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Global Trends of the 90s and Beyond: What It Means for American Business

Published on Sunday, January 01, 1995

Global Competition Is Increasing and Economic Integration Is Changing the Landscape

For the past 200 years, the United States' enormous internal market has more than satisfied the needs of U.S. firms. But today, this is no longer the case.

The world is quickly becoming economically integrated, forcing unprecedented changes at every level of industry. U.S. companies, small and large, are facing record levels of foreign competition for domestic market share. In addition to this, the world landscape is changing as never before.

In an effort to achieve a higher level of productivity and, in turn, economic security, the world has emerged into three primary trading blocs composed of Western Europe, East Asia and North America. Based on past trade patterns and policies, and anticipated policies, these blocs will continue to develop, gaining increased strength and influence. Within each bloc, free trade has and will continue to become more entrenched. However, it is likely that trade among blocs will increasingly become managed by governments.

On December 31, 1992, the European Community achieved the elimination of physical, fiscal and technical barriers to trade. Now referred to as the European Union (EU), the 15-member bloc encompasses Belgium, Britain, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain; and on January 1, 1995, Austria, Sweden and Finland became members. In years to come, it is likely that East European countries will join the 350 million population of the EU, expanding the market to include 850 to 900 million consumers.

The demise of Soviet Communism and the fall of the Berlin Wall has exposed Eastern Europeans to the free market economy for the first time since World War II. In an attempt to shift from the Communist system of central planning to markets governed by supply and demand, much of Eastern Europe has been plagued with economic and political instability.

For the past several years, negative growth and rampant inflation were recorded in varying degrees in Eastern Europe and the former Soviet Union. Shortages of industrial equipment and spare parts, the breakdown of traditional distribution channels, hyperinflation, and the collapse of monetary controls have contributed to the economic decline of the region. According to the U.S. International Trade Commission, in 1992, the former Soviet Union registered a decline in gross national product of 18% -- a steeper decline than Eastern Europe as a whole. The eruption of ethnic conflict in parts of Eastern Europe, including the former Yugoslavia and elsewhere in the old Soviet Union, has accelerated the economic and political deterioration.

Much of the EU's vested interest in allowing East European countries to become full members is aimed at preventing a potentially large mass migration. It is estimated that emigration from Eastern Europe, especially former Yugoslavia, and North Africa has risen from roughly 1 million in 1985 to 3 million in early 1993. This poses a serious problem for the EU. By integrating East European economies with the EU, the economic and political stability of the region will likely improve.

In recent years, East Asian nations have moved markedly toward increased economic integration. For example, both the Asian-Pacific Economic Cooperation Forum and the Pacific Economic Cooperation Council have emerged to facilitate greater regional integration. Others, such as the Association of Southeast Asian Nations (Asean), have advanced without U.S. membership.

In January 1992, the six-member Asean, comprising Malaysia, the Philippines, Singapore, Thailand, Brunei and Indonesia (325 million population) agreed to established a free trade area. Originally established on August 8, 1967 to counter the spread of Communism, Asean has recently begun to effectively deal with economic integration. The region grew by an average of 8% annually throughout the 1980s, among the fastest growth rates in the world.

Many fast-growing East Asian countries have a more favorable trade relationship with the United States than with Japan. However, due to Japan's economic power, investment and influence in the region, it has forged an informal trade bloc among East Asian countries. 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.

In an effort to better fortify our economic position, the United States implemented the United States-Canada Free Trade Agreement (U.S.-Canada FTA) on January 1, 1989. 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, 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 our products more competitive not only in North America, but in Europe, Asia and throughout the world.

Last December 9th, 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.

The Potential Effect on American Business

These trade blocs are continuing to liberalize trade among members. However, as intra-trade bloc barriers are eliminated, non-members are concerned that trade barriers applied to their products may actually increase. Fear that competing 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.

Should Europe or East Asia become inwardly focused, U.S. exports there could be severely curtailed -- harming U.S. business interests and the economy. According to Lester Thurow, a contemporary economist, "Those who feel they will be hurt in the economic integration (the Spanish banks feel threatened by the German banks) will go to their governments for protection. Their governments, however, cannot give them direct protection if integration is to go forward. In lieu of direct protection from bloc members, their governments will offer them protection from non-member competitors. So, less competition from American and Japanese banks will be offered to Spanish banks to compensate them for more competition from German banks."

The EU doctrine of reciprocity, for example, is based on equal treatment and access to one another's markets. If non-EU banks wish to do business in the EU, their domestic laws must parallel EU laws. Economists argue that the Europeans can keep American banks out of Europe or prevent those already operating there from expanding unless American banking laws are radically changed. For example, the United States does not allow interstate banking. Consequently, if a European bank does not have access to all of America, then American banks in Europe can be denied access to all of Europe. This can be interpreted as protectionism.

Even if existing barriers remain the same to EU non-members, the effects of trade diversion or regional trade preferences may have a similar impact as protectionism. 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 British are likely to buy more German and French goods at the expense of the United States. Likewise, U.S. businesses will benefit from the creation of a trade bloc of the Americas, where members buy increasingly from each other.

In 1985, 53% of European Community trade was with member countries. This percentage has risen to 59.6 in 1991 and it will continue. There is concern that increased trade by EU members will likely come at the expense of non-members, resulting in trade diversion.

In 1988, 22% of East Asian trade (10 countries) was with one another. By 1991, this had risen to 35% according to the U.S. International Trade Commission.

The Uruguay Round Agreements of the GATT — Providing Balance

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

GATT is the international body that governs approximately 90% of world trade. It is responsible for reducing international tariffs from an average of 40% in 1947 to 5% in 1990, which has permitted international trade to expand enormously, national incomes to substantially increase and international competition to flourish resulting in higher quality, lower priced goods. However, before the successful passage of the URA, the formerly perceived failure of GATT to effectively deal with rising world trade barriers resulted in a lack of confidence in the organization. Consequently, many individual countries took it upon themselves to establish regional trade blocs in order to secure market access to other countries.

During the phase-in period, the URA will eliminate many non-tariff barriers and expand intellectual property protection. The new World Trade Organization (WTO), created by the URA, is expected to be much more effective at enforcing internationally agreed upon trade rules and regulations and settling disputes among members. GATT and the new WTO will attempt to police the forces that may promote protectionism among trade blocs.

New Strategies Are Required in Order to Successfully Adapt to Global Realities

In the past, an abundance of natural resources once secured competitive advantage. This has changed. Abundance too often can lead to waste, misuse and abuse. Conversely, limited resources have forced companies to achieve higher levels of efficiency, as the Japanese have proven. For example, technical progress in the development of stronger and lighter materials is quickly replacing raw materials. In today's global environment, knowledge, not an abundance of natural resources, is key to success.

In order for U.S. 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.

Its no longer "business as usual." If your company does not take steps to expand internationally, your competition will. Your level of risk will likely increase, market sectors will become more competitive, and market share may be lost.

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.

GATT Serious

Published on Sunday, January 01, 1995

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.

Nafta and the Auto Industry

Published on Sunday, January 01, 1995

Peso Crisis Throws a Wrench into Mexican Auto Industry

The value of U.S. car exports to Mexico decreased 6% from 1992 to 1993, but increased a whopping 685% in 1994 to over $437 million, according to the U.S. Department of Commerce.

Mexican domestic car and light-truck sales were up in October 1994 by 32% compared to those of October 1993. Nissan recorded an increase of 183%; followed by Volkswagen, up 100%; Ford, up 8%; General Motors, up almost 2%; and Chrysler slightly down.

From January 1 to October 5, 1994, Ford Motor Company exported 18,000 cars to Mexico. This represented a huge increase from its 1,700 cars and truck exported there in 1993. Prior to the Mexican Peso crisis, Ford expected its exports from the United States and Canada to Mexico to top 50,000 vehicles in 1996.

Chrysler, Ford, General Motors, Nissan, Mercedes-Benz and Volkswagen currently produce in Mexico. Prior to the Peso crisis, Deloitte & Touche, the international consulting firm, estimated the Mexican auto market to grow by 8% during the next several years. Based on positive economic expectations, many auto producers had planned to expand upon or establish manufacturing facilities in Mexico.

Announced last October, Ford had planned to increase production capacity in Mexico to 108,000 cars annually beginning with the 1996 model year. The additional investment in Mexico would total about $60 million mainly for tools and equipment.

BMW reportedly planned a $600 million investment in car assembly, auto parts and distribution operations scheduled to begin in mid-1995. It chose to locate the assembly plant in Lerma, just west of Mexico City. T&N PLC, a British auto parts manufacturer, began building a plant on the grounds of a Chrysler de Mexico facility in the central Mexican city of Saltillo.

Reported in November 1994, Daewoo of South Korea had planned to invest about $350 million in a joint venture with Mexico's Creaciones Automotrices Nacionales (CANSA) to assemble automobiles in the municipality of Escobedo near Monterrey. Honda Motor Co. Ltd. planned to produce automobiles in Mexico within a two years. The company considered producing a smaller car for sale throughout North and South America.

Since the Mexican crisis, Italy's Fiat Auto S.p.A., which was negotiating a joint venture with Consorcio G. Grupo Dina S.A. (Dina), a Mexican truck and bus manufacturer, pulled out. The joint venture had planned to produce 100,000 cars a year in Mexico. And the Big Three U.S. auto makers have trimmed production plans for the Mexican domestic market. Until the dust settles, future plans of these producers are unknown.

The devalued Peso will boost the price of cars imported into Mexico, drop the value of dollar-based investments in Mexico, and lower the price of Mexican goods shipped to the United States and other countries. According to an industry analyst, prospective Mexican car buyers flocked to showrooms in order to buy before prices increased.

Although confidence in the Mexican economy declined as a result of the crisis, Mexico's solid economic base and entrenched free trade policies will no doubt overcome the adversity.

Protectionism in the Mexico Auto Sector Hurt the Industry

Through a series of regulatory proclamations known as the "Mexican Auto Decrees", the Mexican automobile industry has been essentially state regulated since 1925. The decrees established high tariffs on imports of finished automobiles and effectively encouraged joint ventures between Mexican and foreign firms to construct assembly and parts facilities in Mexico.

The Mexican government's second decree was issued in 1962. It increased the use of Mexican-made components in domestically produced models. The required domestic content of 20% was raised to 60%, and power train production, which is typically a capital-intensive process, was required to be manufactured in Mexico. Additionally, all imports of finished vehicles were prohibited and foreign ownership of parts producers were limited to minority shares.

By 1960, twelve Mexican assembly plants were producing 60,000 finished models annually. By 1970, production reached 188,000 units annually. However, quality was low, and producers continued to import parts despite high tariffs. Consequently, both costs and prices were high, which significantly contributed to a persistent Mexican trade deficit in the automotive sector.

In an attempt to reverse this, new Mexican laws required assemblers to export parts in relative proportion to their production intended for sale within Mexico. Despite rising Mexican exports of engines and power train assemblies, the trade deficit continued to worsen. By the early 1980s, U.S. auto makers began to feel the pressure of low-cost Japanese imports into the American market, and began to view Mexico as a possible site for future low-cost production.

In 1982, the Mexican debt crises resulted in a severe economic decline. Another auto decree was passed that further raised tariffs limiting imports and inhibiting outflows of pesos. Led by Ford, U.S. auto producers built several new and world competitive export-oriented engine and assembly plants. Investment in maquiladora parts production also rose. By the late 1980s, economic activity improved and Mexican sales increased. Mexican production in the 1980s fell from 600,000 units in 1982, to a low of 248,000 units in 1987, and up to 547,000 units in 1990.

The most recent auto decree in 1989 under former President Salinas continued the tradition of high tariffs, restricting ownership, and enforcing local content requirements. The provisions:

1. permitted foreign firms 100% ownership of export-oriented plants, but only 40% ownership of suppliers serving the Mexican market;
2. raised local content rules to 36% of the vehicles value for models sold in Mexico;
3. required foreign assemblers to maintain a positive Mexican trade balance;
4. allowed finished cars and light trucks to be imported into Mexico (beginning in 1991) for the first time in nearly thirty years, but limited market share to 20%, and required exports to positively offset imports by a ratio of 1.75 to 1 in 1994;
5. set tariffs for finished vehicles and parts and continued to bar imports of used vehicles; and
6. allowed Maquiladora plants to sell some of their output domestically.

The effect of these and past trade barriers resulted in a generally non-competitive industry characterized by small outdated plants producing with low productivity and high costs. In addition to this, Mexico's infrastructure is poor making it difficult to produce and transport goods efficiently.

Contrary to popular belief, U.S. assembly plants in Mexico were primarily there to satisfy government requirements and to get around high tariffs -- not to gain access to low-cost labor. According to the Office of Technology Assessment, "Mexico offers limited strategic options for the Big Three: while direct production costs are sometimes lower in Mexico, shipping costs back to the United States can eat up the savings and then some."

Mexican-owned automotive parts suppliers' level of cost-efficiency and quality are well below the levels of their maquiladora counterparts. The previous protection and regulation that governed their competitive environment has prompted little incentive to upgrade labor’s skills or to modernize its plants and equipment.

The maquiladoras are much better equipped and managed, and are able to generate sufficient economies of scale in low value-added activities. In fact, Mexican maquila parts production plants consistently outweigh the additional costs of operating in Mexico.

According to the Office of Technology Assessment, even though such production utilizes very low levels of technology, these plants buy only about 25% of their parts content from Mexican suppliers due to poor quality. In anticipation of greater competition under Nafta, Mexican firms have begun forming strategic alliances with U.S. and European firms in order to gain access to new technologies and more advanced management methods.

The U.S. Auto and Parts Sector Is Restructuring

From W.W.II to the 1970 and 1980, the U.S. auto industry enjoyed a comfortable oligopoly. However, over a period of three decades, U.S.-based auto makers witnessed their domestic market share decline from 95% to 65%. This has forced the industry to restructure, down-sizing and investing in state-of-the-art technology.

In a strategy many believe consistent with dumping, Japanese auto companies introduced attractive, high quality and low-cost vehicles in the U.S. market. While incurring a net loss, they gained a great deal of consumer loyalty and U.S. market share. Upon this success, Japanese companies increased prices by an average of 43% between 1985 and 1991. By the end of the 1980s, the Honda Accord was the best-selling car in America.

In the past, Ford, GM, and Chrysler manufactured most of the major components used in their assembly of automobiles, subcontracting smaller systems components, such as brakes, electronic components, seats, glass, and tires, to independents. In recent years, however, U.S. they have discontinued this and began relying heavily on a independent suppliers.

U.S. suppliers of auto parts are very possibly undergoing a more rigorous restructuring than the auto makers. According to the Office of Technology Assessment, imports of Japanese parts have grown rapidly in the past ten years, from $4 billion in 1984 to $11 billion in 1991. Japanese transplant assembly plants in the U.S. buy from many U.S. suppliers, but mostly low value-added parts, such as gaskets and hoses as opposed to gears and brakes, while continuing to import high value-added parts from suppliers in Japan. Thus, the Big Three models incorporate a U.S. parts content of about 88%, while Japanese transplant models have only a 48% U.S. content.

The U.S. auto industry employs about one million people. Approximately 600,000 work directly for the auto makers and their subsidiaries, while about 400,000 are employed by independent suppliers. From 1978 to 1991, employment of production workers by the Big Three dropped by 37%. Auto industry employment will continue to fall as productivity improves.

From the late 1940s to the late 1970s, real hourly wages rose steadily. By 1982, competitive pressures ended the tradition of annual wage increases. Average hourly wages for assembly workers fell in real terms by 3% from 1985 to 1991.

The Big Three have put intense pressure on their U.S. suppliers to adopt just-in-time delivery requirements characterized by low inventories, lean production and express delivery. In an attempt to meet this demand, many U.S. suppliers see relegating low value-added and labor-intensive production to Mexican maquiladoras as an easy means of cutting costs. Small U.S. suppliers face the toughest struggle and are therefore more likely to relocate production to Mexico. Note: U.S. imports of auto parts from Mexico increased from $1.3 billion in 1984 to $4.7 billion by 1991.

Auto Rules of Origin and Tariff Reductions Under Nafta

In order for a product to receive Nafta status or duty-free treatment, minimum content requirements must be satisfied. Starting from a base of 50% content for most North American products, the rules of origin rise to 62.5% for autos, light trucks, engines, and transmissions, and to 60% for other vehicles and parts.

Concern that Mexico could be used as an export platform by European and Japanese auto makers to secure preferential access to the United States has been well addressed in Nafta. Its stringent rules of origin were devised with the specific intention of retaining the Nafta advantages to Nafta members.

Under Nafta, the Mexican tariff of 20% on autos was reduced to 10% on January 1, 1994. The remainder will be phased out in equal increments over the next eight years. The Mexican duty of 10% on trucks was cut in half immediately upon Nafta's implementation. This will be phased out in equal increments over the following three years. The Mexican Auto Decrees will be phased out by January 1, 2004. Thus, the pre-Nafta requirement that an auto manufacturer's exports be 200% as much as it imports will be phased out as well.

Under Nafta, U.S protection which was not nearly as extreme as Mexican protection, will be phased out with little consequence on U.S. imports. Prior to Nafta's implementation, the United States had a tariff of 2.5% on cars, which was eliminated January 1, 1994; and 25% on trucks, which was reduced to 10% on January 1 and will be completely phased-out over the next 4 years.

Tariffs on most auto parts, in some cases as high as 6%, averaged from 3.1 to 3.7%. Many of these were already eliminated under Nafta while others will be eliminated over the next nine years. Buses and most auto parts imported from Mexico, however, entered the United States duty-free under the U.S. Generalized System of Preferences. Products from maquiladoras entering the United States under the tariff classification 9802.00.80 only had duties levied on the non-U.S. value-added content.

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

According to the Office of Technology Assessment, some U.S. auto companies manufacturing in Mexico may move their plants to the United States -- since they will no longer be required to produce in Mexico in order to sell in Mexico after the year 2004. However, plants which produce primarily for the Mexican market and other Latin markets will likely find Mexico an attractive low-cost producer.

Prior to the Mexican Peso crisis, the Office of Technology Assessment projected that Mexican auto consumption could approach that of Canada's 10 years after Nafta is implemented. Although economic activity will be slowed, the market will again pick up. And with the immediate reduction in tariffs, Mexico's ill-equipped domestic auto industry is now subject to intense U.S. competition. This has and will continue to result in greater U.S. exports to Mexico. Again, the economic decline due to the recent crisis will slow this pace.

Although U.S. plants are becoming more efficient and solid sales of U.S.-built autos will continue long into the future, the number of Americans employed in the industry will decline -- as it has done for the past fifteen years for reasons extraneous to Nafta. Increased sales globally and to Mexico under Nafta is expected to only slow this process.

Many U.S. parts suppliers, however, may relocate more of their low value-added production to the Mexican maquiladoras in an attempt to become more competitive.

In the intermediate to long-term, Mexico's auto industry will likely become more efficient as investment increases and unproductive plants are closed. Although Mexican economic growth may be curtailed over the next few years due to the peso crises, a tremendous long-term potential exists for a rapidly growing Mexican consumer market. As this occurs, U.S. auto makers will be well positioned to gain the greatest market share vis-à-vis European and Japanese competitors.

GATT Is Good For the United States, New York State and Western New York

Published on Thursday, December 01, 1994

The GATT Uruguay Round Agreements (URA), recently passed by Congress, is good news for the United States, New York State and Western New York. Held under the auspices of the General Agreement on Tariffs and Trade (GATT), the URA phases out quotas and cuts tariffs by about one-third 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. This has permitted international trade to expand enormously, national incomes to substantially increase and international competition to flourish resulting in higher quality, lower priced goods.

During the phase-in period, the URA will eliminate many non-tariff barriers, expand intellectual property protection and improve the current dispute settlement mechanism. The impact will be extremely advantageous for the world and the United States. GATT economists believe that by the year 2002, the URA will result in annual world income gains of $235 billion and trade gains of $755 billion.

By the year 2004, the United States will likely gain approximately 500,000 new jobs and see an annual increase of $100 to $200 billion in gross domestic product, $150 billion in exports, and $1,700 in income per family

New York State Stands to Benefit

In 1993, the United States exported approximately $660 billion in goods and services, supporting about 10.5 million jobs. This is up 57% from 6.7 million in 1986. And the wages of non-farm workers directly supported by exports pay 18% higher than the average U.S. rate.

Last year New York State, the second largest exporter among all U.S. States, exported $40.7 billion worth of goods globally. This marked a 38% increase since 1987, the fourth largest increase in exports compared to all other states. New York State is the second most populous state in the nation and if viewed as a sovereign nation would rank as the world's tenth major economic power. The URA will benefit numerous New York industries, including producers and distributors of computer equipment, industrial & analytical instruments, machine tools, motor vehicle parts, paper & allied products, pharmaceuticals, printing & publishing, processed foods, telecommunications equipment, and much, much more.

Western New York to Win

Western New York's auto parts industry is a growing sector and the largest employer in the region. This industry will benefit under the URA.

Western New York has cited its medical product industry to be among the top most promising sectors in the region. As a result of the URA, major pharmaceutical export markets will reduce tariffs an average of 72%. Improved patent protection and better standard setting procedures will protect U.S. trade secrets and reduce unfair trade practices.

Western New York producers of medical equipment and pharmaceuticals will prosper -- creating more jobs in Western New York. This high-tech sector employs skilled workers and pays higher wages -- the type of industry to gain the most from the GATT agreement.

Our Sovereignty Is Not Compromised

In order to ensure that all trading members are playing from the same rule book, the URA will soon create the World Trade Organization (WTO). It will be more effective than the current system. For example, a new dispute-settlement mechanism will provide for a speedy remedy when foreign countries violate international rules and raise new trade barriers -- and does not allow decisions to be indefinitely blocked by violators.

Under the URA, no rule by a dispute-settlement panel can become a part of U.S. law without Congressional approval and Presidential signature. Should a panel find that a U.S. domestic law (Super 301 for example) is inconsistent with GATT principles, the United States may disregard a decision and take unilateral action suiting our national interests. In return, the complaining country will be allowed to take action and institute tariff penalties against the United States. This tactic puts the United States in no worse a position than existed prior to the URA.

One Country, One Vote Is Not a Hindrance

Substantive GATT decisions have normally been made by consensus -- 100% of GATT members in agreement. Should a consensus not be achieved (which has not happened since 1959), a set of improved voting procedures would be enacted. Thus, a substantive measure lacking U.S. support will require a two-thirds majority vote. If passed, still a second vote resulting in three-fourths majority would be required in order to compel the United States to accept the amendment. This scenario is very unlikely for two reasons:

• The United States would almost certainly be able to generate enough support to prevent a gang-up;
• The WTO would risk losing the world's strongest economy as a member -- thus creating uncertainty and instability in the world trading system.

The GATT Uruguay Round is worth five Nafta's -- and less than one year after implementation, Nafta has proven to be a winner. And the WTO improves the United States' ability to fight unfair global trade practices -- while not compromising our sovereignty.