NAFTA Would Enable US To Innovate and Export

Opponents discount significant trade surplus with Mexico

OPPONENTS of NAFTA are making some unconscionable arguments about what constitutes an export as a way of countering the self-evident fact that US exports to Mexico have soared in recent years. The facts are well known. US merchandise exports to Mexico have risen from about $12 billion in 1986, at the height of the Mexican depression, to more than $40 billion in 1992.

These facts are troubling to those who oppose NAFTA. Because their position is that NAFTA will lead to an explosion of US imports from Mexico, they need some rationale to explain away why exactly the reverse is happening.

One argument being used is the assertion that intermediate products shipped to Mexico, which then adds value and reships the altered products back to the United States, is not an export. Never mind that world trade is increasingly of this nature. The purpose of world production is to increase competitiveness by using those factors of production best offered by each location. These factors include skilled labor for certain operations, cheap labor for others, availability of natural resources, and so on.

The position that an intermediate export is somehow not an export is being made by the AFL-CIO and has been picked up by Rep. Richard Gephardt (D) of Missouri. If the issue of NAFTA approval were not so serious, the assertion would be laughable.

If an intermediate product that is exported is not an export, what is it? These products are produced in the US by US workers who are paid to do this. Shippers, mostly owned by US firms and using US workers, move the goods to Mexico. The income of the workers who make and ship these goods gets spent in the US.

The AFL-CIO and Representative Gephardt have it backwards in an even more fundamental way. When the modified products come back to the US they are shown at full value in US import statistics. If anything, it is the import side that is overstated, because the value that was originally added in the US is included.

For the maquiladora, in general about 50 percent of what comes back is value-added in the US and 50 percent value-added in Mexico. Our export data show the value of the US product at 50 percent, but our import figures are exaggerated by showing the US 50 percent again. If the trade statistics were based solely on value added (which is a more logical way of accounting) this is how we would add up the US gross domestic product precisely to avoid double counting. The growing US trade surplus with Mexico would show up as being even larger than it is.

Another alleged horror that is becoming standard fare of NAFTA opponents is that the US is not selling many consumer goods to Mexico, but rather intermediate and capital goods. This argument implies that there is something wrong with this, that Mexico is being permitted to build up its industrial structure to be able to compete better with the US. Again, any economist must wonder about the judgment of those who make this point.

The US has long ceased to be a major exporter of consumer goods to any location. We are a high-wage, high-income economy precisely because we can produce sophisticated intermediate products such as computer chips, capital goods, and machinery that goes into factories and service industries. Much of our trade with Canada and Europe is in these products. Wouldn't Gephardt rather have Intel on the Inside - that is, have the US able to send out sophisticated material for the assembly of computers, rather than devote ourselves to the intellectually less demanding and lower-paying process of doing the more routine work of assembly?

In one respect, the opponents of NAFTA are correct. Mexico, as it develops economically, should become more competitive and, as it does, wages there will rise as they have during the past five years. Is there anything wrong with this? Do the critics of NAFTA really think that the US can be a competitive country if we refuse to face competition? Do they think that a machine shipped to Mexico today will remain the state of the art tomorrow? They obviously do, although perhaps not consciously, or they would not make the argument they are putting forward.

We cannot be a major economic power unless we constantly innovate. We cannot be a major player in world trade unless we export those products that we are good at producing. We cannot provide the standard of living Americans want if all we do is assemble simple consumer goods and not develop more advanced intermediate and capital products.

Britain, in its mercantilistic heyday, tried to prevent the export of machinery for producing textiles. The thinking was the same as that of many of today's opponents of NAFTA. Great Britain failed, as was inevitable. So too would we fail if we thought we could hoard all innovation inside the country.

The argument that an intermediate product shipped to Mexico is not a ``real'' export is distressing. It is surely an export when shipped to other countries. The contention that the US should not send capital goods to Mexico is equally mind-numbing. How about such shipments to Europe? This thinking is equivalent to saying that the US should close in on itself, try to export only those goods in which it is not competitive, and try to prevent foreign competition in our leading industries. It is a counsel of despair and I would grieve for my country if this view were to prevail. 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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