Doing Business : U.S., Mexico Wrestle With Free-Trade Prospect : An agreement on gradually ending tariffs would mean winners and losers in each country, with adaptability, planning, luck--or a little of each--as the deciding factors.

MEXICO CITY —  To an auto-parts maker in the Mexican industrial city of Queretaro, the prospective U.S.-Mexico free-trade agreement could mean getting a half-used factory running at nearly full capacity.

The view from California’s Salinas Valley is completely different. Vegetable and fruit growers fear they will lose even more of their market if an agreement gives Mexican competitors lower tariffs.

Such contrasts are repeated throughout both countries as business people and labor leaders try to predict what a free-trade pact would mean for their industry, their region, their company or union.

The form of a possible agreement is still far from certain. The first, informal discussions have only begun. But the broad outlines of the upcoming negotiations are becoming clearer.

Officials on both sides have clearly stated that they do not want a common market, like the one being built in Western Europe. Each country wants to independently determine its commercial relations with third nations. However, they do want to create an overall framework for two-way trade, similar to the agreement between the United States and Canada.

The agreement would outline the steps for gradually eliminating tariffs between the two countries. It also would create a mechanism for resolving trade disputes.

To an extent, the agreement would simply formalize a trend toward interdependence and production sharing evident in the 1,700 maquiladoras --factories concentrated on the Mexican side of the international border that assemble U.S.-made components into products sold in the United States--as well as cross-border investments. U.S. companies provide more than half of Mexico’s foreign investment, and Mexican corporations have recently bought major U.S. glass and cement factories.

However, negotiations leading to an agreement also will bring into sharp focus the industries in each country that will prosper or suffer under expanded trade.

In the United States, industries and unions that suspect an agreement will be detrimental have already begun to complain. In Mexico, a respected business think tank has launched a study on how free trade would affect different sectors of the country’s economy.

“These sector studies will allow concerns to surface in time to incorporate them in the negotiations,” said Juan Gallardo, the Mexican private sector’s representative to the trade talks.

“We will be able to get breathing space for those areas affected,” he said. “But in the end, we’re going to have to do what we have to do” to have a competitive economy.

In the end, the agreement will mean winners and losers in both Mexico and the United States. In many cases, those winners and losers may be in the same industry, on the same side of the border. The difference may be only adaptability, planning, luck--or a little of each.

One easy pick for the winning side is Tremec, a Mexican auto-parts maker with $130 million in annual sales.

The company started making transmissions in 1963, when Mexico sealed its border to auto imports to encourage domestic manufacturing. Today, two of every three transmissions sold in Mexico is made by Tremec.

However, an eight-year economic crisis has taken its toll on Mexican auto sales, and the company’s plant in Queretaro, an old mining town in central Mexico, operates at only half of capacity. In response, Tremec has diversified into other auto parts and into exports.

Spare parts and transmission components exported to Chrysler, Ford, Cummins and the U.S. subsidiaries of German auto parts makers accounted for 12% of sales last year.

That is only a start. The company is in the second year of a three-year program to update equipment and train employees in an effort to reduce costs and improve quality, said Salvador Silva, Tremec spokesman.

“Next year, we really will be ready to export,” he said. A free-trade agreement, coming as the company caps off its modernization program, “would be a great opportunity to increase sales,” he said.

That is precisely what Steve Beckman, international economist for the United Auto Workers, most fears. The losers, he said, will be U.S. auto workers.

“It is quite clear that Mexico does want to increase its integration into the U.S.-Canada (automotive) market,” he said. “An agreement would accelerate a phenomenon that is already occurring”--use of Mexican parts and assembly by the U.S. auto industry.

Indeed, the automotive industry accounts for nearly one-fourth of Mexico’s manufactured exports, from engines made in Chihuahua in northern-central Mexico, to automobiles assembled farther west in Hermosillo. Overwhelmingly, those products are sold in the United States, which overall buys two-thirds of Mexico’s exports.

Mexico requires auto makers to export at least as much as they import. Next year, companies will be allowed, for the first time in nearly 30 years, to import U.S.-made automobiles for sale in Mexico.

A free-trade agreement systematizing the growing automotive commerce “would place the U.S. seal of approval on something not in the interest of the U.S. economy or of U.S. workers,” Beckman said.

Not all the differences are between U.S. unions and Mexican industry. There are divisions over the agreement within industries on both sides of the border.

For example, removing agricultural tariffs would be a boon to Midwestern U.S. grain farmers. Mexico is chronically short of grains and could be expected to buy more if current trade restrictions were eliminated.

However, after watching Mexico gain nearly half of the U.S. frozen broccoli market over the past decade, Bill Ramsey, head of Mann Packing Co. in the Salinas Valley, is apprehensive about an agreement that would also eliminate tariffs on vegetables.

“A substantial amount of (broccoli) acreage that used to be grown in California is now grown in Mexico,” he said. “We’re trying to diversify into other products, but what do you diversify into?”

Mexico’s lower wages and less-stringent pesticide laws make nearly any crop cheaper to grow there, he said.

Ramsey’s concerns are shared by other fruit and vegetable growers, said Michael Stuart, director of the Western Growers Assn.

“The irony of a free-trade agreement and the argument that we should give up fruit and vegetable tariffs because they are going to have to import grain, is that we are trading away tariffs in a market-oriented industry, like fruit and vegetables, to gain market access for a heavily subsidized industry, like grain,” he said.

Similar divisions exist in Mexico’s textile industry.

Export-oriented cloth and clothing makers, particularly maquiladoras , see the agreement as an opportunity to expand and even eliminate the quotas that restrict their access to the U.S. market.

But garment makers in central Mexico, who manufacture mainly for the Mexican market, are less enthusiastic.

Textiles was one of the industries hardest hit by the Mexican government’s decision to slash tariffs and reduce other trade barriers in recent years. The market share of textile and garment imports, many from the United States, tripled from 1985 to 1988, at a time when spending power--and therefore sales--dropped dramatically.

That left the industry with a substantial amount of unused capacity. However, converting that capacity to export manufacturing will be difficult, said one industry analyst who spoke on the condition that his name would not be used.

Machinery is outdated, and workers need extensive training to improve productivity and quality to meet world market standards, he said. “Otherwise, what we have is a craft industry.”

Unless the industry receives financial help to modernize, removing the few remaining trade barriers could destroy it, he said.

Such analyses are not popular in Mexico. Weary of eight years of deprivation, Mexicans prefer to see the prospective free-trade agreement as an alternative to what once seemed an endless road of sacrifice headed toward an unclear destination.

“The free-trade agreement gives it all meaning,” said Carlos Sauceda Alvarez, assistant director for international affairs at the National Manufacturing Industry Chamber. “Now people say, ‘That’s why we had to go through this.’ ”

The question is whether the optimistic attitude needed to sell the free-trade agreement to the Mexican public will affect Mexico’s ability to negotiate with the United States.

Negotiations delegate Gallardo sees the Mexican consensus as a plus in the talks.

“We are in a position to assist in making (the U.S. Congress) understand why an agreement is a good proposition for both sides,” he said.

U.S.-Mexico Trade: An Overview

Five largest imports from Mexico: Crude petroleum Passenger motor vehicles (including buses) Electricity distribution equipment Motor vehicle parts and accessories Other (misc. not specified elsewhere)

Five largest exports to Mexico: Motor vehicle parts and accessories Electricity distribution equipment Telecommunications equipment and parts Electrical switching equipment Other (misc. not specified elsewhere)

SOURCE: United Nations