Would freer economy aid or hurt Mexico? Government and most Mexican businessmen feel joining UN tariff group would boost economy, but critics see serious social consequences

Over the past two weeks, important sectors of Mexican society have engaged in a government-sparked debate over whether their country should enter into the General Agreement on Trade and Tariffs. The debate far transcends the narrow question of membership in GATT, a specialized agency of the UN which seeks to reduce tariffs and other barriers to international trade.

The two sides engaged in the public controversy basically hold widely differing views about Mexican society, its future, and the solutions to the serious economic problems confronting Mexico.

Those favoring GATT membership feel freer trade is essential for Mexico's economy to grow and modernize. Those opposed to the move fear it will cost too many jobs, exacerbate social differences, and lead to US domination of the economy.

The debate pits opponents of GATT membership -- a coalition of manufacturers (fearful of losing their tariff protection), labor leaders, and left-wing intellectuals -- against government leaders and most members of the private sector, who believe that it is necessary to open up Mexico to foreign trade and investment.

Until now, Mexican industry has been protected by high tariff walls. Most analysts agree that large sections of Mexican industry produced goods inefficiently, resulting in low quality and high prices.

This has meant higher inflation rates and the inability to market nonpetroleum Mexican goods abroad.

There has been an increasingly strong belief in the government and in the private sector, spawned by the country's economic crisis that began in 1981, that the only way to get the Mexican economy going again would be to open Mexico to foreign trade and investment. This view received a boost after President Miguel de la Madrid Hurtado took office in 1983.

Until now very stringent investment rules have made foreign investment relatively scarce. Finance Minister Jes'us Silva Herzog Flores has led the faction within the government that is battling for free-market policies.

Over the past year, the government has been moving increasingly in this direction -- lowering tariffs for many United States goods and recently relaxing investment rules in order to allow the IBM Corporation to set up operations in Mexico.

Within the past few weeks, the government has given strong public hints that it is very seriously considering entering into the GATT accords, which would mean eventually getting rid of the artificially high tariffs that protect Mexican industry. This would create vast readjustments in the Mexican manufacturing sector.

The need for these changes, if Mexico is to sell its goods abroad, is apparent from a glance at the shoes of a middle-class Mexican. No matter how well-dressed he may be, his shoes are generally poorly constructed. Shoes are one of Mexico's most important non-petroleum manufactured products and one which it hopes to sell abroad, especially in the US.

Although these adjustments may be necessary to increase Mexican exports, their immediate effect on Mexico's already hard-hit economy will be painful. Unemployment will almost certainly rise substantially as Mexican products face competition from better-made, lower-priced foreign products. In the face of such competition, significant numbers of Mexican manufacturers will go under.

In a country where unemployment is at 15 percent and under-employment is an estimated 25 percent, the loss of more jobs would have serious political effects.

``Going into GATT is necessary if Mexico is to enter the modern world. I think we are at a crucial turning point. If Mexico does not enter GATT, and open up its economy, it will become no more than an economic backwater.'' This statement by an economic analyst here summarizes the feelings of those wishing Mexico to join GATT.

In addition to making Mexican industry more efficient and forcing manufacturers to reinvest profits into their factories, many Mexicans believe that GATT membership would open up larger foreign markets for their products. These markets would develop because other members would lower their tariff barriers against Mexico once it joined GATT.

Partisans of Mexican entry also state that it would create a climate favorable to foreign, especially US, investment.

They argue that greatly expanded foreign trade and investment are both necessary if Mexico is to continue paying the interest on its large foreign debts.

Those pushing for these measures are confident of eventual victory. As Rogelio Ramirez de la O, head of Econal, a major consulting firm which does economic analysis for US and Mexican private companies, said, ``I don't know what the government's timing is, but I am convinced that it is going to liberalize trade with or without GATT membership and eventually, go into GATT itself.''

Mr. Ramirez, who supports GATT membership, believes that many manufacturers in traditional US industries want to move out of the US and that Mexico, if it had liberalized trade and investment laws, would be a natural place for them to move to.

Those leading the coalition against joining GATT oppose it for different reasons. Manufacturers and labor leaders are concerned with factory closings, loss of sales, and jobs.

The intellectual left is worried about these factors (especially the social effects of unemployment). It is most concerned with the broader, longer-term effects on Mexico of an economy based on foreign investments and export industries.

Most intellectuals say that such an economy would be dominated by the US. They fear that it would increase acute social differences in Mexico, bringing prosperity to some, but worsening the living standard for a majority of the population.

All opponents of Mexican GATT entry state that Mexico could expand exports without many bad effects by continuing to rely on bilateral trade agreements -- agreements between Mexico and individual countries to lower tariffs.

They say that Mexican manufactured goods can be made more competitive by a series of internal measures, such as using government policies to control the prices of raw materials and finished products.

Many Mexican economists agree with one academic and journalist who said, ``When we are talking about entering GATT and opening up the Mexican economy to world trade, we are really talking about almost complete US domination of Mexico.'' This analyst says Mexico is in the US's backyard politically, geographically, and economically. US domination might inevitably result, since Mexico is economically weaker than the US.

Most Mexican intellectuals and economists say that a US-dominated, export-oriented economy would benefit much of the middle class and some workers, but not a majority of the population. They fear that US competition would hurt Mexican industry, which uses many workers and replace it by high-tech export industries which use a lot of capital but employ relatively few workers.

They say this kind of economy would reorient Mexican agriculture toward highly mechanized, export-oriented production. This would drive most peasants out of the countryside and into the cities, which are already greatly overcrowded.

They feel that before Mexico opens up its economy, it must first develop a strong agricultural base.