Economic Viewpoint
It's Time for NAFTA to Look Farther South
BY GARY S. BECKER

01/08/2001
Business Week
28
(Copyright 2001 McGraw-Hill, Inc.)

The U.S. and Chile have begun negotiations on a trade pact that could set the stage ultimately for a hemisphere-wide agreement. One approach to a broad, open trade zone is through a simple expansion of NAFTA, the highly successful North American Free Trade Agreement among Mexico, Canada, and the United States.

An attractive first step would be to include in NAFTA not only Chile but also Argentina and Uruguay, two other democratic nations of the Southern Cone. All three have been experiencing significant economic problems. Argentina, in particular, has has trouble and recently negotiated a sizable loan from the International Monetary Fund to help finance payments on its foreign debt. Unemployment in Argentina and Uruguay has reached about 15%, and it is above 10% even in the better-performing Chilean economy.

The economists and government officials I met on a recent visit to these nations are convinced that a free-trade accord with the U.S. would greatly benefit their economies. It would not only widen the market for their exports but would also attract more investment capital from abroad. The result would be vigorous competition for their telecommunications and other protected industries. It would also increase pressure to reduce the excessive regulation in their labor and product markets. BORDER BICKERING. One obstacle to an expansion of NAFTA to South America is that Argentina and Uruguay, along with Brazil and Paraguay, belong to Mercosur, a customs union. Chile is an associate member. After a good start, this agreement has bogged down in bickering over Brazil's devaluation, import quotas, allegations of dumping, and domestic-content requirements in the automobile industry. As a result, exports from Argentina and Uruguay have expanded slowly and remain a small fraction of their total production of goods and services. This provides an opening for NAFTA.

The three Southern Cone nations prefer a broader free-trade union with the U.S. to the continuation of Mercosur in its present form. They hope that Brazil would also join the larger trade accord, but they would be willing to join now, even if it took much longer for an agreement to be worked out between Brazil and the U.S. The longer-term goal should be to include all Western Hemisphere nations in one inclusive trade agreement.

Such a move would be popular in South and Central America, but political leaders there worry whether the political climate in the U.S. is ripe at this time for such an agreement. They fear that many members of Congress would be concerned about the loss of jobs in their districts and states due to competition from goods produced in a broad free-trade area. They hope the new Bush administration will take up the expansion of NAFTA next year but fear that a serious downturn in the American economy may block the initiative.

The election of George W. Bush as President should be reassuring to South American leaders, since Bush is an outspoken supporter of open markets. He wants fast-track authority from Congress to negotiate a free-trade agreement by 2005 among the nations of South, Central, and North America.

In addition, the rapid growth in employment in recent years has shown the American people that NAFTA did not worsen labor-market conditions. Lower employment in some companies because of greater competition from Mexican imports has been offset by greater opportunities for other companies to sell to Mexico. On balance, both the U.S. and Canada have benefited from NAFTA, although the proportionate benefit has clearly been much greater for Mexico.

Mexican exports to its northern neighbors exploded in a spectacular fashion after the formation of NAFTA and now make up 90% of its total exports. Yet imports from the U.S. and Canada grew almost as fast, and foreign investments in Mexico have also rapidly increased. Mexico's economic success helped to stabilize the political climate there and may even have contributed to the election of Vicente Fox, the first president from the opposition Pan party. South American nations would probably gain less from a free trade agreement than Mexico did from NAFTA, but their economies would also be helped from more open access to the markets and financial resources of North America.

The remarkable economic and political success of NAFTA is the strongest argument for free trade throughout the Western Hemisphere. Chile, Argentina, and Uruguay are three deserving initial candidates for a broader trade agreement with North American nations because of their democratic governments, economic reforms, and current economic problems. But that agreement should be considered only the first step toward an open trade zone throughout the hemisphere that would produce tremendous benefits for the economies and democratic governments of this region.