The evolving global economy and NAFTA

Real Estate Weekly, Dec 15, 1993 by C. Stewart Forbes

Two important and interrelated benefits of the NAFTA agreement have been overlooked: equity and economic evolution.

First, global equity is overdue.

The World Bank indicates there are 135 emerging markets representing 80 percent of the world population but only 12 percent of the GDP. We must broaden the distribution of wealth, if for no other reason than to avoid the extremism of a world of haves and have nots.

Ethically, NAFTA begins to redress a centuries-old pattern in which we capitalized on developing nations' natural resources without creating jobs for many of their citizens. Economically, it will create new markets and opportunities that will produce economic growth and jobs here as well as in Mexico. Economic self-interest in the long run is best served by policies that grow the world's 22.6 trillion dollar economy not just one countries' share of it. It is estimated that for every $100 billion in trade, the world's economy grows by $10-20 billion.

NAFTA will, for mutual benefit, transfer technology, management and capital to a country whose economy is less than 5 percent of the US's. As the Conference Board reported last month, Mexican wages in industries where there is already significant foreign investment have already increased dramatically in the past five years. As that report concluded, narrowing of the wage gap between the US and Mexico will reduce the incentive for US firms to relocate there. It will allow ambitious Mexicans to find better-paying jobs at home, rather than being forced to migrate to the US. It will also significantly increase Mexican markets for US firms that can't compete there now because of stiff tariffs and the Mexicans' lack of discretionary income.

We need only look to Japan for proof of the wisdom of a strategy of helping build competing economies. Japan, which uses economic policy as a competitive tool as well as any country, has systematically conducted such transfers of technology, management and capital to its previously impoverished neighbors, Korea, Singapore and Thailand, for many years.

Have Japanese industries paid a price for extending a helping hand? Yes. Their companies lost a competitive advantage in textiles, as well as shipbuilding. On the other hand, the Japanese economy has offset those losses by creating whole new industries unthought of 20 years ago.

This brings us to NAFTA's second overlooked benefit: it accepts and capitalizes on the global economy's evolution. Loss of jobs is painful and tragic to individuals and the community. At the same time, history shows it is an inescapable part of the evolutionary process of start-ups, growth, decline and shut downs. After all, we were once a nation of farmers, then made the difficult transition to manufacturing despite significant short-term dislocation.

Now, as Mexico and other nations follow in our footsteps by industrializing, we are evolving to the next economic level, one that depends more on information and knowledge than on raw materials and manufacturing. No country is better positioned to capitalize on these knowledge-based resources than the US. For example, no industry used to be more localized than real estate. Yet, the globalization of clients has prompted the creation of global real estate federations to better match client needs. Such a service would have been impossible until the advent of integrated, digital information networks.

Evolving jobs lead to evolving demand. People, whether in Mexico or other developing nations, who pay 70 percent of their income for food, don't have discretionary income. As their incomes increase, their purchases evolve: first, they may buy radios and motorbikes, then washing machines and TVs, and, eventually, air conditioners and luxury cars. At each step, jobs will be created worldwide to make the products to satisfy these evolving and more expensive tastes.

Rejecting NAFTA would not have stopped the economy's evolution to a global, information-based system. It is inevitable. It would not have prevented textile jobs from moving to Mexico anymore than New England could prevent the movement of this industry to the South.

What rejecting NAFTA would have done was encourage other countries such as France and Japan to be more protective, and thereby doom the Uruguay round of trade negotiations.

In Russia, Eastern Europe and many nations where economic evolution is dramatic and difficult today, people make a leap of faith in the global market's capacity to create opportunity and their ability to capitalize on it. Ironically, the country that has exemplified the free market system now appears reluctant to take such risks, and has become more concerned with protecting existing jobs than developing new industries.