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O.C. Poised for Payroll Growth as NAFTA Rules Move Forward

High export rates to Mexico should continue. Accord may ultimately bring real democracy to that nation.

January 11, 1998|DENNIS AIGNER | Dennis J. Aigner is professor of management and economics at the Graduate School of Management, UC Irvine, and a faculty associate at the Harvard Institute for International Development

Nov. 2 was the Day of the Dead in Mexico, a celebration of life and its tragicomic interrelationship with death. There's a special bread that's baked for the occasion, pan de muertos, in the shape of a skull and bones, a special bright yellow flower laid on graves, cempasuchitl, and short, usually funny, poems written and recited, called calaveras.

Nowhere among the multitude of graves spread across this big country was there even one this year marked "NAFTA," so I am told, though it can hardly be said that the Mexican populace is happy in the aftermath of the country's worst economic crisis since 1982. In fact, in a recent poll conducted in Mexico City, 79% of the respondents said Mexico is on the wrong economic track. While not specifically targeted in the questioning, no doubt, the North American Free Trade Agreement played a part in that rather overwhelming negative view.

NAFTA doesn't do too well on this side of the border either. In a Times poll conducted last year, people were split on the question of whether NAFTA has been good or bad for the United States. Were I to have been asked at the time, I would have voted with those who opted for "mixed," for the following reasons.

First, the agreement has been in effect only three years. Its implementation is phased over 15 years. Second, other events have confounded the picture, in particular, the devaluation of the Mexican peso in December 1994, the severe recession that followed and continuing issues with Mexico's transition to real democracy.

U.S. exports to Mexico took a nose dive in 1995 as a result, but rebounded in 1996 and are on the same growth now as they were pre-devaluation. U.S. imports from Mexico currently are running about $10 billion ahead of exports, about the same trade gap that existed in 1995 and 1996. Textile/apparel imports, in particular, are surging at unprecedented rates of increase. Mexico is fast replacing Asia as America's tailor.

Interestingly and perhaps ironically, the apparel industry in Orange County also grew substantially over the past five years. This parallel development is supported by immigrant labor (not necessarily all from Mexico) earning the U.S. minimum wage and exists despite the lure of lower labor costs in Mexico.

It's hard to forget Ross Perot's powerful metaphor of U.S. job losses due to NAFTA, the "giant sucking sound." Claims of U.S. job losses due to NAFTA range as high as 400,000 (Teamster's Union), whereas job gains from increased U.S. exports to Mexico and Canada are estimated at slightly more than 300,000 (President's Report). The truth is that both are probably overstatements and that the overall net U.S. employment effect of NAFTA has been slightly positive.

In Orange County, employment levels in those industrial sectors mentioned with regard to export growth into Mexico have actually declined. For example, from 1992 to 1996, employment declined 18.9% in aircraft parts. In computing and office equipment, the decline was somewhat larger, at 23%. But average payrolls were growing faster, at 28.1% and 42.4%, respectively, signaling an overall net improvement in these sectors.

Even during 1993, when the NAFTA debate was at its apex, the most astute observers were commenting that, rather than being a radical departure, NAFTA was most significantly a formalization and extension of tariff and trade liberalization policies toward the U.S. that had begun earlier.

High rates of export growth to Mexico have been the norm for Orange County businesses over the past few years too, with annual growth rates averaging 25%. From UCI's 1997 Orange County Executive Survey, 26.8% of Orange County businesses involved in international sales and/or operations were doing business in Mexico, with 8.6% more planning to enter the Mexican market soon. In 1996, Mexico surpassed Canada to become the county's second most important export destination.

Probably the most accurate overall conclusion about the impact of NAFTA to date is that it has helped Mexico and Canada without really hurting the U.S. In addition, NAFTA is not just about economics, particularly where Mexico is concerned. Mexico has a long way to go politically. It is hoped that democracy and a more export-oriented economy will begin to supplant corruption as the glue that holds Mexico together. The end result should be the strengthening and expansion of the middle class. But that is likely to take a long time, and the transition will undoubtedly have some rough spots along the way.

So, patience is indeed going to be a virtue where Mexico and NAFTA are concerned. Let's not lay cempasuchitl on the grave of NAFTA quite yet.

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