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NAFTA at Seven: The U.S.-Mexican Relationship Is Working Well

Published on Friday, December 01, 2000

Nearly seven years after the North American Free Trade Agreement (NAFTA) was implemented, cross-border trade and investment have flourished. This has improved the level of U.S. competitiveness, generated high-wage jobs, and benefited companies from California to New York. Has your company seized opportunities provided by NAFTA?

Mexico: the Second Largest U.S. Market

Since NAFTA went into effect, Mexico has become the United States’ second largest export market. In fact, from 1997 through 1999, Mexico imported $56 billion more in U.S. goods than did Japan, the third largest U.S. export market. U.S. shipments to our southern neighbor reached almost $87 billion in 1999. And, since NAFTA began in 1994, exports to Mexico have increased twice as fast as U.S. exports to the world.

Not surprisingly, U.S. foreign direct investment (FDI) in Mexico also has increased faster than U.S. FDI worldwide. And, from 1994 through 1999, the U.S. FDI position in Mexico on a historical-cost basis more than doubled.

Top Export and Investment Opportunities

Due to NAFTA, Mexican trade barriers have been substantially reduced or eliminated, paving the way for greater opportunities. According to the U.S. Department of Commerce, the leading nonagricultural sectors for U.S. exports and investment now include:

• Auto parts and supplies
• Building products
• Franchising
• Telecom equipment & services
• Computers and peripherals
• Pollution control equipment
• Water resources equipment & services
• Food processing & packaging
• Security & safety equipment
• Electronic components.

“Trade flows clearly confirm that opportunities have increased for U.S. exporters and investors in all sectors,” said Francisco Zamores, Bank of America Vice President of Trade Services, Latin America. But, a major opportunity for U.S. exporters and importers, he points out, is in the Mexican energy sector, assuming the remaining barriers are lifted under the new administration.

The Mexican Economy Is Connected

NAFTA has partially insulated Mexico from the negative effects of the Asian financial crisis that began in 1997, the subsequent Russian debt default, and other economic problems that plagued Brazil and other Latin American countries.

By the same token, much of Mexico’s expansion is contingent on U.S. growth, since nearly 90% of its exports are sold to its northern neighbor. “Mexico’s strong lock with the U.S. economy has been a positive factor during the upswing of the U.S. economy,” said Zamores. However, Mexico’s growth is likely to slow during the soft landing of the U.S. economy over the next year or so, he said.

During the election debate, newly-elected President Vicente Fox promised an annual growth target of 7%. “This will be hard to achieve,” said Zamores. Bank of America projects Mexican gross domestic product to reach 6.3% and 4.1% in 2000 and 2001, respectively.

According to the Organisation for Economic Co-operation and Development (OECD), Mexican inflation is projected to gradually decline to 7.5% annually by December 2001. This is not bad, considering inflation was sky-high during the peso crisis that began in December 1994.

New Political Party Gains Presidency

For the first time since 1929, Mexico’s Institutional Revolutionary (PRI) party lost a presidential election. Newly-elected President Vicente Fox of the Alliance for Change party said he wishes to establish an even closer economic relationship with the U.S., building on efforts undertaken by his predecessor to further integrate the two economies.

“Former Mexican President Zedillo’s administration set a sound precedent for maintaining strong fiscal discipline by controlling expenditures during periods of low tax revenue due to lower oil prices (1998-1999), as well as during times of windfall tax revenues resulting from high oil prices (2000),” Zamores said. Like Mr. Zedillo, President Fox has pledged a commitment to financial discipline.

However, “Building a coalition and governing in a multi-party system may present a challenge for Mr. Fox,” noted Zamores. This could create an obstacle to continued deregulation of various industries, such as telecom, or structural reform involving banking and energy.

Texas Leads the Pack

In 1999, Texas again ranked as the largest state exporter to Mexico, with more than $23.3 billion in goods. Following were California, with $12.2 billion; Michigan, $9.2 ; Indiana, $3.2; Illinois, $2.9; Pennsylvania, $2.3; Ohio, $2.3; Arizona, $2.2; New York, $2; and North Carolina, $1.8. As U.S.-Mexican trade flourishes, U.S. companies will continue to benefit.

APEC Summit Demonstrates Differences of Opinion Between Developing and Developed Countries

Published on Sunday, October 01, 2000

Leaders of the Asia-Pacific Economic Cooperation (APEC) forum met in Brunei on November 12 and 13 for “APEC 2000,” the twelfth ministerial meeting.

Established in 1989, the 21-member organization includes: Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, North Korea, Malaysia, Mexico, New Zealand, Papau New Guinea, Peru, the Philippines, Russia, Singapore, Chinese Taipei, Thailand, the United States, and Vietnam.

Purpose of the Meeting

According to the APEC Secretariat, the forum’s main theme, entitled Delivering to the Community, “signified the need for sustaining economic growth to raise incomes and reduce poverty in the region.” The agenda was organized in accordance with three themes: Building Stronger Foundations, Creating New Opportunities, and Making APEC Matter More.

Building Stronger Foundations

The ministers reaffirmed their commitments to the goal of free and open trade and investment. With the understanding that achieving this goal will be difficult, the APEC Secretariat expressed the need to explore more creative and efficient ways to prepare its members for success.

Creating New Opportunities and Making APEC Matter More

APEC said the revolution in information and communication technology has transformed the ways of doing business. It believes the new economy presents both developed and developing members with new opportunities, and sees itself as a catalyst to help its members seize these opportunities.

APEC also welcomed efforts that provide focus on the tangible benefits that have accrued in the region, and said it has ensured that its programs are more relevant and meaningful.

Meeting Outcome

No major agreement resulted from the meeting. This is not unusual considering many participating national leaders are “lame ducks” and therefore not well positioned to implement any far reaching legislation. But more importantly, differences of opinion between developing and developed country members over the ability to participate in the globalization process, the information technology revolution, and the planning of the APEC agenda made any major consensus unlikely.

The U.S., Japan, and Australia pushed to obtain an agreement to establish a new round of talks under the auspices of the World Trade Organization. But with globalization under scrutiny, APEC pledged to address the disparities in wealth and knowledge in hopes of bringing the benefits of globalization to all its members.

Keep Your Eye on Relationships

Issues such as globalization and the “digital divide” will continue to affect the relationship between the wealthier and poorer countries.

Indonesia’s Political and Economic Instability Creates Risk

Published on Sunday, October 01, 2000

From its rise to prominence on the international market, to its dramatic economic downturn in 1998, followed by political upheaval and separatist movements, Indonesia has remained in the spotlight.

Recent events, including the September 13, 2000 bombing of the Jakarta Stock Exchange, have further shaken confidence in Indonesia’s political and economic system. As a result, it’s necessary to proceed with much caution in this country of 200 million people, which is comprised of 300 different ethnic groups living on 13,500 islands.

Severe Economic Crisis

Indonesia’s crisis of 1998 was precipitated by the rapid devaluation of currencies throughout Southeast Asia. Massive numbers of Indonesian companies faced bankruptcy, and a sharp rise in inflation occurred, followed by the collapse of the banking sector.

In early 1998, the value of the Indonesian rupiah fell considerably. Thus, on June 1, 1997, 1998, 1999, and September 21, 2000, one dollar equalled 2430, 11350, 8090, and 8820 rupiahs, respectively.

According to the U.S. Trade Representative’s office (USTR), Indonesia’s gross domestic product (GDP) dropped precipitously from 1998 to 1999. Widespread government corruption under President Suharto’s regime was revealed, followed by protests and violence that led to Suharto’s resignation.

Economic Recovery Followed by Instability

Aid from the International Monetary Fund, the World Bank, and the Asian Development Bank appears to have helped. The rupiah stabilized and interest rates and inflation decreased. Importantly, the country’s GDP in 1999 ticked into the positive, with a rise of 0.1%. However, growth prospects for this year are difficult to estimate.

Newly elected President Wahid has attempted to implement structural reforms and liberalization measures initiated by former interim President Habibie and several international financial institutions. However, Wahid’s effectiveness and ability to monitor his appointees’ actions is questionable. Also, the banking sector continues to face stiff problems while massive corporate debt hangs overhead.

Sustaining economic recovery has been challenging. Recent violence in East and West Timor, in Aceh, a region fighting for political autonomy, and in Hebrides, where Islamic groups are pitted against Christians and ethnic Chinese, has shaken confidence in the government.

Trade and Investment

Investors who have not pulled out of Indonesia during the turmoil have incurred much risk. However, with this risk have come opportunities with low price tags. According to the USTR, the stock of U.S. foreign direct investment in Indonesia reached approximately $6.9 billion in 1999, an increase of 4% over 1998. This is concentrated in the petroleum, manufacturing, and financial sectors.

U.S. exports to Indonesia rose to $8.3 billion in 1996, but declined to $2 billion in 1999. Prior to the instability, sectors predicted to expand included information technologies, security and safety industries, and industrial chemicals.

Also significant were food processing, paper and paperboard, telecommunications, medical equipment, mining, oil and gas equipment, and education and training services.

Follow the Market Closely

Indonesia offers a wealth of natural resources, a modern telecommunications sector, and plenty of opportunity — with risks. Currently, predicting this level of risk is challenging.

The Euro: A Currency in Transition With Many Implications for U.S. Businesses

Published on Sunday, October 01, 2000

Increasingly, European businesses are asking U.S. companies to list their price sheets in euros, the single European currency, and to use the currency for all transactions. Fulfilling this request may give you a competitive edge. However, the recent instability of the euro could increase your risks.

Currency Stability Has Become an Issue

Introduced on January 1, 1999, with a value of approximately $1.17, the euro dropped to a low of about $0.84 the week beginning September 18th. During September, European officials repeatedly insisted that the euro was undervalued in proportion to European economic performance. As a result, calls for intervention were made from inside the euro area, referred to as Euroland, as well as from international organizations.

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