Although the congressional debate on the North American Free Trade Agreement will focus on labor and environmental issues, legislators should recognize that the pact would be a tremendous boon to the U.S. financial industry and its workers.

Under current Mexican law, a U.S. bank may not establish a branch or subsidiary to solicit business in Mexico. Nor may a U.S. firm establish a securities subsidiary or bran to solicit business in Mexico.

At most, a U.S. Bank or securities firm may have a representative office in Mexico with very limited powers, or a U.S. company may hold a minority position in a Mexican financial firm subject to stringent conditions.

Limits on Growth

The trade pact, however, would place caps on the size of U.S. financial firms in Mexico during a transition period from 1994 to 2000.

During this period, U.S. and Canadian banks could expand their aggregate market share from 8% to 15% of the Mexican banking system. At the same time, an individual firm could grow its share to 1.5% of the Mexican banking system.

In addition, if U.S. and Canadian banks achieve an aggregate market share of 25% between 2000 and 2004, Mexico could impose a one-time, three-year moratorium on further expansion by U.S. and Canadian banks.

Brokerage Units Allowed

The trade pact would also allow U.S. securities brokers to establish wholly owned subsidiaries (but not branches) to do business in Mexico. U.S. brokers in the aggregate could grow their share of the Mexican securities market from 10% initially to 20% by the year 2000.

During the transition period, each U.S. broker could grow its share to 4% of the Mexican securities market.

Similarly, the agreement would allow U.S. firms to establish through wholly owned subsidiaries (but not branches) other types of financial service providers like credit card, investment management, and leasing companies. These other types of financial firms, in contrast to banks and brokers, would not be subject to market caps during the transition period.

However, the Mexican regulatory framework for these firms is not well developed, which may slow their entry into Mexico.

The market share limits for banks and brokers in the accord are unwise a policy perspective and unworkable as a practical matter. What will be the definition of the relevant Mexican market, and who will enforce the allocation among competing U.S. firms?

Market share will probably be defined in terms of the capital of the Mexican banks or brokers, as the case may be. These limits will most likely be enforced by a Mexican government agency.

Nevertheless, these market share limits appear to be the price of U.S. admission to Mexico. Mexican officials are reportedly fearful that U.S. financial firms will overrun Mexico and put local firms out of business. Without these limits, Mexico would have refused to lift the current barriers to entry for U.S. financial firms.

Congress does not have the option of making its approval contingent on deletion or modification of the market limits for banks or brokers. Since Congress is considering the trade agreement under "fast track" procedures, it must vote up or down on the provisions as they are, together with the labor and environmental side agreements.

Despite the market caps during the transition period, the trade agreement is a win-win situation for U.S. financial arms. At present, U.S. firms may not offer their services to Mexican investors, though Mexican banks and securities brokers may offer their services to U.S. investors, as long as they comply with the same rules that apply to U.S. firms.

Given the gross disparity in the current situation, the accord can only enhance the opportunities of U.S. financial service providers. Of course, U.S. financial firms entering Mexico will provide some jobs in Mexico, especially in sales.

Generating Jobs

In addition, U.S. financial firms will generate new jobs in their operations areas to support their Mexican offices; these U.S. operations are the "factories" for the services that will be sold in Mexico.

Thus, the trade pact would expand not only the opportunities for U.S. financial firms but also the opportunities for their workers.

If Congress rejects the agreement, Mexico is likely to continue prohibiting U.S. financial firms from soliciting business in Mexico. president Salinas and his top adviser have staked a lot of their power and prestige on the passage of the pact, so they would view U.S. rejection as a political slap in the face.

On the other hand, if Congress approves Nafta, this agreement would probably serve as a precedent for U.S. trade relations with the rest of Latin America.

The agreement is a far superior model of free trade in financial services than anything being discussed in the Uruguay round of GATT.

Mr. Pozen is general counsel and a managing director of Fidelity Investments in Boston.

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