Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: \TITLE Date: Mon, 26 Oct 92 13:29:30 EST Message-ID: <9.1992Oct26.132931@AmeriCast.com> TITLE #m#gmtlj/wm#m#WILL THE TRADE PACT COST JOBS? Yes, But Nearly Twice As Many Should Be Created Robert Corrigan Don't ask Hewlett-Packard Co. about possible U.S. job losses be- cause of production moving to Mexico. That's not a concern at the giant computer maker. It's too busy trying to figure out how to handle burgeoning sales of U.S.-made personal computers, printers and other products south of the border. In its fiscal year 1991, Hewlett saw sales in Mexico rise 27% over the year before to $187 million. Shipments have been so brisk that Hewlett is building an expansive new sales and corporate office on the outskirts of Mexico City. Company offi- cials add that Mexican sales help support hundreds of jobs here in the U.S. Hewlett is not alone. General Electric Co. says its sales to Mex- ico have more than tripled since 1986. GE estimates that roughly 17,000 jobs in the U.S. support those sales. Caterpillar Inc., which shipped only 12 pieces of heavy construction machinery there in 1983, last year sold 1,200. U.S. companies are enjoying an export boom to Mexico. Exports are expected to reach $44 bil- lion by the end of this year, up 40% from just three years ago. Shipments should go even higher if Congress approves the North American Free Trade Agreement next spring. But U.S. companies' relations with Mexico are coming under sharp attack from labor unions and other critics, such as maverick presidential candidate Ross Perot, who claim that firms are selling out by shipping jobs - not just goods - to low-wage Mexico.#m#cq#m# In particular, they target NAFTA, which they say would accelerate that process. U.S. firms have been sending mostly low-end manufacturing jobs to Mexico for years to take advantage of lower wage levels and, some say, lax pollution-law enforcement. The critics, however, tend to downplay or ignore the huge gains in Mexican sales by U.S. companies such as Hewlett, and the number of U.S. jobs that support those sales. They also minimize the potential for future gains under NAFTA. Behind the criti- cisms lies another debate as well, over the belief widely held by economists that free trade is a fundamental good that increases the wealth of all countries practicing it. The battle of words and statistics over the size of NAFTA-inspired job gains and losses is heating up as the prospect grows of a labor-backed Democrat moving into the White House. The debate could determine the fate of the proposed accord, or at least the way it's worded in its final form. Bill Clinton recently announced that he supports the pact in principle. But he added that his support for the bill will be conditioned on it including a heavy load of protection for both jobs and the environment. NAFTA could be one of the first pieces of legislation that Clinton and a new Congress take up in Janu- ary, should he win the election. Meanwhile, both sides are get- ting their voices heard. According to the study most often WILL THE TRADE PACT COST JOBS? cited by pro-NAFTA forces, the agreement will boost U.S. firms' sales and jobs by substantial amounts. Authored by economists Gary Hufbauer and Jeffrey Schott#m#cq#m# of the independent In- stitute for International Economics in Washington, the study says that within several years of the pact's initiation, 325,000 new jobs will be added in the U.S. The institute's report also predicts that 150,000 U.S. jobs will be lost. But most of those will be unskilled and semi-skilled factory positions, the authors say. Overall, the study concludes, the U.S. will realize a net gain of 175,000 jobs, and more gains could come later. These increases will be added to the more than 600,000 U.S. jobs that already support exports to Mexico, the Commerce Department says. Labor unions, such as the AFL-CIO, cite other sources with vastly different numbers. An oft-quoted study comes from the Economic Policy Institute, a liberal think tank in Washington. Thea#m#cq#m# Lee, an economist at EPI, esti- mates up to a million "high-skill, high-wage" jobs could be lost in the first 10 years after NAFTA takes effect. She says another half million would be gained, resulting in a net loss of about 500,000 jobs. Lee co-authored the study of NAFTA released in July. Those losses will come in addition to the half million or so manufacturing jobs that already have found their way to Mexico since 1980, labor sources say. Lee's study also claims NAFTA will hurt wages of U.S. jobs that remain here, with low- skill workers seeing their earnings reduced by up to $1,000 annually#m#chk#m# as companies demand lower pay scales in return for not moving production to Mexico. The EPI's numbers have drawn sharp criticism from several economists. Rudiger Dorn- busch, an economics professor at the Massachusetts Institute of Technology, said the report's conclusions are weak "because we'll have another export boom with Mexico the moment the agreement comes. And they talk as if there's going to be massive losses. There's just no prospect of that." Robert M. Stern, an economist at the University of Michigan who recently wrote a study of NAFTA's potential impact on the U.S. work force, adds that there is a consensus among economists who have examined NAFTA that the gains will be larger than the losses. "Labor's concerns are very emotionally based and misplaced, in my opinion. There is plenty of evidence, based on previous years' experience, that gains will continue," he said. Dornbusch, for his part, estimates that job losses will be far fewer and gains much greater than even the IIE study suggests. But behind the debate about jobs is an even deeper philosophical rift. It con- cerns the relative merits of free trade. The unions and other critics are generally calling for some form of protectionism, a practice they say U.S. competitors use exten- sively to their advantage and which is also used by the U.S. whenever it desires. Most economists, on the other hand, call for free trade, or at least freer trade than now exists between most countries. The debate is much older than NAFTA. It has gone on in the Western world for at least two centuries. Perhaps the most well-known argument for free trade was formulated by 19th- century English economist David Ricardo, who claimed that coun- tries who engage in trade both stand to benefit.#m##m# Ricardo's doctrine of "comparative advantage" states that some countries produce things better and cheaper than others. As an example, Ricardo noted that during his time, England made good cloth chea- ply, while Portugal made good wine cheaply. He concluded that trade between two nations of those products would be mutually beneficial, since it would result in higher sales of the good each country produces most efficiently. The increased sales, in turn, would boost output, wages and capital in general. Most economists today agree with Ricardo's notion of the benefits of free trade, said Frank Wykoff, an economics professor at Pomona College in Pomona, Calif. "Free trade is not a zero-sum game, it's a plus-sum game," he said. "It's the whole underpinning of economic exchange." Labor unions will have none of that. AFL-CIO economist Mark Anderson says the free-trade philosophy, as of- fered by many economists, is unsophisticated. "When we talk about trade, (the comparative advantage theory) is the received wisdom here," he said. "But it's an unbelievably sad statement for the profession" of economics. He said that little trade between the U.S. and Mexico falls under the comparative advantage theory. The economies are so vastly different in size that any notion of balanced trade is ludicrous, he says. He notes that the U.S.' economic relationship with Mex- ico does not concern just straightforward trade, but also production-sharing. That can confuse matters and make trade numbers look bigger than they are, he says. Much of what appears to be straighforward U.S. trade - exports and imports -with Mexi- co is in fact intra-company trade within U.S. firms, he says. Under production-sharing agreements, U.S. firms send product com- ponents to about 2,000 factories in Mexico for assembly. The fin- ished goods are then shipped back to the U.S. for sale here. Commerce Department statistics confirm that a large number of U.S. exports to Mexico are not sold to people there but are re- turned north across the border. But the number is not anything like the 40% to 50% that some labor officials have claimed. Ac- cording to Commerce figures, only 23% of U.S. exports return from Mexico after assembly there. Anderson also says that Mexico's major comparative advantages are lax enforcement of environmental laws and its cheaper labor force, with manufacturing pay scales less than an eighth of those in the U.S. David Rolley#m#cq#m#, an economist at DRI-McGraw Hill Inc. in Lexington, Mass., said such analysis ignores that jobs have been moving abroad for years for a more fundamental reason -competitiveness. "The high-wage manufacturing jobs that we've lost have tended to be in protected industries, which were the most inefficient in- dustries," he said. "The reason they went abroad is that other people did that stuff better. Why? Because if you have an indus- try like that, it goes to sleep - it doesn't stay competitive, it doesn't stay on the cutting edge." He notes that NAFTA's most significant impact on job losses may not be in the U.S., but in Singapore, Taiwan and other newly industrialized Asian countries that have absorbed U.S. manufacturing jobs in the 1980s. But even then, U.S. workers could benefit, he says. If jobs relo- cate from Asia to Mexico, U.S. exports - and jobs that support those exports - are likely to increase because a Mexican is far more likely to buy an American product than is a worker in Malay- sia. Rolley adds that he believes labor's real beef is that the jobs that will be lost in NAFTA's wake will be largely low-end manufacturing jobs, where union enrollment is high. When those workers find other work, especially if they are retrained and hired for higher-skilled positions, they are not as likely to join a union, he says. Rolley and other economists also offer another idea that is complete anathema to unions: The U.S. should let those low-skilled jobs go abroad, if economic realities take them there. In fact, the only way to stop them is through protec- tionism, an approach that has failed miserably recently in the steel and other industries, he says. "Low- wage manufacturing jobs, where you have an easily transported product that can be made anywhere, cannot be retained. Period," said Rolley. Dornbusch said the U.S. should now concentrate on creating jobs in the higher-end manufacturing sector and in the service econo- my. Those jobs hold the most promise for the future, he says, and indicate an economy in advanced stages. But in the meantime, rough times lie ahead for people with certain manufacturing jobs that will continue to leave the country. Their best hope is work- er retraining, coupled with new jobs arising from an improved economy. In a reversal of previous policies, the Bush adminis- tration in August announced a huge new $10 billion worker re- training program designed in part to help workers "dislocated" by the effects of NAFTA. Michigan's Stern said the proposal seems "quite generous," and should help workers quickly retrain for better jobs. While Clinton has not offered specifics about a worker retraining program, they are likely to show up eventually in his sweeping worker training proposals. Clinton wants employers with more than 50 workers to spend 1.5% of their payroll on working training, generating $21 billion, according to the American Society for Training and Development. IIE's Schott says the fact that both Bush and Clinton have now produced extensive plans on retraining for workers indicates Congress will find a way next year to pro- vide substantial help for those workers who lose their jobs and need new skills. But where will the jobs come from when the workers exit retraining classes? That will depend on the state of the economy, and the economy has had only one bright spot lately - exports. James Schraith,#m#cq#m# vice president of sales for North America at computer maker AST Research Inc., is gearing up to help keep U.S. exports moving. Last week,#m#week of Oct. 18#m# he went down to Mexico City to expand AST's local sales force there and find bigger offices. AST, a fast- growing firm with almost $1 billion in sales, is expecting sharp increases in its Mexico shipments in the years ahead. The Mexican government says computer sales in the country should expand 20% a year with the help of NAFTA, which will tear down present tariffs. The lion's share of sales will go to U.S. brands, like AST, which employs 1,580 workers in the U.S. "When the personal computer came out, people were concerned that humans would be put out of work. But the exact opposite happened - thousands of jobs were created," said Schraith. "The same thing is going to happen with NAFTA," he said. This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM