MEXICO, THE U.S., AND FREE TRADE

U.S. oil and gas producers should set aside natural competitive fears and support the proposed trade agreement involving the U.S., Mexico, and Canada. Problems beyond competition will result if the initiative fails.

Competition is, nevertheless, an issue. And the competition issue has a name: Petroleos Mexicanos. When 15% of what one party to a trade pact sells the other comes from a state-owned monopoly chartered to keep foreigners out, trade freedom loses some of its charm. Yet Pemex is so central to Mexican politics that the government won't deal with it in trade talks.

GAS EXPORTS?

Someday, then, Mexico might invoke a free trade pact to resume natural gas exports to the U.S., adding a southern front to international competition for the U.S. market. Many U.S. producers now say Canadian gas enjoys an unfair trade advantage due to tariff differentials. At least in theory they can move to Canada to take advantage of the disparity. Mexico won't offer that option as long as Pemex retains control over production and sale of hydrocarbons.

Laws, however, can change. So can practices of national oil companies and protectionist governments. Pressured by creditors and a reformist administration, Mexico has relaxed tariff and import barriers. Its imports of U.S. petroleum equipment and services have climbed. Pemex itself recently let an unprecedented turnkey contract to a U.S. firm for offshore drilling. It earlier released a number of petrochemicals from its exclusive control.

Pemex thus resembles another important state oil company within easy trading range of North America. Petroleos de Venezuela SA, never as insular as Pemex has been loosening its nationalist grip where it had been tightest: upstream. The comparison isn't just academic. Pdvsa has long considered North America part of a natural market for its petroleum. And North America--with a free trade agreement between the U.S. and Canada in place since Jan. 1, 1989, and Mexico shedding its economic seclusion--acts more like a unified market all the time.

Energy trade, however, doesn't wait for comprehensive trade pacts. Canada's gas export surge didn't result from the free trade agreement. It began when Canada phased out gas export limits and adjusted tariffs. Mexico and Venezuela are opening up because they need and recognize the benefits of trade, just as Canada unchoked gas exports because it needed money in hand more than gas underground.

So what happens if the U.S. blocks a free trade agreement that extends to all of North America? Maybe nothing. Mexico might continue to push international trade as a matter of economic necessity. But the political response to a U.S. rebuff would be isolationist, like the rebuff itself. And isolationism, especially when practiced by countries separated physically by nothing more than the Rio Grande, tends to spread. The economic consequences can be dire.

ECONOMIC CHOICE

That's why U.S. producers have more to gain than to lose from a North American free trade agreement. The first test comes in mid-May, when Congress decides whether to extend to the administration negotiating leeway essential to any trade pact. Producers should support this so-called fast track authority and the agreement to which it might lead. The choice is between sickness and health of regional and perhaps global economies.

Who knows? If Mexico swallows the whole free trade pill, Pemex for purely economic reasons, might one day follow PetroCanada and other state oil companies into full or partial privatization. U.S. operators may yet drill wells in places like Tabasco, Chiapas, or Nuevo Leon.