NAFTA's Impact On Border Region

Pact offers hope as post-cold-war defense spending falls

THE United States-Mexican border is about to be affected by a sharp economic jolt with or without the North American Free Trade Agreement (NAFTA). In the border states, US federal power since World War II is most visible in US military spending, principally in aerospace, military bases, and shipyards. In the 1980s more than 25 percent of domestic contractor and salary budgets of the Department of Defense (DOD) were centered in the four states bordering Mexico. With the end of the cold war and the corresponding closure of military bases and reduction in procurement from military contractors, the US-Mexican border states will be affected sharply.

Five decades of military spending in the US border states have covered over the two principal weaknesses of the US-Mexican border economy. The first is an underfunded public infrastructure, especially on the Mexican side, in areas such as public health, housing, transportation, water supplies, sewage treatment, environmental controls, and education. The second, which is partly responsible for the underfunded infrastructure, is the lack of viable tax policies for the border region.

The inadequate infrastructure can easily be seen by a day's trip to any border town - and it's not necessary to cross the border to get the point. The inadequacies of the tax system, however, are invisible to the field observer. On the US side, no border tax is earmarked for infrastructure at either the state or federal level. Those parties using the border for trade and investment do not pay for the border services and resources they consume.

Consider a maquiladora assembly plant in Cuidad Juarez. This plant, consumes infrastructure and services on the US side in El Paso, Texas. The plant assembles a television set (more likely in Tijuana, Mexico than in El Paso) made principally with components manufactured in the Far East. The assembled product crosses the border, paying duty only on the value added by assembly labor. There is no duty on the value added by the infrastructure of the border communities. Worse, the real market value of the assembled product is taxed in the state where the wholesale profits are booked, typically not one of the four US border states. In this way the Industrial Belt, from Minnesota to Connecticut, receives value-added from border infrastructure without paying tax contributions toward the maintenance or upgrading of that infrastructure. This structural problem was one that the border states could overlook when their economies were bolstered by defense spending.

The tax problem on Mexico's side of the border is entirely different. The Mexican government runs by a strictly centralistic fiscal, administrative, and political system. As a result, all taxes flow to Mexico City and are redistributed at the state and municipal level. At the local level there are a few pennies of property taxes but no state or municipal income taxes. As a result, Mexican states are fiscal agents of federal budgets and priorities.

In 1993, some 2,000 maquiladoras employ roughly 500,000 assembly workers. They would be a great boon to the border economy if they paid taxes based on some meaningful measure of the productivity of the plant, such as true profitability, and if their tax contributions were to remain in the border region and not disappear in the black fiscal hole that is Mexico City.

If NAFTA is implemented, the maquiladoras will argue that their tax-exempt status should be grandfathered. It would be in the best interest of the border region to have maquiladoras pay real taxes on profits. (They currently only pay a tiny housing tax calculated as a percentage of the wage bill.) In this way the maquiladoras would cease being economic placebos for the border region.

NAFTA, however, is silent on such seemingly secondary matters of corporate and regional tax policy. NAFTA is also silent about the basic economics of border infrastructure: Every dollar not spent for social and economic infrastructure on the Mexican side results in $2 of cost on the US side. Should NAFTA, then, be rejected?

IT is becoming clear that it is in the highest interest of the US to reconceive US-Mexican relations in ways that address central issues of post-cold-war America. These issues concern, first, how to upgrade the standards of living of the US-Mexican border; second, how to replace to-be-lost defense employment with meaningful civilian jobs; third, how to spur Mexican economic development in a way that lowers capital borrowing rates, increases employment, and ameliorates the poverty of the US-Mexican border and of rural Mexico everywhere.

It also is in the US interest to find out how to implant environmental standards that would be enforceable in Mexico, with or without EPA enforcement authority. The controversy surrounding the proposed Carbon II coal-fired electric power plant in the border region in the State of Coahuila near the Big Bend National Park, illustrates the gap in standards and enforcement mechanisms between the two countries. Unfortunately the unexpected deferral of this project will mean that northern Mexico will not have access to important sources of private funding for electric power generation. Only with the pressure of NAFTA have the two governments put border infrastructure on their policy agenda: the concept of a Border Development Bank is long overdue.

What about job loss and job creation? On the Mexican side of the border the infrastructure cannot absorb any more plants without endangering the region's socioeconomic fabric. Ross Perot's claim that millions of US jobs will come to Mexico with the signing of NAFTA might be true if the infrastructure were there to support those jobs: But it's not there.

Maquiladoras consume infrastructure - the real sucking sound of which Mr. Perot complains - but they do not contribute to infrastructure beyond the green grass of their landscaped industrial parks. The maquiladora concept is flawed in another way: It uses up time and entrepreneurial energy of Mexican engineers and managers in activities on behalf of assembling products in neither the design, marketing, nor profits of which they will participate.

The border, then, is ripe for a new challenge. NAFTA offers a new vision, the first since the time of the US-Mexican War. To reject NAFTA is to continue with the status quo, one in which there is no incentive for Japan to move Far East component manufacturing jobs to the US or Mexico. By contrast, NAFTA's North American content rule will stimulate the core manufacturing sectors in the US, Mexico, and Canada.

NAFTA offers securities and mechanisms that will lead to an upgrading of Mexico's investment rating, greater access to capital markets, and with it, increased employment, purchasing power, and ability to provide social services such as public education and health care.

None of these benefits will happen tomorrow or in five years: NAFTA is a vision of change that will take place over a generation. It deserves the support of regions of the US other than that of the US-Mexican border. Without such support, the social, economic, and environmental problems of biblical proportions that we have experienced on the border will become more severe and more costly to remedy. By comparison, today's price is cheap. The Opinion/Essay Page welcomes manuscripts. Authors of articles will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHELCSPS.COM.

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