Topic Category: Trade & Finance

Economic Integration Is the Wave of the Future

In an effort to gain secure access to foreign markets, and in turn achieve a higher degree of economic security while maneuvering into the twenty-first century, many countries have entered into trade agreements with one another. Some of these agreements are between two countries; others are among many, creating trade blocs. Three agreements, however, have grown to encompass countries with massive economic might, to the extent that they have already come to dominate continents.

Within each bloc, small and large, free trade has and will likely continue to become more entrenched. However, future trade among blocs is not so clear. Some argue that these blocs are a stepping stone to global free trade. Others believe they will turn inward and become protectionist. And others feel that although global free trade may eventually come to be, the path will be full of mine fields and dangerous for quite some time. Fear that these trade blocs will become inwardly focused and protectionist, not allowing cost-efficient, non-member producers to sell their products on the basis of competition, has promoted a race among nations to achieve the largest and most powerful trade area.

Whether or not trade blocs become protectionist, one thing is for certain: any outcome will have a profound affect on international trade and investment.

From 1947 to the end of 1994, a total of 108 regional trade agreements were notified to the General Agreement on Tariff and Trade (GATT), the international body that governs approximately 90% of world trade. These trade agreements include: the Central American Common Market, Asia-Pacific Economic Cooperation Forum, Arab League, Andean Pact, Economic Community of West Africa, Lome Convention, Association of South East Asian Nations, and the East Asia Economic Caucus.

Over the years, three powerful trading blocs have emerged: the European Union, chiefly involving West European countries; the North American Free Trade Agreement among Canada, the United States and Mexico; and an informal bloc in East Asia dominated by Japan. Based on past trade patterns and policies, and anticipated policies, these blocs will continue to develop, gaining increased strength and influence.

The European Union Is Expanding into Eastern Europe

The 15-member European Union (EU) encompasses Belgium, Britain, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. On January 1, 1995, Austria, Sweden and Finland became members. In years to come, it is likely that East European countries join the 350 million population of the EU, expanding the market to include 850 to 900 million consumers.

The implosion of Soviet Communism and the fall of the Berlin Wall have exposed East Europeans to a free market economy for the first time in several decades. In an attempt to shift from central planning to a free market, the economies and political systems of most East European countries have experienced chaos to various degrees. And the eruption of ethnic conflict in former Yugoslavia and elsewhere in Eastern Europe has accelerated the economic deterioration.

Much of the EU's vested interest in allowing East European countries to eventually become full members is primarily aimed at preventing a potentially large mass migration westward. By integrating East European economies with the EU, the economic and political stability of the region will likely improve.

The North American Free Trade Agreement (Nafta) Will Likely Expand Southward

In an effort to increase the competitiveness of the United States and the region as a whole, The North American Free Trade Agreement (Nafta), which built on the achievements of the U.S.-Canada FTA, was implemented on January 1, 1994.

Preferential access to Mexico and Canada, guaranteed by Nafta, has put U.S. companies at a competitive advantage relative to rapidly expanding European and East Asian trade blocs. Nafta not only opens up the Mexican market of 92 million customers, but creates a trade area of 360 million consumers ensuring secure markets for U.S. products. Importantly, Nafta promotes greater efficiency, making U.S. products more competitive not only in North America, but in Europe, Asia and throughout the world.

On December 9, 1994, the leaders of 34 Western Hemisphere nations met in Miami for the Summit of the Americas. The goal: to establish a free trade area of the Americas by the year 2005, further building on the achievements of Nafta. During the Summit, Chile was invited by the United States, Canada and Mexico to begin negotiations to accede to the trade bloc.

Trade Representative Mickey Kantor says that by the year 2010 the United States will export more goods to Latin America than to Japan and Europe combined. The pursuit of an expanded Western Hemispheric trade bloc goes further, and again ups the ante with regard to our economic strength and negotiating position compared to the EU and East Asia.

East Asian Economic Integration Is Accelerating Under Japanese Domination

In recent years, trade among East Asian nations has increased at a much faster pace than trade outside the region. Through the development of several trade agreements, such as Asean, with a population of 325 million comprising Malaysia, the Philippines, Singapore, Thailand, Brunei and Indonesia, the region is becoming more trade-cohesive. However, economic integration is mostly influenced by Japanese investment in the region, which is creating an informal trade bloc.

According to Harvard Professors Kenneth Froot and David Yoffie, Japan appears to be the only major industrial country whose domestic market remains protected from both foreign trade and direct investment. They conclude that with Japanese expansion in East Asia, North American firms may increasingly lack access to an East Asian bloc.

The Uruguay Round Agreements of the GATT Promote Global Integration

The GATT Uruguay Round Agreements (URA), implemented by the United States and well over 100 other countries on January 1, 1995, further integrate trade policies among its members. It phases out quotas and cuts tariffs by about one-third on most products traded globally.

GATT is responsible for reducing international tariffs from an average of 40% in 1947 to 5% in 1990, and has permitted international trade to expand enormously, national incomes to substantially increase and international competition to flourish resulting in higher quality, lower priced goods.

The new World Trade Organization (WTO), created under the URA and replacing GATT, is expected to enforce international trade rules and settle disputes among members to a better degree than its predecessor. The new WTO will attempt to police the forces that may promote protectionism among trade blocs.

What All This Means

Whether or not you are a manufacturer, exporter, importer, foreign investor or simply work in a business limited to the domestic market, the development of global trade agreements and emerging trade blocs will undoubtedly affect you business. Even if you are retired, these global trends will still affect you -- at least through the selection of consumer goods and their prices.

Under the Uruguay Round, all signatories to the Agreements are phasing out their trade barriers. As a result, it is unlikely, at least in the short-term, that trade blocs turn inward, become protectionist and raise their tariffs. Nevertheless, as a result of trade diversion or regional trade preferences, the effect may be similar.

Trade diversion occurs when members of a trade group buy more goods from each other due to the elimination of internal trade barriers, displacing non-member goods. For example, due to preferential access, the French are likely to buy more goods from the Germans at the expense of United States. Should this diversion become significant, future U.S. exports to the European Union may be curtailed.

Trade within blocs and regions has indeed increased. For example, in 1928, 50.7% of Western European trade was with Western European countries. By 1993, this increased to 70%. During this period, internal North American trade increased from 25% to 33%; internal Latin American trade increased from 11% to 19.4%; and internal Asian trade increased from 45.5% to 49.7%.

In light of these trends, it may be wise to target several diverse markets instead of relying on one region or market when deciding upon an export strategy.

In order for companies to sustain themselves and generate growth well into the next century, they are advised to establish strategies designed to gather and analyze information from throughout the world -- and use this to achieve international expansion. Companies that rely solely on their domestic market will likely go up against greater foreign competition seeking the same market share. Their level of risk will likely increase as the degree of foreign competition increases.

With the advent of Nafta and the benefits derived from the GATT Uruguay Round, international trade and investment opportunities will flourish. However, these opportunities will only benefit those companies whose corporate cultures view the world as one global village -- and act on it.

Trade Agreements Impact Where A Product Is Made and Where Its Components Are Sourced

The rules of origin established under Nafta, for example, favor U.S., Canadian and Mexican manufacturers who source their components in Nafta countries. Under the agreement, a minimum component requirement is necessary in order to classify goods as North American, allowing them to enter any North American country at a reduced duty rate or duty-free depending on the Nafta duty phase-out schedule. Consequently, U.S. and Canadian firms, and others that wish to sell into North America, are likely to choose Mexico as their low-cost manufacturing location.

As a result of the Mexican peso devaluation which brought Mexican wages down about 40%, U.S. companies manufacturing in East Asia and in other low-wage countries for North and South American markets are now more likely to move production to Mexico. This will boost U.S. exports of components to Mexico, which are widely used in Mexican production and assembly, strengthen the Mexican economy, and very importantly, increase North American global competitiveness.

Production sharing, permitted under the U.S. Tariff Code, allows U.S. materials assembled, processed or improved abroad to be shipped back to the United States incurring duty only on the foreign added value. This has allowed some low-skill, labor intensive manufacturing processes to be conducted in lower-wage countries, while the high-skill, capital intensive processes are retained in the United States. According to the U.S. International Trade Commission, production sharing has also been responsible for retaining jobs that would have been lost due to intense foreign competition. Expanded co-production has been a primary goal of Nafta.

The benefits derived from U.S. production sharing have been enhanced when used in conjunction with Mexico's maquiladora program. Mexico's maquiladora law allows the Government to grant licenses permitting companies to import components and machinery free of duty under bond. The components are assembled, processed or improved and eventually exported. Most of the finished goods are exported to the United States -- many of which displace East Asian exports. Because these goods incur no duty in either country and are subject to low-cost labor, their prices are more competitive internationally.

The U.S.-Mexican production sharing program, combined with other factors, resulted in Mexico becoming the United States' largest production sharing partner in 1993. From 1991 to 1994, Mexican production sharing exports to the United States increased more than 60% and accounted for almost half of all Mexican exports to the United States.

Of all the countries currently participating in the U.S. production sharing program, Mexico, by far, utilizes more U.S. components in the finished products. U.S.-made components account for over half the value of U.S. imports from Mexico under the production sharing program; U.S. parts typically account for only 25% of the value of such imports from Asian newly industrialized countries. Because of this, U.S. industry and labor benefit more from greater co-production of goods with Mexico, compared with goods co-produced elsewhere.

Under Nafta, low-cost U.S. production will continue to shift from low labor-cost countries to Mexico. Its no surprise that Japanese production will continue to move to lower-cost producers in East Asia and EU production will continue to move to Eastern Europe and Northern Africa.

Some old myths never seem to die. This is certainly true of the latest accusations being cast at the North American Free Trade Agreement (NAFTA).

Habitual NAFTA critics Pat Buchanan and Public Citizen are back in attack mode, this time using the recent U.S. visit by Mexican President Ernesto Zedillo and Mexico’s economic difficulties to charge that NAFTA is wrecking havoc on U.S. jobs.

Fortunately, a more objective look at the facts shows these attacks to be as far off the mark as ever.

Myth #1: After nearly two years, NAFTA is a proven failure.

Reality: NAFTA continues to deliver, on jobs and more.

U.S./Mexico trade grew at a record rate in NAFTA’s first year, jumping more than 20% to reach $100 billion in 1994. According to the U.S. Department of Commerce, $10 billion in new sales were made to each nation’s market, and total U.S. jobs from trade with Mexico grew to more than 800,000.

This year, U.S. export growth has been dampened by Mexico’s financial crisis. What NAFTA critics don’t say is that U.S. exports to Mexico are still higher than pre-NAFTA levels, despite a 7% decline in Mexico’s GDP for the first half of 1995.

It is also important to remember that NAFTA is a long-term instrument, reducing tariffs and other trade barriers over 15 years. Judging it based on short-term shifts in the business cycle, or Mexico’s economic downturn, is premature.

Moreover, NAFTA isn’t just about opening new U.S. export markets. It’s also about encouraging increased partnerships among North American businesses. NAFTA’s success here is clear -- evidenced by the steady growth in U.S./Mexico joint ventures and intermediate good imports by Mexico for use in production partnerships with U.S. firms.

Why is this important for U.S. jobs? Because, says the U.S. International Trade Commission, U.S./Mexico production sharing is a key strategy for countering stiff competition in trade from Asia and Europe, and keeping more U.S. jobs and business at home instead of migrating overseas.

Myth #2: U.S. benefits from NAFTA went down the drain with the peso crisis.

Reality: NAFTA is helping ease the crisis and secure U.S. trade gains.

NAFTA didn’t cause the crisis. That was more a product of financial miscalculations in Mexico. But NAFTA is helping to solve it.

Without NAFTA, Mexico could have shut its doors to U.S. goods, as it did after the 1982 debt crisis. Then, U.S. exports plummeted 50% and didn’t recover for six years. Had that happened today, hundreds of thousands of U.S. jobs would have been at risk.

NAFTA has legally obliged Mexico to maintain its open markets with the United States. As a result, the impact of the crisis on U.S. exports and jobs has been relatively modest. This is backed up by trade figures and U.S. Department of Labor data, which shows no appreciable rise this year in the rate of applicants for its NAFTA Training and Technical Assistance program (NAFTA-TAA).

NAFTA is also helping Mexico hasten its recovery by growing its own exports. Mexico’s 33.3% export rise and only 7.7% import drop during the first 9 months of this year is correcting its large trade imbalance. A return to economic health will restore Mexico’s demand for U.S. goods and the balanced trade of NAFTA’s first year.

Myth #3: Mexico’s trade surplus will cost more than 300,000 U.S. jobs.

Reality: The facts show U.S. job dislocation from Mexico trade is only 21,000.

The most far-fetched charge is that Mexico’s new trade surplus could cost 340,000 U.S. jobs. To arrive at this, critics take the formula economists use to project job growth from exports -- every $1 billion in new exports creates 12,000 to 20,000 jobs -- and mistakenly apply it to overall trade balances. Department of Commerce data shows that history doesn’t support such a correlation.

• From 1982-1987, the U.S. trade deficit quintupled. But employment grew by 12.9 million and unemployment dropped from 9.7 to 6.1%.
• From 1987-1991, the trade deficit was reduced by half. Employment again rose, by 6.3 million, but unemployment increased to 6.7%.
• From 1991-94, the trade deficit more than doubled. Employment was up again, by 5.2 million, while unemployment declined to 6.1%.

While trade balances matter, they have too many variables to accurately measure job loss. Better figures come from the NAFTA-TAA program. As of Sept. 24, nearly two years into NAFTA, the Department of Labor has certified 41,201 dislocated workers for training assistance -- 21,643 from trade with Mexico, 13,508 from trade with Canada and 6,050 with no assigned country of cause.

Myth #4: NAFTA-TAA only shows the tip of the U.S. job loss iceberg.

Reality: If anything, NAFTA-TAA overstates job dislocation from NAFTA.

NAFTA-TAA doesn’t analyze whether NAFTA itself causes job loss. For example, the certification of 520 workers at Mattel's Fisher-Price facility in Medina, New York -- highlighted by Public Citizen -- cites Mexican imports for the dislocation. But the removal of tariffs on imports of Mexican toys preceded NAFTA. Clearly, NAFTA wasn’t the cause.

NAFTA-TAA certifications also don’t represent current unemployment. U.S. data shows average new job searches last about 18 weeks. Based on this, U.S. workers still unemployed among the 21,643 Mexico certifications are less than 7,500.

While every job loss is important, this must be kept in perspective with the 800,000 U.S. jobs that rely on trade with Mexico, and more than 1.5 million jobs that turn over in the U.S. economy every year.

Instead of seeing the glass as 99% full, NAFTA critics are obsessed with the 1% empty. The facts, however, are clear. In today’s global economy, NAFTA isn’t part of the problem -- it’s part of the solution.

World trade, measured by volume, expanded by 9% last year -- more than doubling the rate of growth in 1993 -- and achieving the largest gain since 1976. From 1993 to 1994, the Port of New York and New Jersey's air cargo exports (measured by volume in long tons) increased by almost 6% and almost 71% over the last ten years. The air cargo fleets servicing the Port are responsible for facilitating this achievement.

Last year the United States exported almost $513 billion worth of goods and imported almost $664 billion -- for a total of $1.18 trillion in trade with the rest of the world. The Port Authority of New York and New Jersey handled a whopping 26% of all air cargo shipments. This represented about 65% more traffic, by tonnage, than the next leading U.S. port. Airports under the control of the Port Authority of New York and New Jersey include JFK, which handles about 90% of international cargo, Newark, which handles about 10%, and LaGuardia Airport, which handles domestic shipments only.

The United States is the leading world exporter and importer, followed by Germany, Japan, France, the United Kingdom and Italy. Last year the United States maintained a 12.3% share of world exports and a 16% share of imports. This represents 22% more global export market share and 84% more import market share than Germany, the next leading contender. The Port of New York and New Jersey -- the leading U.S. port by far -- is a major world competitor in terms of volume and efficiency.

In 1994, major export destinations for air cargo departing from the Port of New York/New Jersey were Northern Europe, with 176,497 metric tons; the Far east, with 100, 375 metric tons; the Mediterranean, with 36,846; Southeast Asia, with 34,894; the Middle East, with 29,411; and South America, with 28,557.

Leading air cargo exports from the Port include: machinery, office equipment and computers; electronic machinery and sound equipment; optical, photographic and medical equipment; paper and paperboard; fish; plastics and related products; books and newspapers; vehicles; chemicals; aircraft, spacecraft and parts; iron and steel; and pharmaceuticals.

Last year, major air cargo received by the Port arrived from Northern Europe, with 211,524 metric tons; the Far East, with 159,095 metric tons; Southeast Asia, with 97,057; the Mediterranean, with 78,938; South America, with 26,686; and the Middle East, with 22,769.

Leading imports by air through the Port included: apparel and accessories; machinery, office equipment and computers; electric machinery and sound equipment; footwear; vegetables; optical, photographic and medical equipment; books and newspapers; leather products; plastics and related products; fish; chemicals; plants; toys, games and sport equipment.

Several airlines operating out of JFK and Newark effectively connect the New York and New Jersey region to all major regions throughout the world. These airlines include Asiana Airlines, Cathay Pacific, Volga-Dnepr, Cargolux, and Singapore Airlines, among others.

On July 13, Asiana Airlines celebrated the grand opening of its new $1 million cargo facility at JFK International Airport. According to Asiana, the new facility more than doubled their handling capacity, enabling the South Korean airliner to better serve its new scheduled 747-400 freighter flights. The airline completely renovated the 85,000-square foot cargo building formerly leased by Japan Air Lines, and added a 7,500-cubic-foot refrigeration room to handle perishables and a 151-pallet elevated transport vehicle system for more efficient storage of cargo containers.

On July 2 Asiana began operating new flights every Sunday (New York-Seoul-Singapore) and Thursday (New York-Seoul). Stated by B.H. Moon, General Manager of JFK cargo, these new flights (which bring the total to 12 weekly flights) add 58% more cargo, reaching nearly 600 tons per week. The company now operates 34 Boeing aircraft. Five more are scheduled for delivery this year and plans call for an additional 21 aircraft by the year 2000.

Last year U.S. exports to the Pacific Rim reached $147.8 billion, up more than 12% from 1993. Imports topped $261 billion, up 13.8%. Asiana, the 1994 recipient of Boeing's Award for Excellence for maintaining the highest overall dispatch reliability for Boeing aircraft, flies 28 international routes serving 38 cities in 10 countries in Asia, Far Eastern Russia and the United States. The majority of cargo, however, is picked up or delivered to the Pacific Rim. As trade develops in this dynamic area of the world, the Port of New York/New Jersey will continue to offer state-of-the-art facilities to Asiana and others airliners in order to efficiently handle the growing number of air cargo shipments to and from the region.

Next year will mark the 50th anniversary of Cathay Pacific Airways' operations. According to the company, it is the 12th largest international air cargo carrier, with a monthly uplift of 40,000 tons. Based in Hong Kong, Cathay Pacific serves 44 cities in 27 countries.

On July 12, Cathay Pacific took delivery of its second B747-400F airliner. According to the company, the B747-400F freighter version of the ultra-long B747-400 passenger aircraft is more fuel efficient and can fly further than earlier models, and has a capacity of approximately 120 tons of cargo. "The 400 freighter really comes into its own on long-haul services.... For us, it is particularly well suited to transpacific services," said Robert Cutler, General Manager of cargo. This cargo market is one of the biggest and fastest-growing worldwide, Cutler said.

On July 27, Cathay Pacific began operations of its latest acquired aircraft on a new Hong Kong-Toronto freighter route. This, combined with the company's four B747-200s, brings the total freighter fleet to six. This year the company will take delivery of eleven new aircraft.

Cathay Pacific serves a wide variety of cargo markets. "From North America, we carry seafood, fresh fruit and vegetables, heavy machinery, and high-tech equipment to Southeast Asia, Australia and the Middle East," said Ava Thomas, Cargo Manager, Western USA. More than 50% of the airliner's freight consists of Asian exports of textiles, electronics, automotive components and food items to global destinations.

Volga-Dnepr is the biggest Russian cargo airline. In June the company established a new DC-10 chartered service from JFK to Moscow. Stated by Andrew Shumilin, Foreign Relations Manager, "We are awaiting approval from the Department of Transportation to start regular scheduled services."

Last year the Russian Federation exported $48 billion to and imported $28.2 billion worth of merchandise from the rest of the world. Its exports to the United States increased by 85.5%. In 1993, the airliner said it moved 35,655 tons of cargo. As the Russian economy emerges from a period of slow economic growth, the demand for air shipments will increase.

Stated by Alexey Isaikin, President of Volga-Dnepr, in 1993 the airliner was formally appointed by Russia to operate both charter and scheduled flights from the United States and China to Russia.

The company's aircraft fleet is based largely on its six Antonov An124-100 Ruslans, the biggest aircraft in the world. The Ruslan is unique in terms of megalift payload capability. According to the Volga-Dnepr, the outsize and super heavy cargo market, where the Ruslan is most competitive, is experiencing a constant growth in demand. As a result, the company has focused on developing this market.

The use of a modified loading/securing system now makes it possible to transport large diesel engines for ships, power station turbines, nuclear power stations design elements, helicopters, boats and yachts, and large-size oil and gas extracting equipment.

In 1993 Volga-Dnepr increased its number of its international flights. According to the company, it obtained traffic rights and flew independent charters to a host of destinations including the Benelux countries, Britain, Germany, Hungary, Turkey, South Korea, Thailand, Singapore, Israel, Sweden, the United Arab Emirates, India, among others. The company plans to increase its presence in Southeast Asia, the Middle East and North America.

Cargolux Airlines International S.A., founded in Luxembourg in 1970, moved 670 tons of goods to global destinations last year. Since 1970, this represents an increase in tonnage of 2,481% .

In order to accommodate the growth in world trade, Cargolux entered into numerous agreements and established many new routes last year. At the beginning of 1994, the company signed an agreement between Luxembourg and Bahrain nominating Cargolux as the official Luxembourg carrier. On January 17, the company entered into an agreement with the Japanese Government to service Japanese cities. Cargolux reestablished its operations out of JFK on April 30. On May 19 the company was awarded rights to service Prestwick, Scotland. In July, it began flying to Ho Chi Minh City. In September, new services were inroduced to Lebanon, Iceland, Zimbabwe and South Africa.

The company is currently utilizing 4 B747-200Fs and 2 B747-400Fs. It is taking delivery of a third 747-400F this fall in order to satisfy a growing demand for its services.

The company's slogan ,"You Name It -- We Fly It", announced in 1973, is representative of its cargo shipments. For example, Cargolux's principle commodities departing JFK include fruit and vegetables as well as aircraft engines destined for Iceland; fabric, oversized machinery, telephonic switching gear and cars destined for Istanbul; and a wide variety of cargo, including 100 feet long pipes, dangerous goods, etc., destined for Luxembourg and distributed throughout Western Europe through the company's trucking network.

This trucking network, which the company claims to be the most sophisticated of any air carriers in Europe, provides a "hub and spoke" operation combining B747 capacity with direct road feeder service to and from Europe's major industrial countries.

In 1994, the United States exported $118 billion to and imported almost $131 billion from Western Europe. As this trade steadily grows, Cargolux is well positioned to accommodate the expanding demands for air cargo shipments.

Beginning on September 3 and every Sunday thereafter, Singapore Airlines introduced a new 747-400 freighter service called the "Mega Ark." The flight departs from JFK and flies to Brussels, Dubai and Singapore. This will complement the airline's daily service capacity of 120 tons to Asia and other global destinations.

Singapore Airlines began operating out of JFK in July 1992. It currently moves general cargo to 75 cities in 41 countries linking Asia, North America, Europe and Africa. Stated by Mike Christiansen of the airlines, Singapore airlines has become more service oriented. It recently invested in a 60,000 sq. ft. facility at JFK in order to facilitate its new Mega Ark traffic and built a new "superhub" valued at $150 million in Singapore for the purpose of improving its service worldwide.

Last year the United States exported almost $32 billion to and imported almost 51 billion from Association of South East Asian Nations (ASEAN), the trade organization comprised of Singapore, Thailand, the Philippines, Malaysia, Indonesia and Brunei. These figures represent an increase of 13% and 23%, respectively. As U.S. trade with ASEAN increases, Singapore Airlines, with its newly expanded facilities at JFK and in Singapore, will be well positioned to service the growing cargo demands.

In 1994, the Port of New York/New Jersey handled 1.07 million metric tons of cargo by air (448,355 outbound and 625,937 inbound). According to the World Trade Organization, the body that recently replaced the General Agreements on Tariffs and Trade, world trade this year is anticipated to increase by 8%, a very strong pace. This will, again, support the ever-growing air cargo shipments originating and arriving at the Port of New York/New Jersey.

The North American Free Trade Agreement (NAFTA) was implemented on January 1, 1994. The purpose of the Agreement is to eliminate barriers to trade and investment—including tariff, import quotas, import licenses and investment restrictions—among the United States, Canada and Mexico so as to ultimately increase our standards of living. NAFTA has been hailed as a success by many. However, recent events have clouded its benefits.

NAFTA: A Success In Year One

During the first year of NAFTA, U.S.-Mexican bilateral trade rose 22%, up from $81.5 billion to $100 billion. U.S. exports to Mexico increased at about the same rate -- and almost four times faster than U.S. exports to the rest of the world.

Since NAFTA was implemented, there has been a proliferation of joint ventures and strategic alliances between U.S. and Mexican companies.

A survey conducted in May 1994 by KPMG/Peat Marwick, a leading consulting firm, revealed that nearly 40% of the 1000 respondents said their industry had already benefited from NAFTA. The American Chamber of Commerce in Mexico conducted a survey of its members in the Spring of 1994. Most respondents expressed confidence that NAFTA would be beneficial to their productivity and profitability.

Coopers and Lybrand, another leading consulting firm, interviewed executive officers of 410 of the fastest-growing U.S. product and service companies. According to the report issued, for growth companies, NAFTA has meant export opportunities, not job relocations.

NAFTA: The Second Year Will Be Poor

On December 20 of 1994, on the verge of entering the second year of NAFTA with flying colors, the situation drastically changed. An attempted currency adjustment by the Mexican Government that some say should have occurred earlier but at a more gradual pace, accelerated out of control.

The Mexican Government expanded its exchange rate band by 15% in an attempt to allow the peso to adjust downward. Within two days pressures mounted -- currency reserves used to prop up the peso were quickly dwindling. As a result, the peso was allowed to float freely. Shortly thereafter, it nose-dived.

From December 20, 1994, to July 1995, the peso dropped about 40% in value compared to the U.S. dollar. Like falling dominos, what began as a short-term liquidity crisis drove down confidence and sparked panic. The Mexican stock market dropped precipitously. Most investors whose money came due did not reinvest in the country. Prior to this, Mexican political events pressured the situation.

The assassinations of Luis Donaldo Colosio, the PRI presidential candidate, and Francisco Ruiz Massleu, a senior ranking PRI official, combined with unrest in the southern state of Chiapas, further fueled investor unrest.

U.S. exports of consumer goods, which include sporting goods, are expected to be most affected by the devaluation, according to David Hirschman, Director of Latin American Affairs of the Chamber of Commerce of the United States. Stated by Robert Hall, Vice President of Government Affairs at the National Retailers Federation based in Washington, D.C., Mexican retailers fear that the industry won't bounce back for years. Other retailers are not as pessimistic, but have delayed expansion plans pending how quickly the economy recovers.

JC Penny, Footlocker, Dillards (which operates 227 stores in the United States), Wal-Mart and Sax Fifth Avenue have delayed plans to open new stores.

President Clinton's announcement on January 31 to provide Mexico with about a $50 billion U.S./international package of loans and loan guarantees was met with considerable relief in the Mexican and U.S. business communities. Although economic indicators have fluctuated since then, greater stability and confidence in the economy has resulted.

On March 9th, Guillermo Ortiz, Mexico's Minister of Finance, announced an economic program designed to restore economic stability. The measures call for an increase in the national value-added tax from 10% to 15% and the elimination of some exemptions; reductions in government expenditures to 1.6% of GDP for fiscal year 1995; a rise of 35% in gasoline prices and 20% in electricity rates; a continuation of the floating exchange rate; and a 10% hike in the minimum wage (which was bumped to 12%).

As a result of the crisis and new austerity program, the Mexican Government anticipates a temporary increase in inflation of between 40% to 50% and a reduction in GDP of 2% to 3% this year.

NAFTA: Year Three Looks Bright

Earlier this year, Salomon Brothers projected Mexican GDP to rise by 3.4% next year. More recent estimates anticipate 3% -- indicating a short-lived crisis. These projections are partly based on strong anticipated exports -- which have already been registered. Lower inflation is also predicted for 1996.

According to a newly released 1995 Investment Climate Survey by the American Chamber of Commerce in Mexico, planned capital investment by the 374 foreign and domestic firms in Mexico that responded to the survey will increase by 5.1% this year, from $5.9 billion in 1994 to $6.2 billion in 1995. Nearly 91% of all respondents indicated that long-term prospects for growth in Mexico are favorable. Of the American-owned companies surveyed, 95.4% expressed such confidence.

Exports of sporting goods (including games, toys and accessories) to Mexico increased almost 55% from 1993 to 1994. Exports to Mexico this year will be poor. However, as a result of renewed confidence and investment in the economy, Mexico's sporting goods and retail industry as a whole will slowly strengthen.

The Canadian Sporting Goods Market Improves

The Canadian economic recovery has positively affected its retail sporting goods market. Reportedly, Marcel Rousseau, co-owner of Sports Gilbert Rousseau, a Quebec City sporting goods chain specializing in hockey equipment, anticipates his sales figures to increase substantially over the next several years.

Paul Levine, a buyer for Sports Distributors of Canada, a 200-store chain based in Calgary, said his sales are on the rise. Levine believes that confidence in the economy has been restored and as a result, anticipates greater sales. The chain plans to expand into team sports, ski and cycling merchandise.

The Canadian sporting goods market is very receptive to U.S.-made sporting goods. From 1993 to 1994, U.S. exports of sporting goods there increased by 16%. As the Canadian economy grows stronger, U.S. exports will likely increase at a faster pace.

The Sporting Goods Market Is Growing in Chile, the Next NAFTA Partner

Chile, with a population of 14 million, is a growing market for sporting goods. The sector grew by 41% from 1991-1992, and by 47% from 1992-1993. Even though some specific subsectors such as bicycles and related products have increased by as much as 107% (1991-1992), the growth of the Chilean sporting goods market appears to have slowed to about 20%. Approximately 80% of sporting goods sold in Chile are imported.

Local production consists mainly of bicycles and related products, billiard and other game tables, and boats, motorboats, sailboats and yachts. Imports come mainly from Far East countries such as Taiwan, Korea, Hong Kong and Malaysia, as well as from Europe. Many of these products incorporate U.S. technology and licensing rights. More recently, China and Japan are becoming significant competitors.

American sporting goods are regarded as being of excellent quality. U.S. market share has increased from 18% in 1991 to 20% in 1992, and to 23% in 1993. U.S. imports increased by 59% during the period 1991-1992 and 63% during the period 1992-1993. The Chileans are increasing interested in manufacturing locally under licensing agreements.

The market for sporting good products in Chile has grown steadily. This increase is fueled by a combination of factors, including improved economic conditions of consumers and a greater interest in health and fitness.

Within the next ten years, we will likely see an expanded free trade agreement that will encompass the entire Western Hemisphere.

The goal to establish a free trade agreement of the Americas was agreed on by 34 Western Hemisphere leaders at the Summit of the Americas, held in Miami last December. With approval from Congress, U.S. businesses can look forward to greater opportunities and risks throughout Latin America.

The last decade has seen a period of remarkable economic reform and growth in the Americas. For the first time in history, Latin America, with a population of about 440 million, is now a community of democratic nations. The Summit of the Americas was dedicated to promoting this prosperity through open markets, hemispheric integration, and sustainable development.

Many Foresee Benefits

Many manufacturers see a real benefit. Frank Stucke, co-owner of Perfect Fit Glove Company in Buffalo, New York, agrees. "We've increased our exports to Mexico under Nafta, and through a free trade agreement of the Americas, we intend to gain greater market share in Latin America over our Asian competitors."

Perfect Fit has been manufacturing knit industrial and safety gloves for 21 years. Exports to Canada and Europe have been strong over the past five years. But sales to Latin America have increased the most, showing greater promise for the company.

Perfect Fit's success is on par with the experiences of many U.S. businesses. In fact, Latin America is the United States' second fastest growing export market, increasing at a high average annual rate of 14% since 1988. What's more, in 1994 U.S. exports to 20 Latin American countries increased by 16% from the previous year, achieving 2% above the average annual rate, reaching $88 billion. A free trade agreement that eliminates Latin American tariffs and non-tariff barriers will undoubtedly result in an even greater export performance by the United States.

According to a survey by KPMG Peat Marwick, an international consulting firm, U.S. direct investment in Latin America during the first quarter of this year totaled $1.9 billion. This represents an increase of 46% from the same period last year.

Many organizations and economists project solid growth in the region. According to a recently released survey from the Association of American Chambers of Commerce in Latin America, Brazil, Chile, Colombia, Peru, El Salvador, and Trinidad and Tobago are expected to average 5% or more growth through 1996. The Association said that despite the Mexican economic crisis and its spillover effect on other Latin America countries, the region should remain attractive for foreign investors well into the future.

U.S. Trade Representative Mickey Kantor says that by the year 2010 the United States will export more goods to Latin America than to Japan and Europe combined.

U.S. consumers will also benefit through lower prices on consumer goods here in the United States. The elimination of import duties on goods entering the United States from Latin America will result in many consumer goods becoming less expensive to purchase here. Retail prices on clothing are expected to decrease more than most other goods, according to Ralph Watkins of the U.S. International Trade Commission.

A Free Trade Agreement of the Americas Will Likely Boost Textile Exports South

Apparel production, which is labor intensive, difficult to automate and requires few skills, has continually moved to developing countries where labor rates are very low. Consequently, U.S. production has declined.

According to a U.S. International Trade Commission report released in January, the U.S. apparel production index declined from its base of 100 in 1987 to a low of 92.2 in 1990. It increased to 95.0 in 1992 before declining slightly in 1993 to 94.9. Over the last 10 years, U.S. imports of apparel grew by 90% to $34 billion.

This trend is not unique to the United States. Stated in the Commission report, from 1980-1993, apparel output decreased by 24% in developed countries but increased by 39% in developing countries. During this period, employment in this sector fell by 19% in developed countries and rose by 110% in developing countries.

The United States is one of the world’s largest and most efficient producers of textile mill products. However, over the years domestic output has also dropped. This is primarily due to a reduction in apparel production in the United States -- the single largest market for the textile industry. Thus, East Asian producers of apparel, major suppliers to the United States, source their textiles in East Asia, not in the United States.

In an attempt to sustain remaining domestic market share, U.S. apparel producers have expanded their production-sharing operations in Mexico and the Caribbean -- benefiting from the lower wages and tariff preferences. This activity also benefits the U.S. textile industry.

Macfarland Cates, president of Arkwright Mills and former president of the American Textile Manufacturing Institute, says that a under a free trade agreement of the Americas, more apparel production will move to Latin America as opposed to East Asia. Cates believes that U.S. textile mills will likely supply Latin apparel producers, where Asian producers will continue to source their textiles in Asia. This is good news for the industry, he says.

Importantly, a free trade agreement of the Americas will secure Latin American market share for U.S. firms vis-a-vis European and Asian firms.

Argentine Business Environment Positive

For the first time in more than a generation, the environment for American business in Argentina is positive. This is a result of a political decision by the Menem government to embark on a course of free market reform that includes fiscal responsibility, an open market, privatization and deregulation. A free trade agreement of the Americas will support and further strengthen these commitments.

The Menem government has reversed the isolationist, import substitution policies of the past half century. In only a few years, respectable growth and confidence in the future have been established. The country has achieved a high degree of economic and political stability.

With a population of 32.6 million, a per capita income of almost $9,000, and an annual growth rate of about 4.5%, Argentina has a great deal to offer the United States. Its consumers welcome American products and its business sector has increasingly become a firm commercial ally of the United States. Thus, last year the United States exported almost $4.5 in goods to Argentina, achieving an 18% increase over 1993, and a positive trade balance of $2.7 billion.

Mercosur, the regional trade bloc, includes Brazil, Paraguay, Uruguay and Argentina. NAFTA accession, or a bilateral trade agreement with the United States, which would precede a Western Hemisphere free trade agreement, is currently being debated in Argentina.

Colombia Has Undergone Dramatic Changes

The Colombian economy has been undergoing dramatic changes during the past several years as a result of the Government's new policy of aperatura or opening. Additionally, the Government has pursued a leadership position in forging free trade agreements in the region. Free trade agreements have been signed with Venezuela, Ecuador, Chile, and Mexico, while negotiations with others continue. Colombia has given notice to the United States that it wishes to become part of the North American Free Trade Agreement in the short-term -- in addition to becoming a member of a more powerful and influential trade agreement of the Americas in the long-term.

With a long history of democracy, sustained economic growth since the 1950's, and the aperatura process that is well underway, which includes the privatization of many state-owned enterprises, the Colombian economy will continue to grow well into the future. The economy, which registered a 3.5% GDP in 1993, increasing to 5.3% last year, is expected to grow at a rate of about 5% this year.

Since the Government implemented its liberal economic policies, Colombian imports have grown substantially. In 1994, Colombia imports from the United States reached almost $4.1 billion, a 25.8% increase over 1993. This represented approximately 36% of total Colombian imports.

Colombia, a major trading partner in Latin America, has demonstrated a preference for U.S. goods. While that country's image is often one of violence as a result of the illegal drug trade, it has achieved a very attractive investment and commercial climate. A trade agreement of the Americas will improve this.

The Venezuelan Market Will Provide Greater Opportunities

U.S.-Venezuelan trade is expected to grow substantially over the long term, despite declines of U.S. exports to Venezuela since 1992. In 1994, U.S. exports to Venezuela exceeded $4 billion, down from $5.4 billion in 1992. The U.S. has traditionally been Venezuela's most important trading partner, receiving about 57% of Venezuela's total exports and accounting for about 42% of its imports in 1993.

Venezuelan reforms begun in 1989 form a basis for movement away from a petroleum-based economy toward one that is diversified and market-driven. Tariffs fell sharply from a ceiling of 135% to a maximum of 20% (with some exceptions), and free exchange of currency was established. Driven by the reforms and economic expansion, imports grew rapidly during 1990, 1991 and 1992.

Since early 1992, Venezuela has endured a series of political and economic crises that have shaken business confidence within the country and have led to increased caution by international investors. Although new investments and marketing initiatives have suffered greatly since mid-1993, business efforts launched during the 1989-92 boom have largely continued to thrive.

In 1993, the Venezuelan economy went into recession. President Rafael Caldera suspended certain constitutional guarantees and decreed exchange and price controls on June 27, 1994. As the new currency control mechanism was being designed and put in place during July, foreign currency was generally not available to importers. As a result, orders from Venezuelan buyers slowed significantly.

This year will likely be difficult as the new Government deals with the struggling economy and policy challenges. Oil income, the main source of government funding, will probably not recover significantly from 1993 lows.

As the Venezuelan economy recovers from recession and low economic growth, imports from the United States will rise. A free trade agreement of the Americas will help to solidify Venezuelan economic liberalization policies, and will invariably secure Venezuelan market share for U.S. and other firms of the Western hemisphere.

The U.S. Service Sector

The United States is one of the world's largest and most advanced exporters of services. Currently, the industry accounts for over half of the U.S. gross domestic product. In 1991, the United States exported $257 billion in services worldwide, and $8.3 billion to Mexico alone. Although Mexico has restricted trade in services, U.S. exports of services to Mexico have increased dramatically, more than doubling since 1987. This is a consequence of the United States' overwhelming competitive advantage in such a specialized and high value-added sector. For example, the U.S. telecommunications services industry is the largest and most competitive in the world, with revenues of over $90 billion in 1991, and a trade surplus of $1.9 billion.

New York City is the dominant producer of services in the United States and home to the largest firms in advertising, accounting, management consulting, engineering, diversified financial services, banking, securities and insurance. In the 1980s, corporate service firms became important export businesses and developed global expertise. The global economy has facilitated a boom in services trade due to the modern technology facilitation of long-distance interaction between the buyer and seller via electronic information flows and other modern telecommunications advances.

The Mexican Service Sector

The Mexican services industry is plagued by two problems that free trade and continued market liberalization will alleviate. First, Mexico's relatively small commercial and industrial sector has not created a large demand for a modern service sector. Mexico's highway system is so dilapidated that truck transportation can take 30 to 40% longer to go the same distance as in the U.S., with 60% higher fuel costs. As a result, the cost of services is significantly higher than in most industrialized nations. Second, extensive government regulation and mismanagement have created a service sector that is in need of modernization and improvements. The level of service that most Mexican entrepreneurs and managers are accustomed to is much lower in quality than would be acceptable in the U.S. This has been a particular disincentive for U.S. firms to do business in Mexico.

Service Rules of Origin and Nafta Provisions

Under the U.S.-Canada FTA, each country agreed to provide national treatment to those persons providing over 150 services. However, this obligation did not require that the treatment has to be the same in all respects. For example, if Canada chooses to treat providers of one service differently than does the United States, it is free to do so, as long as it does not discriminate between Canadians and Americans. In addition, a country may accord different treatment for legitimate purposes, such as consumer protection or safety, as long as the treatment is consistent. Under the U.S.-Canada FTA, regulations cannot be used as a disguised restriction on trade. For example, either government remains free to license and certify providers of a specific service, but must ensure that these requirements are applied consistently and do not discriminate against persons from the other country.

Nafta, in essence, does the same. The substance of the agreement requires each nation to treat the others' service firms no less favorably than its own. An important auxiliary rule incorporated into Nafta maintains that firms providing services cannot be required to establish a residence, office, branch, or subsidiary as a condition for providing a service. If the provider does wish to establish a tangible presence though, Nafta's rules will also prevent discrimination against that firm in the marketplace. Additionally, Nafta would extend this concept of national treatment to include provisions related to professional licensing and certification. The agreement explicitly forbids using such procedures to restrict trade or provide preferential treatment to nationals. Finally, Nafta does endow each country the right to deny benefits to firms which provide the service through a enterprise owned or controlled by a person or business of a non-Nafta country.

Nafta's Impact on the U.S. and Mexican Service Sector

Nafta will substantially add to current U.S. exports of services by further opening Mexico's $146 billion market in services. It levels the playing field, guaranteeing that U.S. service providers get the same treatment in Mexico as Mexican firms, and allows U.S. firms to provide services in Mexico without relocating their operations to Mexico.

The U.S.-Canada Free Trade Agreement established the first comprehensive set of principles governing services trade. Nafta broadens these protections and extends them to Mexico. Canada has retained its cultural exclusion from the U.S.-Canada Free Trade Agreement. Sectors covered under Nafta include: accounting, enhanced telecommunications, advertising, environmental services, architecture, health care management, broadcasting, land transport, commercial education, legal services, construction, publishing, consulting, tourism, and engineering.

According to the Congressional Budget Office, the major services that Nafta would open in Mexico include finance, business services, land transportation and telecommunications. Under Nafta, the licensing of professionals, such as lawyers, doctors, and accountants, will be based on competence, not nationality or residency. Citizenship requirements for licensing of professionals will be eliminated within two years.

Importantly, Nafta requires each country to provide for improved intellectual property protection and enforcement of the rights of inventors, authors, and artists against infringement and piracy, reducing the risk that products of U.S. creativity and innovation could be unfairly exploited in Mexico. By reducing the threat of piracy and other loss, Nafta provides additional incentives for U.S. providers to develop new technologies and products. Also, the Agreement ensures protection for North American producers of computer programs, sound recordings, motion pictures, encrypted satellite signals and other creations, including rental rights for computer programs and sound recordings. Increased protection against copyright/patent violation should lead to increased R&D spending by U.S. firms. This will undoubtedly enhance opportunities for U.S. service providers.

Although a comprehensive set of regulations modify the liberalization of trade and investment in the banking, investment, insurance, transportation, and telecommunications industries, these regulations only cover the transition period of liberalization. Afterwards, these industries will be as open to free trade and international competition as any other. For example, after 2000, Nafta would allow U.S. banks, securities and insurance firms, and other financial institutions to establish wholly-owned subsidiaries in Mexico. All current restrictions discriminating against foreign firms would be lifted for Nafta countries.

New U.S. entrants establishing joint ventures in Mexico will be allowed 100% ownership by 2000. Finally, reciprocal rights would be established for firms based in member nations. U.S. bank's share of the Mexican market is immediately expected to grow under Nafta, thus making the U.S. banking industry more internationally diversified and competitive. Financial institutions particularly stand to gain in the long run as they both finance further Mexican development, and finance and insure the growing volume of trade between the U.S. and Mexico. In insurance alone, industry experts calculate that Mexico could become one of the world's top ten insurance markets by the turn of the century. The liberalization of the financial sector is crucial to Mexico's further development because of the country's absolute necessity to institute a modern system of credit and securities markets.

The benefits to both countries extend to the transportation and telecommunications sectors, too. Since both are essential services for the furthering of business, they will grow exponentially as the volume of trade and investment increases between the Nafta countries. Under Nafta, both nations have agreed to allow reciprocal truck and bus access to the states and regions adjacent to the border by the end of 1995. By the year 2000, Nafta will eliminate restrictions on the U.S. trucking industry -- allowing U.S. rigs to deliver anywhere in Mexico. According the U.S. International Trade Commission, in 1990 two-way trade with Mexico in goods carried was approximately $65 billion, or about 37% of two-way trade with Canada. The International Trade Commission forecasts modest gains in the short run for U.S. trucking firms, with increased gains commensurate with increased trade.

The United States' overwhelming competitive advantage in telecommunications will allow it to gain the majority market share in advanced telecommunications services. In 1991 alone, U.S. exports to Mexico of telecommunications services registered a $30 million trade surplus. Providers of these services stand not only to gain from increased cross-border business with Mexico, but also from increased demand for advanced telecommunications services on the part of multinationals investing in Mexico. As a result, Mexican firms will in turn take advantage of the opportunity to purchase from U.S. providers the establishment of intra-corporate private networks. Increased trade in software and network consulting services is also likely, as Mexican firms become integrated into the North American business communications network. Increased demand for these high value-added services will in turn beget increased demand for the high-tech equipment that facilitates these services, thereby benefiting U.S. telecommunications equipment manufacturers as well.

The list of service providers who will benefit from Nafta is extensive. For example, companies such as AT&T, ITT and MCI International would gain improved access to a $6 billion telecommunications services market. American Express, a global financial services and travel company, sees a number of benefits to the U.S. economy from Nafta. According to the company, U.S. and Canadian financial institutions which have generally been prohibited from operating in Mexico, will be treated like their counterparts in Mexico. This will allow American Express to offer the same range of products and services to Mexican customers that are offered to U.S. customers. As the Mexican and U.S. economies grow as a result of Nafta, business and leisure travel will increase. For example, over 1.5 million Mexicans visited the United States in 1992, comprising the fifth largest tourist group to the United States. U.S. travelers to Mexico account for over three-quarters of all visitors there. As Nafta spurs travel between the United States, Canada and Mexico, travel-related services offered by American Express will also increase.

Firms providing construction and engineering services will benefit. U.S. firms have a competitive advantage over many Mexican firms due to their highly skilled staffs and advanced engineering techniques. Rising demand for services is anticipated due to Mexican infrastructure improvements, stricter enforcement of environmental laws, and potential contracts to be awarded for work on renovations and new construction for Pemex, the Mexican government-owned oil company.

The net effect of Nafta in U.S.-Mexican services trade is the removal of the variety of non-tariff barriers and burgeoning regulations restricting foreign access to the Mexican services market. The preferential access Nafta endows U.S. firms coupled with the U.S.'s highly competitive position creates an unprecedented opportunity for U.S. service providers in one of the world's fastest-growing markets. Continued Mexican growth and development plus Nafta's liberalizing effects will make Mexico a highly attractive market to U.S. services firms in the future.

Many of the best markets for companies exporting through the New York/New Jersey Port Authority are located in northern Europe. Whether the goods are shipped by sea or air, the United Kingdom and Germany are top export destinations. This is fairly representative of exports departing from New York State, New Jersey, and the United States as a whole.

Western Europe's period of slow economic growth and recession has ended. Revised figures released from the European Commission in November 1994 project gross domestic product (GDP) of the European Union (EU) to have reached 2.6% in 1994, 2.9% in 1995 and 3.2% in 1996. This is up from -0.4 for 1993 and is good news for New York/New Jersey Port exporters to the EU.

Recent growth in the European Union has already had a positive effect on some U.S. exporters. Stated by Timothy Casey, Traffic Manager for J&J Log and Lumber Corp. based in Dover Plains, New York, "Our exports to the European Union have increased markedly in the past few months." He continued, "With stronger economic growth, we anticipate selling more to the region." About 85% to 90% of J&J's exports depart from the NY/NJ port.

Steve Shyne, International Traffic Manager for Pfizer, Inc., a manufacturer of pharmaceuticals and food chemicals headquartered in New York City, said that it has become difficult getting space on vessels destined for Europe. This is a pretty good indicator of the greater demand for U.S. products.

The Commission sited several factors for the EU's improved performance. These include the passage of the GATT Uruguay Round, an upswing in the U.S. economy, an anticipated decline in EU interest rates and a restoration of business and consumer confidence.

The EU accounts for 40% of the world's GDP. Germany, the largest EU economy, accounts for 24 percent of the EU's GDP. The UK, the United States' biggest European market, accounts for 16%. Per capita income for the EU is roughly $20,000. Former West Germany, the Netherlands and Denmark have the highest per capita incomes, reaching 135% of the average.

Gary Zwiercan, Vice President and Manager of the food products division of National Starch & Chemical Co., is bullish about his company's export prospects to northern Europe. The food products division of the Bridgewater, New Jersey-based manufacturer produces specialty food starches used in food processing. Stated by Zwiercan, now that the recession has ended, "We're very excited about the opportunities in northern Europe." Zwiercan pointed out that both the UK and Germany are major markets for his company.

The Single Market Has Created Opportunities — and New Risks

The European Single Market of 370 million consumers, officially established on January 1, 1993, has significant implications for U.S. companies. The elimination of many EU internal trade barriers has enabled EU-based firms to operate relatively freely, thereby achieving economies of scale and a higher degree of competitiveness. European mergers and acquisitions, and the rationalization of industrial production and distribution systems have enhanced this.

The ongoing harmonization of product standards, labeling, testing and certification requirements simplifies U.S. exporters' ability to offer products throughout the Union, while reducing costs. This also allows U.S. firms to achieve economies of scale and greater competitiveness in Europe, along with other non-EU countries and U.S. competitors, such as Japan, Taiwan, South Korea, Hong Kong and Singapore.

The possibilities always exist that the European and North American trade blocs will become embroiled in trade disputes, the EU will establish protectionist measures or through trade diversion U.S. exports there are curtailed. Trade diversion occurs when members of a trade group buy more goods from each other, due to the elimination of internal trade barriers, displacing non-member goods. As a result, a sound export strategy may involve the eventual targeting of a diversity of markets on global basis.

1994 Exports to the United Kingdom — Our Top European Market — Topped $26.8 billion

The UK economic recession, which began in the third quarter of 1990 and was the UK's longest recession since the 1930s downturn, is over. During the recession, widespread business failures occurred, both blue and white collar workers became unemployed, and consumer and business confidence was undermined. And many of the jobs lost may never be replaced as enterprises adjust. The UK, however, has emerged from recession with leaner, more competitive industries.

In 1992, UK GDP expanded by 2%. It is projected by the European Commission to have reached 3.8% in 1994, to increase by 2.7% in 1995 and 2.8% in 1996.

The UK is the largest importer of U.S. products in Europe. Last year the United States ran a trade surplus with the UK of $1.8 billion, and again ranked as our fourth largest export market after Canada, Japan and Mexico. Given its size and growth potential, the UK represents an extremely important overseas market. Over the next few years, new and current U.S. exporters to the UK can expect to find exceptional trading opportunities.

UK Sectors Present Opportunities for NY/NJ Port Shippers

Britain's telecommunications sector is the most liberal among European countries and offers increasing opportunities for U.S. equipment manufacturers. Although equipment for basic voice services is largely reserved for EU companies, power utilities, transport utilities, and cable TV companies have new transmission equipment requirements that U.S. exporters can fill.

Computer software is one of the fastest growing British market sectors. After the British, U.S. companies are dominant and likely to remain unchallenged by third-country suppliers. The activities of the major U.S. vendors of computers and operating systems software have created a fertile secondary market for applications programs that require little or no adaptation to be acceptable to British users.

The UK health care market is dominated by the state-funded National Health Service (NHS). However, NHS management is becoming decentralized. As a result, Regional Health Authorities are taking on procurement responsibilities. Managerial and financial autonomy is also being granted to many hospitals and general practitioners. With increasing emphasis on cost containment, U.S. suppliers of medical equipment are likely to benefit.

A growing public awareness of environmental pollution and the return to economic growth in the UK is expected to reinvigorate the environmental technology and pollution control equipment market. U.S. advancements in this field have positioned U.S. firms at a competitive advantage.

U.S. consumer goods, especially those considered representative of the American lifestyle, are held in high esteem in the UK. The upturn in consumer spending will present greater opportunities for U.S. suppliers of children's wear and nursery products, sporting goods and exercise equipment designed for the home, garden and outdoor leisure equipment, and general fashion accessories.

Other profitable export markets include auto, electronic components and test equipment, aircraft and parts, computers and peripherals, oil and gas field machinery, hotel and restaurant equipment, biotechnology, apparel, drugs and pharmaceuticals, building products, and security and safety equipment.

U.S. Exports to Germany — the Largest European Economy — Last Year Reached $19.2 Billion

The bonanza that German unification brought to the country's western producers came to an end in early 1992. The surge in product demand in former East Germany dropped and the global economic slowdown negatively impacted the heavily export-oriented economy. In 1993 the bellwether automobile industry, for example, said to account for one in seven German jobs, hit its worst slump in years.

German GDP is projected by the European Commission to have reached 2.5% for 1994, and to increase to 3% in 1995 and 3.4% in 1996. These figures are a vast improvement over Germany's -1.2% GDP incurred in 1993. The growth and sheer economic size of the economy makes for a very profitable export market. And some observers anticipate that eastern Germany may become the fastest growing economy in Europe.

Growing German Sectors Will Benefit NY/NJ Port Exporters

The industrial process controls sector covers measurement and control instrumentation and equipment, counting and recording instruments, testing and monitoring equipment, numerical controls and programmable controllers. German growth estimates for 1995 are favorable. U.S. producers of these products have an excellent reputation in Germany and already account for a sizable portion of imports to Germany.

The majority of German computer distributors and users perceive U.S.- made computer products as of high quality and leading edge technology. The market is growing and presents sound opportunities for U.S. producers. A large number of independent software vendors with small local operations maintain about 85% of the sector. With a 22% share of the European software and services market, Germany is the largest and fastest growing European market for software.

In 1993, the United States ranked fourth among Germany's leading chemical suppliers, after France, the Netherlands and Belgium/Luxembourg. German imports of photochemical and pharmaceutical products from the United States have been strong. According to the U.S. Department of Commerce, the 1993 industry market size of $80.5 billion is expected to grow to $87.2 billion this year.

The German market for high quality, advanced medical equipment is exciting. U.S. producers of innovative technologies such as laser optics, new diagnostic devices, as well as new artificial implants and components should find opportunities in Germany. Innovative devices used in micro-surgery, biomedicine and radiology are also in demand.

Other major German markets where U.S. producers stand to benefit include aircraft, motor vehicles and parts, telecommunications equipment, electronic components, and audio/visual equipment.

Some like it — some don't — most don't know. That's the word on the Uruguay Round Agreements (URA) signed by 117 countries in April 1994 -- but yet to be ratified by Congress. Held under the auspices of the General Agreement on Tariffs and Trade (GATT), the URA will phase out quotas and reduce tariffs on most products traded globally.

GATT, the international body that governs approximately 90% of world trade, is responsible for reducing international tariffs from an average of 40% in 1947 to 5% in 1990. These tariff reductions have permitted international trade to expand enormously, national incomes to substantially increase and international competition to flourish resulting in higher quality, lower priced goods.

GATT economists believe that the URA will result in world income gains of $235 billion annually and trade gains of $755 billion annually, by 2002. For the United States it means increased exports by more efficient U.S. industries, an increase in our overall disposable income and improved economic growth. So what's not to like? It depends on your perspective -- or job.

The Agreement also means increased imports of goods for which the United States is not globally competitive and does not have a comparative advantage. On a micro scale this may result in losses for your company -- or the loss of your job. According to critics, the URA subordinates societal values to trade priorities and consequently has upset many labor unions, environmental groups, state and local officials. Additionally, many fear that the United States will surrender too much sovereignty to the World Trade Organization (WTO), the ruling body established by the URA, which is not directly accountable to the U.S. public.

"The Uruguay Round is not necessarily a good agreement for the United States," says Macfarland Cates, president of Arkwright Mills of South Carolina and past president of the American Textile Manufacturing Institute. Mr. Cates' fear that the textile industry will be hurt by the Agreement is not unfounded. According to the U.S. International Trade Commission, the URA will likely cause the U.S. textile trade deficit to increase by over 15%. The projected 5 to 15% increase in imports will offset the smaller 1 to 5% gain in exports resulting in a small but negative impact of 1% or less on production and employment in this sector.

Arkwright Mills is a manufacturer mostly of industrial textiles and garments. The company's annual sales range in the hundreds of millions of dollars, and exports account for about 15% of production. Like many U.S.-based textile mills, Arkwright mills is very competitive. Compared to other global producers, U.S. mills are one of the world’s largest and most efficient producers of textiles, being competitive in quality, innovation, marketing and related services. So why is the industry expected to lose under the URA?

The elimination of protection will expose the competitive weaknesses not of the U.S. textile industry, but of the apparel industry -- the single largest market for U.S.-produced textiles. The U.S. apparel industry is labor intensive and is subject to tremendous foreign competition from developing countries whose wages are a fraction of those in the United States. As a result, the greatest threat to the U.S. textile industry is the growth of imported garments. And increased imports of apparel negatively affect the U.S. demand for textiles. The negative effects on employment will be largely felt in North Carolina, South Carolina and to a lesser extent, Georgia. These three states account for one-half of U.S. textile employment.

Mr. Cates feels that the URA does not give U.S. producers equal access to foreign markets. Additionally, he believes that the United States is giving up too much sovereignty under the URA. Stated by Cates, "If you had reservations about the United Nations -- this is worse -- because we have no veto power."

According to Robert Stevenson, CEO of Eastman Machine Company based in New York State, "We need to produce for global markets in order to succeed. The U.S. market is peanuts compared to world markets." Mr. Stevenson, an ardent supporter of free trade, met with President Clinton last year in support of the North American Free Trade Agreement. Stated by Stevenson, "international competition is not harmful, it is a necessity. It helps you improve your product and manufacturing process."

Stevenson believes that U.S. companies must take advantage of the world economy and the GATT Agreement will help achieve this. Established in 1893, Eastman Machine Co. is a manufacturer of cloth cutting and spreading equipment used in the apparel, auto, furniture and industrial fabric industry. The company's annual sales exceed $25 million -- and 80% of new machines are exported. The success enjoyed by this company will likely improve with the advent of the URA. According to the U.S. International Trade Commission, the impact of the Agreement on the U.S. industrial machinery industry will be positive.

U.S. duties on cloth cutting and spreading equipment are about 10%. Stevenson believes that Eastman Machines' 80% share of the domestic market is not at risk with the reduction or elimination of this protection. He does see large potential export gains to countries like India, where the average current duty on his products is about 50%; and Brazil, where imports of finished machines are currently prohibited -- but will be forced open by the URA. Stated by Stevenson, "We can't support our economy by just selling to ourselves."

The world market for computers and office equipment reached $220 billion in 1993. Currently, U.S. producers supply 46% of U.S. consumption. The U.S. computer industry is globally competitive and a firm supporter of the URA. Thus, industry representatives believe that the tariff reductions will have a significant beneficial effect on the computer and office machine industry.

Dean Barren, CEO of DSB Computer Applications, provides computer consulting services and systems to customers domestically and overseas. Based in California, Dean Barren expects the growth of his small firm to accelerate with the advent of the URA. Claims Barren, "Some developing countries' high tariff barriers on computers have essentially prohibited sales by U.S. firms. For example, Brazilian tariffs range from 30 to 35% and their customs and other taxes can add an additional 40% on top of that. Some of India's tariffs on computers and office machines are 130%. Under the new GATT agreement, these barriers will come down."

According to the U.S. International Trade Commission, the URA will result in an increase of exported computer products, especially to developing countries such as India, Thailand and Indonesia. Additionally, the U.S. computer industry expects to save hundreds of millions of dollars from duty reductions in Europe.

U.S. firms lead the world in computer technology advances and invest large shares of their revenues in R&D. As a result, Barren believes that improved intellectual property protection under the URA will also benefit U.S. firms, especially in developing countries -- some of which have the fastest growing markets in the world.

The global demand for environmentally friendly products is at an all-time high. Consequently, sales are rapidly increasing for Ecostar International, a fast-growing New York State producer of biodegradable additives for plastics.

Bob Downie, CEO of Ecostar International, is very familiar with the global trading environment and a supporter of free trade. His firm exports about 70% of its production to Japan, South Korea, Taiwan, Denmark, Germany, Scandinavia and most recently to Mexico. Ecostar also has a joint venture production agreement in Changchun, China, located in the north. This facility produces a biodegradable agricultural mulch film which is spread over crops for the purpose of retaining heat and moisture, then degrades in the spring, not requiring the expense and labor to pick it up and discard it.

According to the U.S. International Trade Commission, the URA impact on most U.S. chemical sectors is positive, but small. Stated by Downie, "Global duties on our additives are already minimal." Thus, he believes that the URA will have little impact on his company. The only significant trade barriers to his product are logistical. Because the product is heavy, bulky and expensive to ship, the firm has plans to establish production facilities in strategic regions around the world.

Other issues, however, may be problematic. "I am very concerned about the loss of sovereignty regarding the establishment of the WTO", said Downie. "National sensitivities are definitely on the rise. People are more sensitive about their national identity and national prerogative." Overall, Bob Downie is neutral on the Agreement.

Ed Steger, CEO of Stetron International, relocated the headquarters of his electronic controls manufacturing company from Canada to the United States several years ago. The firm has manufacturing facilities in Japan, South Korea, Taiwan, Germany and China. Stated by Steger, the URA "was negotiated quite well. It does not appear to favor one country over another." This is an important point since the manufacturer custom designs much of its product to client specifications and ships from many countries to numerous others.

"The 90s are different than the 80s. In the 90s you have to be extremely competitive in order to stay in business. Artificial barriers will no longer keep one in the market", said Steger. "The Uruguay Round of the GATT is a good agreement. Any reduction in tariffs is beneficial -- and it should work well for the electronics industry."

The U.S. electronic component industry is the second largest in the world and a leader in the development of new product and process technologies. The industry produces a quarter of the world's total output and competes primarily with Japan, other Asian nations and the European Union. U.S. industry strengths lie in the production of advanced design-intensive electronic components, not in the commodity and labor-intensive products. Representatives of the U.S. electronic components industry support the URA. Although they sought larger tariff reductions and broader government and services agreements, they regard the URA as an opportunity to increase U.S. exports and investment.

In depicting the true costs to consumers of protectionism, Mr. Peter Sutherland, Director General of the General Agreement on Tariffs and Trade, stated, "It is high time that governments made clear to consumers just how much they pay -- in the shops and as taxpayers -- for decisions to protect domestic industries from import competition. Virtually all protection means higher prices. And someone has to pay; either the consumer or, in the case of intermediate goods, another producer. The result is a drop in real income and an inability to buy other products and services."

Mr. Sutherland continues, "Maybe consumers would feel better about paying higher prices if they could be assured it was an effective way of maintaining employment. Unfortunately, the reality is that the cost of saving a job, in terms of higher prices and taxes, is frequently far higher than the wage paid to the workers concerned. In the end, in any case, the job often disappears as the protected companies either introduce new labor-saving technology or become less competitive. A far better approach would be to use the money to pay adjustment costs, like retraining programs and the provision of infrastructure."

In addition to higher prices, protectionism also results in a reduction of available products limiting choices.

Protectionism has severe negative implications for domestic producers as well as foreign industries. By effectively preventing foreign competitors access to a domestic market, sheltered domestic producers tend to become complacent; producing costly, poor quality products inefficiently. This principle was exemplified by the industries of Eastern European nations during the reign of Communism.

This costs of protectionism can be seen in the historic performance of the U.S. auto and steel industries, too. The United States has attempted to protect its automobile and steel industries from foreign competition through the use of voluntary restraints agreements (VRAs), a type of quota. The policies are designed to temporarily shield the U.S. industries from foreign competition thereby allowing U.S. industries to gear up or recover, and become more productive and globally competitive. The U.S. auto VRA imposed on Japan did not achieved this. Instead, the VRA effectively increased, on average, the price of Japanese autos by more than $2,000 in the U.S. market in 1984. Rather than increase market share, which was a major goal of the program, U.S. producers increased their prices by an average of $750 - $1,000. It is estimated that in 1984 this policy saved only 1,100 jobs in the auto industry at a cost to the U.S. economy $6 billion.

In 1983, it was estimated that the U.S. steel VRA program cost U.S. consumers more than $1 billion, whereby U.S. steel producers gained only $500 million. The annual costs to consumers for each job saved was estimated at $113,622. Furthermore, the price of imported steel rose 4.5%, while domestically produced steel rose almost 1%. In addition, U.S. steel exports declined.

But perhaps the most dramatic demonstrations of the costs of protectionism are those of the global agriculture, textile and apparel industries. According to the GATT report released in August 1993, the total transfers, in terms of higher prices and taxes, from consumers to producers during 1992 to pay for government support for agriculture are as follows (all totals in U.S.$):

• Canada: $9.1b, $330
• Japan: $74.0b, $600
• United States: $91.1b, $360
• EC: $155.9b, $450

Japan maintained a ban on rice imports since 1967, until its domestic shortage finally opened the door for emergency supplies in 1993. Consequently, the cost of rice, per hundred weight, can be $175 to $250 in Tokyo, compared with $45 to $50 in the United States. Partly as a consequence, Japan's per capita consumption of rice has fallen from 260 pounds a year in 1962 to 154 pounds a year in 1990.

In the Fall of 1993, Japan agreed to open its market to U.S. apples for the 1994 growing season. This is the first tangible action over the decade-long apple dispute. According to U.S. Trade Representative Mickey Kantor, the Japanese stated in a letter to the U.S. Department of Commerce that it would move expeditiously to take the necessary action to allow entry of U.S. Golden Delicious and Red Delicious apples from Washington and Oregon.

The U.S. Department of Commerce estimated in 1988 that sugar subsidies added an average of $3 billion a year to American consumers' grocery bills. In 1990, the average U.S. wholesale price for sugar was 23 cents per pound compared with the average world price of under 12 cents.

Canada, like the EC, Norway, Mexico and Finland, operates a system of supply management with respect to eggs, poultry and dairy products. In 1990, one study demonstrated that consumers in Toronto, Canada, paid substantially more for these goods than consumers in Buffalo, New York. In fact, Toronto consumers paid 42% more for a dozen eggs, 128% more for roughly the same volume of milk (.5 gallons/2 litres), 97% more for one kilogram of chicken, and 22% more for 500 grams of cheese.

The textile and apparel industry is another highly protected and supported industry regulated on a global basis by the multi-Fiber Arrangement (MFA). The MFA establishes quotas on behalf of industrialized countries directed against textile and apparel exports from developing countries. The program was originally introduced to provide for an orderly adjustment to the change of international textile and apparel comparative advantage in favor of developing countries.

The U.S. has MFA quota agreements with 40 countries. The Institute for International Economics estimated that in 1986 the MFA raised textile and apparel costs by an average of 28% and 53% respectively, with annual consumer losses of $2.8 billion and $17.6 billion. The net welfare cost to the nation, after subtracting the benefits to producers and workers, exceeded $8 billion. The consumer costs to maintain each U.S. textile and apparel manufacturing job was $135,000 and $82,000, respectively. The result: the lowest 20% of U.S. households, ranked according to income, experienced a decline of 3.6% in their standard of living.

It was estimated that terminating the Multi-Fiber Agreement would increase U.S. national welfare in 1984 by $13 billion.

According to GATT report released in 1993, studies conducted during the 1980s indicate protection costs to the consumer on clothing have been estimated at between $8.5 billion to $18 billion in the United States, £500 million a year in the United Kingdom and C$780 million a year in Canada. Expressing these estimates in current 1993 dollars, the 4-person household spent an additional $200-$420 per year in the United States, $130 per year in the U.K. and $220 per year in Canada.