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Winter 1992
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  N ew York Views

The Mexican Connection
Kenneth Silber
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If Congress approves the free-trade pact currently being negotiated with Mexico, New York City will be a big winner, reaping a greater economic windfall than any other city in the United States. The pact, known as the North American Free Trade Agreement, would create a free-trade zone encompassing the United States, Mexico, and Canada. Such a zone would favor industries in which New York is strong, and any possible negative impacts would be felt mostly by industries that are concentrated elsewhere. Nevertheless, most members of New York’s congressional delegation have so far turned a distinctly cold shoulder to free trade.

The greatest beneficiary of the Mexican pact would be New York’s financial services industry. Under current Mexican law, American banks, like other non-Mexican banks, are forbidden to make loans, accept deposits, or provide most other banking services. American insurance and securities firms operate under similarly severe restrictions.

New York City is home to most of the nation’s largest banking, brokerage, and insurance companies. In 1990, they provided more than 390,000 jobs in the city—60,000 more than all manufacturing industries combined. If a free-trade agreement is signed, these financial services companies can be expected to become major players in Mexico’s fast-growing economy. Moreover, Mexico could be a stepping-stone for U.S. financial institutions seeking to expand elsewhere in Latin America. The growth of financial services companies would create more jobs for New Yorkers and additional sales revenues for city businesses.

For New York manufacturing companies, the overall picture is similar. In 1990, according to U.S. Commerce Department figures, Mexico purchased $801.3 millions worth of New York State products, making it the state’s eighth largest export market.

Yet significant barriers to manufacturing trade remain. Mexico imposes stiff tariffs on a wide range of goods produced by New York companies. For instance, the chemical industry, which provides some 17,000 jobs in New York City, is subject to duties of approximately 15 percent on its exports to Mexico—more than five percentage points above Mexico’s average tariff rate. These barriers will fall if the free-trade zone is created, stimulating New York’s exports.

Local exports to Mexico are currently hindered by nontariff barriers as well, such as weak protection of patents and copyrights. New York’s export industries tend to be knowledge-intensive and therefore need strong intellectual property protection, which the free-trade agreement is likely to provide, according to Irving Williamson, a trade policy analyst at the Port Authority.

Some opponents of the pact argue that free trade may harm city manufacturers. The truth seems to be that some companies may be hurt, but on balance more New York manufacturers would benefit.

New York’s manufacturing base has been steadily shifting toward high-end products made by highly skilled workers, and away from mass-market goods produced by cheap labor. This trend means that the manufacturing industries best prepared to export to Mexico have grown, while those most vulnerable to competition from Mexican imports have shrunk.

According to a KPMG Peat Marwick econometric model, scientific and measuring instruments, currently New York’s leading exports to Mexico, will be helped more by a free-trade pact than any other U.S. industry. Chemical companies and manufacturers of industrial machinery and computer equipment will also be among the largest gainers of jobs and production. Together, these industries accounted for 44 percent of New York’s export trade with Mexico in 1990.

A U.S. Labor Department study points out that free trade with Mexico will probably cause job losses in the nation’s apparel-manufacturing sector. But there is something quixotic about opposing a trade pact in order to protect apparel-manufacturing jobs: New York has already lost thousands of such jobs, particularly those for low-skilled workers, both to other parts of the United States and to foreign countries. The city’s strength is in making high-fashion garments, where New York manufacturers benefit greatly from easy proximity to designers and buyers. These have little to fear from Mexican competition.

In fact, free trade is likely to push low-skilled apparel production toward Mexico that would otherwise go to more distant third world countries. Such a trend would improve the prospects of selling New York-made textiles to Mexican clothing manufacturers. Moreover, New York has become increasingly important in the distribution, rather than production, of apparel. Local fashion distributors can expect a boost from lower import prices following a trade pact.

Despite the economic windfall to New York, a majority of New York’s congressional delegation opposes the Mexican free-trade pact. Last spring, ten of the city’s 14 representatives voted against renewing the Bush Administration’s “fast-track” authority to negotiate trade pacts, which is widely seen as crucial to the success of the talks.

Representative Jos6 Serrano of the Bronx, who opposed the extension of fast-track authority, acknowledges that increased exports might aid New York’s economy, but has expressed concern that a free-trade agreement with Mexico could cost the city manufacturing jobs. Representative Charles Rangel of Manhattan, who also opposed fast-track, unsuccessfully sought an amendment requiring that trade talks be used to pressure Mexico to step up its antinarcotics activities. “If you spent a day on any street corner in my district and asked people what the government could do to make their lives better, you would never hear the words ’free trade with Mexico,”’ Rangel said. “But I can tell you that every person you talked with would emphatically say something about illegal drugs.” Yet closer economic links with Mexico might give the United States more leverage in demanding law-enforcement cooperation.

Some segments of the U.S. economy will be hurt by Mexican competition. In KPMG Peat Marwick’s model, the biggest losers turn out to be fruit and vegetable producers and sugar refiners. Cucumber farmers in California may have rational, albeit parochial, reasons to oppose free trade with Mexico. New Yorkers do not.

 

 


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