their siesta and shout ole! to NAFTA.

CHART: NOT AVAILABLE CREDIT: SOURCE: U.S. INTERNATIONAL TRADE COMMISSION CAPTION: WHAT THE TREATY WILL DO FOR 12 U.S. INDUSTRIES