Author Article List

NAFTA Report Card

Published on Tuesday, August 01, 1995

The North American Free Trade Agreement (NAFTA) was implemented on January 1, 1994. The purpose of the Agreement is to eliminate barriers to trade and investment—including tariff, import quotas, import licenses and investment restrictions—among the United States, Canada and Mexico so as to ultimately increase our standards of living. NAFTA has been hailed as a success by many. However, recent events have clouded its benefits.

NAFTA: A Success In Year One

During the first year of NAFTA, U.S.-Mexican bilateral trade rose 22%, up from $81.5 billion to $100 billion. U.S. exports to Mexico increased at about the same rate -- and almost four times faster than U.S. exports to the rest of the world.

Since NAFTA was implemented, there has been a proliferation of joint ventures and strategic alliances between U.S. and Mexican companies.

A survey conducted in May 1994 by KPMG/Peat Marwick, a leading consulting firm, revealed that nearly 40% of the 1000 respondents said their industry had already benefited from NAFTA. The American Chamber of Commerce in Mexico conducted a survey of its members in the Spring of 1994. Most respondents expressed confidence that NAFTA would be beneficial to their productivity and profitability.

Coopers and Lybrand, another leading consulting firm, interviewed executive officers of 410 of the fastest-growing U.S. product and service companies. According to the report issued, for growth companies, NAFTA has meant export opportunities, not job relocations.

NAFTA: The Second Year Will Be Poor

On December 20 of 1994, on the verge of entering the second year of NAFTA with flying colors, the situation drastically changed. An attempted currency adjustment by the Mexican Government that some say should have occurred earlier but at a more gradual pace, accelerated out of control.

The Mexican Government expanded its exchange rate band by 15% in an attempt to allow the peso to adjust downward. Within two days pressures mounted -- currency reserves used to prop up the peso were quickly dwindling. As a result, the peso was allowed to float freely. Shortly thereafter, it nose-dived.

From December 20, 1994, to July 1995, the peso dropped about 40% in value compared to the U.S. dollar. Like falling dominos, what began as a short-term liquidity crisis drove down confidence and sparked panic. The Mexican stock market dropped precipitously. Most investors whose money came due did not reinvest in the country. Prior to this, Mexican political events pressured the situation.

The assassinations of Luis Donaldo Colosio, the PRI presidential candidate, and Francisco Ruiz Massleu, a senior ranking PRI official, combined with unrest in the southern state of Chiapas, further fueled investor unrest.

U.S. exports of consumer goods, which include sporting goods, are expected to be most affected by the devaluation, according to David Hirschman, Director of Latin American Affairs of the Chamber of Commerce of the United States. Stated by Robert Hall, Vice President of Government Affairs at the National Retailers Federation based in Washington, D.C., Mexican retailers fear that the industry won't bounce back for years. Other retailers are not as pessimistic, but have delayed expansion plans pending how quickly the economy recovers.

JC Penny, Footlocker, Dillards (which operates 227 stores in the United States), Wal-Mart and Sax Fifth Avenue have delayed plans to open new stores.

President Clinton's announcement on January 31 to provide Mexico with about a $50 billion U.S./international package of loans and loan guarantees was met with considerable relief in the Mexican and U.S. business communities. Although economic indicators have fluctuated since then, greater stability and confidence in the economy has resulted.

On March 9th, Guillermo Ortiz, Mexico's Minister of Finance, announced an economic program designed to restore economic stability. The measures call for an increase in the national value-added tax from 10% to 15% and the elimination of some exemptions; reductions in government expenditures to 1.6% of GDP for fiscal year 1995; a rise of 35% in gasoline prices and 20% in electricity rates; a continuation of the floating exchange rate; and a 10% hike in the minimum wage (which was bumped to 12%).

As a result of the crisis and new austerity program, the Mexican Government anticipates a temporary increase in inflation of between 40% to 50% and a reduction in GDP of 2% to 3% this year.

NAFTA: Year Three Looks Bright

Earlier this year, Salomon Brothers projected Mexican GDP to rise by 3.4% next year. More recent estimates anticipate 3% -- indicating a short-lived crisis. These projections are partly based on strong anticipated exports -- which have already been registered. Lower inflation is also predicted for 1996.

According to a newly released 1995 Investment Climate Survey by the American Chamber of Commerce in Mexico, planned capital investment by the 374 foreign and domestic firms in Mexico that responded to the survey will increase by 5.1% this year, from $5.9 billion in 1994 to $6.2 billion in 1995. Nearly 91% of all respondents indicated that long-term prospects for growth in Mexico are favorable. Of the American-owned companies surveyed, 95.4% expressed such confidence.

Exports of sporting goods (including games, toys and accessories) to Mexico increased almost 55% from 1993 to 1994. Exports to Mexico this year will be poor. However, as a result of renewed confidence and investment in the economy, Mexico's sporting goods and retail industry as a whole will slowly strengthen.

The Canadian Sporting Goods Market Improves

The Canadian economic recovery has positively affected its retail sporting goods market. Reportedly, Marcel Rousseau, co-owner of Sports Gilbert Rousseau, a Quebec City sporting goods chain specializing in hockey equipment, anticipates his sales figures to increase substantially over the next several years.

Paul Levine, a buyer for Sports Distributors of Canada, a 200-store chain based in Calgary, said his sales are on the rise. Levine believes that confidence in the economy has been restored and as a result, anticipates greater sales. The chain plans to expand into team sports, ski and cycling merchandise.

The Canadian sporting goods market is very receptive to U.S.-made sporting goods. From 1993 to 1994, U.S. exports of sporting goods there increased by 16%. As the Canadian economy grows stronger, U.S. exports will likely increase at a faster pace.

The Sporting Goods Market Is Growing in Chile, the Next NAFTA Partner

Chile, with a population of 14 million, is a growing market for sporting goods. The sector grew by 41% from 1991-1992, and by 47% from 1992-1993. Even though some specific subsectors such as bicycles and related products have increased by as much as 107% (1991-1992), the growth of the Chilean sporting goods market appears to have slowed to about 20%. Approximately 80% of sporting goods sold in Chile are imported.

Local production consists mainly of bicycles and related products, billiard and other game tables, and boats, motorboats, sailboats and yachts. Imports come mainly from Far East countries such as Taiwan, Korea, Hong Kong and Malaysia, as well as from Europe. Many of these products incorporate U.S. technology and licensing rights. More recently, China and Japan are becoming significant competitors.

American sporting goods are regarded as being of excellent quality. U.S. market share has increased from 18% in 1991 to 20% in 1992, and to 23% in 1993. U.S. imports increased by 59% during the period 1991-1992 and 63% during the period 1992-1993. The Chileans are increasing interested in manufacturing locally under licensing agreements.

The market for sporting good products in Chile has grown steadily. This increase is fueled by a combination of factors, including improved economic conditions of consumers and a greater interest in health and fitness.

U.S.-Mexican Co-production in Textiles and Apparel Increasing

Published on Tuesday, August 01, 1995

According to the U.S. International Trade Commission, Mexico became the United States' fastest-growing supplier of textiles and apparel (by volume) in 1994. Growth, measured by volume, surpassed that of China, Hong Kong, Taiwan, and South Korea. China remained the biggest supplier of textiles and apparel, but the volume of its exports to the United States dropped for the first time since 1988. U.S. imports from Hong Kong, Taiwan and South Korea also dropped. Mexico ranked fifth following South Korea.

Last year, U.S. exporters of textiles and apparel to Mexico performed well. The increase of U.S. textile exports (categorized under SIC code 22) to Mexico from 1993 to 1994, the first full year of Nafta, was 130% more than the increase from 1992 to 1993. The increase of U.S. apparel exports (categorized under SIC code 23) to Mexico from 1993 to 1994 was 17% more than the increase from 1992 to 1993.

U.S.-Mexican Textile and Apparel Co-production to Increase at an Accelerated Pace

Apparel production, which is labor intensive, requires few skills and is difficult to automate, has continually moved to developing countries where labor rates are lower than in the United States. Consequently, U.S. production has declined.

According to a U.S. International Trade Commission report released in January, the U.S. apparel production index declined from its base of 100 in 1987 to a low of 92.2 in 1990. It increased to 95.0 in 1992 before declining slightly in 1993 to 94.9. Over the last 10 years, U.S. imports of apparel grew by 90% to $34 billion.

This trend is not unique to the United States. Stated in the Commission report, from 1980-1993 apparel output decreased by 24% in developed countries but increased by 39% in developing countries. During this period, employment in this sector fell by 19% in developed countries and rose by 110% in developing countries.

The United States is one of the world’s largest and most efficient producers of textile mill products. However, over the years domestic output has dropped. This is primarily due to a reduction in apparel production in the United States -- the single largest market for the textile industry. Thus, East Asian producers of apparel, major suppliers to the United States, source their textiles in East Asia, not in the United States.

In an attempt to sustain remaining domestic market share, U.S. apparel producers have expanded their co-production operations in Mexico and the Caribbean -- benefiting from the lower wages and tariff preferences. This activity also benefits the U.S. textile industry.

Permitted under U.S. tariff classification 9802.00.80, formerly 807 of the old U.S. tariff code, co-production, also known as production sharing, has allowed U.S. textiles sewn and made into apparel in Mexico, or in other foreign countries, to be shipped back to the United States incurring duty only on the non-U.S. material and foreign labor. This has allowed some apparel manufacturing processes to be conducted in Mexico and in other low-cost labor markets.

Under Nafta, a new U.S. tariff code (9802.00.90) now allows U.S. imports of Mexican apparel made with 100% U.S. textile content to enter the United States duty free -- entirely omitting duty once applied to the value associated with Mexican labor.

According to the U.S. International Trade Commission, between 1989 and 1992, U.S. imports of textiles, apparel and footwear under tariff code 9802.00.80 increased by 95%, to almost $5.4 billion. Analysts predict that U.S.-Mexican apparel co-production will increase at a faster rate as a result of the Mexican peso devaluation and use of the new tariff code 9802.00.90. This will benefit both countries as North America becomes more globally competitive with East Asia and other regions of the world.

Approximately 80% of Mexican exports of apparel to the United States is produced in Mexico's roughly 300 maquiladora plants employing about 45,000 workers. Of all countries exporting textile and apparel to the United States under 9802.00.80, Mexico and the Caribbean account for almost all activity.

Some of the new maquiladora production anticipated is expected to result from a shift in existing manufacturing from East Asia to Mexico. And because Mexican maquiladoras utilize about twice as much U.S. material in their finished products as do producers in Asia's newly industrialized countries, U.S. producers of textiles will benefit.

Reportedly, rising labor costs in the Far East helped initiate the shift of apparel production to the Caribbean region about four years ago. Nafta has further influenced this shift away from the Far East to Mexico. Note that the United States Congress is considering legislation that would give the Caribbean region the same duty treatment now given to Mexico under Nafta.

Mexico Raises Textile and Apparel Duties on Non-Nafta Countries

In March, the Mexican Government formally notified the World Trade Organization that it would increase tariffs to protect its apparel industry. The announced tariff increase, from an average of about 20% to 35%, will apply to apparel imports from non-Nafta countries.

Since Mexico significantly reduced its trade barriers as a result of joining GATT in 1986, it has experienced much difficulty in competing with Asian apparel imports. Thus, in 1985 Mexico's tariffs on apparel averaged nearly 50% and all imports were subject to import licenses. By the end of 1987, Mexico's average tariff on apparel dropped to 20% and import licenses were eliminated.

As a result of the steep tariff decline, Mexican imports of apparel increased 74% from 1991 to 1993. During the same period Mexican domestic production grew just 3% in volume, not keeping pace with growing demands for higher volume, better quality and lower prices.

U.S. retailers operating in Mexico, whose inventories include Asian imports, have reportedly criticized the tariff increase. U.S.-based apparel importers who re-export a portion of their inventory to Mexico also predict they will be hurt by the Mexican move. U.S. producers of inexpensive apparel may be able to take advantage of the market void left by Asian apparel imports whose prices are made more expensive by the higher tariffs.

Industry Projections

The U.S. textile industry was expected to benefit with the passage of Nafta. Mexico's economic crisis, which began last December, will temporarily reduce these benefits until Mexican consumer spending increases.

Due to origin requirements under Nafta, it is likely that almost all Mexican apparel will be made from yarn and textiles that are produced in the United States. And if importing under 9802.00.90, all textiles must be sourced from the United States in order to comply with the new ruling.

Under Nafta, U.S. apparel producers of long-run standard commodities were anticipated to be hurt, but less so for U.S. producers of fashion-sensitive garments. Post-crisis projections remain the same. Mexican apparel producers of long-run standard commodities, especially the maquiladoras, will benefit the most -- and more so due to the lower-valued peso and the use of 9802.00.90. As noted above, U.S. textile producers and jobs will benefit from this.

As U.S. and Mexican firms team-up in the co-production of textiles and apparel, North America will become more competitive internationally benefiting North American firms and workers.

A Solid Showing at the Port of New York/New Jersey

Published on Saturday, July 01, 1995

The Port of New York/New Jersey performed exceptionally well in 1994 -- gaining in almost every measure of cargo activity. Last year the port moved almost $140 billion in air and oceanborne cargo.

In 1994, the United States exported $503 billion and imported $804 billion in goods worldwide (balance of payments basis). Thus, a whopping 11.3% of all U.S. exports and 10.3% of all U.S. imports, by value, were handled by the New York/New Jersey port district. This is a tremendous share when compared to other U.S. ports.

Air Export Volume Brisk in 1994 — Reaching 448,355 Metric Tons Worth $39.6 Billion

In terms of volume, air cargo exports carved out a 22.7% market share compared with other U.S. ports -- that's 65% higher than the next leading port. In terms of value, air cargo exports controlled 26.3% of the market -- 53% higher than the next busiest port -- and up 8.9% from 1993.

As expected, northern Europe was the top export destination in 1994, accounting for almost half of the value and almost 40% of the volume of the port's air cargo. The United Kingdom, Germany and France were the major partners in this region (see Via International May/June issue).

Exports to the Far East, the second major market, rose 13.1% by volume and 12.4% by value since last year. The region accounted for approximately one-fifth of air cargo exports by both measures. The economic recovery in Japan and strong growth in South Korea, Hong Kong and Taiwan fueled imports.

Southeast Asia generated the second highest increase in regional air exports by volume, taking in an additional 5,648 metric tons over last year. Singapore and Malaysia accounted for more than two-thirds of the growth.

In 1994, the Mediterranean ranked as the third leading export destination by volume, receiving almost 37,000 metric tons. Italy ranked first, accounting for nearly half of the exports to the region; Spain ranked second.

From 1993 to 1994, the value of exports to South America rose almost 22%, nearly 52% greater than the increase in exports to Southeast Asia, which ranked second. Brazil, Argentina and Colombia were the leaders in the region.

The New York/New Jersey port imports in 1994 performed very well. It maintained 28.3% market share by volume and 26% by value. Both categories showed improvement over last year with imports increasing 11.3% by volume and 6.9% by value.

Maritime Export Volume Reached 6.8 Million Long Tons in 1994, Exceeding $17.4 Billion

The volume of both general and bulk cargo exports and imports registered positive gains in 1994. From 1993 to 1994 the Port of New York/New Jersey handled a total of 46.5 long tons of oceanborne cargo, up 14.4% from the previous year. And the value of goods increased 11.7% to $62.9 billion.

Northern Europe and the Far East were by far the largest markets. The United Kingdom imported 303,970 long tons of general cargo, coming in second to South Korea, which imported 391,495 long tons.

From 1993 to 1994, Southeast Asia generated the largest volume increase in exports -- up 55%. Indonesia and Thailand were the regional hot spots, with exports up 113.2% and 37%, respectively, measured in long tons. Indonesia ranked third in exports by volume; Thailand ranked sixth.

Exports to South America were up 18%, led by Brazil and Argentina. Combined, these two countries imported almost 150 long tons in 1994.

And exports to the Mediterranean rose almost 10%. Together, Italy and Spain totaled almost 230,000 long tons.

In 1994, oceanborne imports through the New York/New Jersey port district registered $45.5 billion, up 17.8% over 1993. The volume of imports rose by 16.4%, reaching more than 39.7 long tons. The volume of imports from Northern Europe were the highest in 1994, up 8.5%; followed by the Far East, up 5.9%; South America, up 8%; Southeast Asia, up 7.8%; and the Mediterranean, up 6.8%.

South Korea Is a Major Destination

South Korea ranked as the United States' 6th largest trading partner last year, importing more than $18 billion worth of American goods. This Far Eastern country was the number one destination for oceanborne general cargo (by volume) departing from the New York/New Jersey port district.

Over the past two decades, Korean economic growth averaged 8.7%. Growth rates in excess of 7% are predicted for the next several years. With 44.1 million consumers and a per capita income of $9,265 anticipated for this year, Korea offers New York/New Jersey port exporters much opportunity.

Over the next ten years, hundreds of billions of dollars are anticipated to be spent on new South Korean infrastructure projects -- boosting South Korean imports. Projects include construction of several electric power generation plants and transmission lines, worth $50 billion; new highway construction, worth $20 billion; new construction and expansion of existing ports, $20 billion; new subway lines for Seoul, Inchon and Taegu, $12-15 billion; and the building of a new international airport, and modernization and expansion of regional airports, $14-18 billion.

Additionally, expansion of Korea's telecommunications facilities and increased spending on defense is expected to yield opportunities for New York/New Jersey exporters.

According to Young K. Hah, a representative of the Port Authority of New York and New Jersey based in Seoul, Korea's imports from the NY/NJ region are expected to continue to increase for some time. Import liberalization policies, the birth of the powerful World Trade Organization, favorable currency fluctuations, increased consumer demand for imported products and continued increases in raw material prices will be contributing to rising imports from the United States.

Hong Kong Has Increased Re-exports to China

In 1994, the United States exported $11.45 billion of goods to Hong Kong, making it the 11th largest export destination. This ranking climbed from 14th place in 1991 to 11th place in 1993.

It has increasingly become a transit and shipping point for goods consumed in southern China, which accounted for 35 percent of Hong Kong's total re-exports in 1993. The United States was second, accounting for 21 percent.

Hong Kong's bright economic prospects, its open economy, focus on infrastructure development and its educated and sophisticated bilingual consumer population translates into opportunities for port exporters to sell everything from food products to airport equipment. Opportunities also exist to provide technical expertise, supplies and equipment to Hong Kong firms developing projects in China.

Taiwan Continues to Liberalize Its Markets

Taiwan, a country of 21 million consumers, imports nearly all of its energy needs and most of the raw materials needed to maintain industrial production. The country also imports a diversity of manufactured goods, including consumer goods such as automobiles, cosmetics and textiles, and industrial products such as machine tools, measuring instruments and construction equipment.

Last year the United States exported more than $17 billion of goods to Taiwan, an economy growing more than 6% per year. As its economy has become more dynamic, so has its need to upgrade its infrastructure. Projects include new highways, expanding the airports, improving telecommunications networks, building new power generation and pollution control facilities.

Taiwan, the United States' 7th largest export destination in 1994, has continued to liberalize its markets and promote greater consumer spending. This, combined with the strength of its economy, has created many export opportunities for New York/New Jersey port exporters.

Singapore Imported Almost $4,100 of U.S. Goods Per Capita

With a population of just 3.18 million, Singapore imported over $13 billion of goods from the United States in 1994 -- a large amount per capita -- making it the 10th biggest export market. Its economy grew by 8% last year, one of the highest in the world.

Singapore's major global imports consist of crude oil, petroleum products, electrical machinery, telecommunications equipment, office and data processing machines, general industrial machinery, transport equipment, and food.

The country imports a wide variety of goods from the United States, both for internal consumption and for re-export to other rapidly growing economies in Asia, including electronics, aircraft, chemicals and computers. Consequently, many American companies have come to rely on Singapore as a major distribution center to neighboring countries such as Malaysia, Indonesia, Thailand, Vietnam and the Philippines.

Italy Is the World's 5th Largest Economy

The Mediterranean ranked third (based on tonnage) among export regions via air for the New York/New Jersey port last year. Italy, the leader in the region and 16th largest U.S. export market, imported almost $7.2 billion worth of goods from the United States. It is the world's fifth largest economy with a gross domestic product of almost one trillion dollars. Opportunities will increase as its economic recovery takes hold.

The Italian economy is undergoing a major transformation as many state-owned enterprises are being privatized. The telecommunications, electrical utilities and energy sectors are anticipated to be next on the auction block.

Despite the lira devaluation, there are many opportunities to both maintain and expand the market for a variety of products. The realignment of the distribution sector toward larger chains and more competitive pricing should also aid U.S. exports. And the continued move toward a fully integrated Single Market should aid U.S. high value, convenience, and health food products.

Principal U.S. imports include aircraft and related equipment, coal, medical products, office equipment, and measuring equipment.

Spain Is the Mediterranean's Second Largest Market

Last year the United States exported $4.6 billion of goods to Spain. Last year Spain was included in the top ten destinations for oceanborne general cargo departing from the New York/New Jersey port, measured by tonnage.

The Spanish market is composed of a series of regional markets joined to two major hubs, Madrid and Barcelona, where most of the economic power resides. As the country and region emerge from recession, many export opportunities are becoming more evident. These include telecommunications equipment, medical equipment, pollution control equipment, computer software, films and videos, paper and paperboard, and dental equipment.

The modernization plans for the telecommunications sector alone is estimated to cost $10 billion over the next 10 years. Exporters of materials and equipment used in the construction and modernization of infrastructure projects can benefit as $147 billion is expected to be spent through the year 2,010 on new roads, upgrading railroads, improving port facilities, refurbishing airport facilities, building new drinking water facilities, and to enhance the environment in downgraded areas.

Brazil Is Latin America's Largest Economy

Brazil moved up 4 places from the United States' 19th largest export market to the 15th from 1993 to 1994, with imports rising almost 52% to more than $8.7 billion. Brazil, a major destination in South America for New York/New Jersey port exporters, has a population of 153 million people and a gross domestic product of $466 billion. It is the largest economy in Latin America.

Following several decades of tight import restrictions, Brazil began a process of trade and economic liberalization in 1990 incorporating import duty reductions, elimination of most non-tariff barriers to trade and privatization of state-owned companies.

The country's demand for energy technologies -- in generation, transmission and distribution of electrical power -- presents enormous opportunities. Additionally, a large number of state/municipal sanitation and cleanup projects, worth more than $1 billion per year, provide excellent opportunities for exporters of environmental technologies.

Brazilian imports of U.S. medical devices are forecasted to grow at an annual rate of 7% between 1995-2000. Transportation (automotive and rail), aerospace, and pharmaceutical are a few other sectors that show promising growth in Brazil through the remainder of the decade.

Argentine Oceanborne General Cargo Imports Up 30% from the NY/NJ Port

The Menem government has embarked on a course of free market reform that includes fiscal responsibility, an open market, privatization and deregulation. Thus, as of mid 1994, economic stability was three years old. Although many Argentines remain cautious about the country's political stability, it no longer appears to be a major issue.

Argentina is now a world leader in privatization. A major challenge, however, lies in their ability to regulate the behavior of the newly privatized companies which are largely engaged in the provision of goods and materials related to energy and fuel generation; telecommunications; road, rail and river transportation; and steel production. These sectors will provide good opportunities for exporters of New York/New Jersey port.

U.S. exports to Argentina rose 18.3% from 1993 to 1994. Steady export growth is forecast for the future.

Confidence Rising in Mexico

Published on Saturday, July 01, 1995

While the recent financial crisis is still weighing heavy on Mexico, increasing evidence shows the stage is being set for the Mexican economy to make a surprisingly strong comeback.

According to a newly released 1995 Investment Climate Survey by the American Chamber of Commerce in Mexico, planned capital investment by the 374 foreign and domestic firms in Mexico that responded to the survey will increase by 5.1% this year, from $5.9 billion in 1994 to $6.2 billion in 1995. Nearly 91% of all respondents indicated that long-term prospects for growth in Mexico are favorable. Of the American-owned companies surveyed, 95.4% expressed such confidence.

This continuing confidence comes on top of recent trade figures that show a strong correction in Mexico’s previous trade imbalance. The December peso devaluation, along with Mexico’s growing export potential, has resulted in an improvement of more than 120% in that country’s trade balance from January through April, 1995, compared to the same period last year. On December 13, 1994, the peso was worth 3.45 to the dollar. After dropping to more than 7 to the dollar earlier this year, the peso has stabilized at around 6. As a result, Mexican exports have become less expensive and are expanding rapidly. Total Mexican exports to the world are up 32.9% and maquiladora exports are up 20.9%.

As Mexican global exports increase, components and materials used in Mexico’s sizable production-sharing sector are rising commensurably. And since most of Mexico’s co-production components and materials are imported from the United States, U.S. exports to Mexico are also rising—benefiting U.S. business and workers. According to the Mexican Government, maquiladora imports have increased by 33.9% from January through April, compared to the same period last year.

Mexico’s export-led recovery is evident in border towns like Tijuana, the site of the largest number of existing co-production facilities. According to Ciemex-WEFA, an economic research group based near Philadelphia, 160 new plants are likely to spring up south of the Mexican border in the next year and a half. And as these plants begin exporting globally, they will import more components and materials from the United States—strengthening North American competitiveness compared to Europe and East Asia.

Pirouz Pourhashemi, owner of Magnotek Manufacturing, Inc., a Mexican producer of injection moldings and a maquiladora operator, is very confident about what he sees in Mexico’s future. Pourhashemi, who has operations on both sides of the border, says that since the devaluation his exports have increased substantially. Because 90% of his assembly materials are sourced from the United States, he will need to increase his imports from the United States to meet his growing production needs.

The May 1995 production-sharing report published by the U.S. International Trade Commission indicates that Mexico has an advantage in the assembly of products such as electronic components, among others. High-tech companies in California’s Silicon Valley and Orange County tend to choose among co-production sites in cities such as Tijuana, Tecate and Mexicali in the Mexican state of Baja California Norte, or sites in East Asia.

Baja California’s proximity to California allows U.S. plant managers to live in Southern California, and provides for greater operational oversight, faster turnaround, and lower transportation costs than East Asia. These advantages, coupled with Mexico’s competitive labor rates, make for a very attractive manufacturing location.

In addition to growing U.S. investment in this region, Asian companies are also making substantial manufacturing investments in Northern Mexico. Asian investors are helping to transform Tijuana into one of the world’s largest television manufacturing locations. Sony, Hitachi, JVC, Matsushita and Toshiba, five of the eight largest Japanese TV manufacturers, have major assembly plants already located there or plan to begin production in the region. South Korean TV manufacturers such as Samsung and Daewoo also have or are in the process of establishing facilities there. And the Los Angeles Times reports that two Chinese delegations visited industrial parks in Tijuana this year in search of sites for textile and toy factories.

These investments are being spurred by the rules of the North American Free Trade Agreement (NAFTA). Under NAFTA, only North American-made products are accorded duty-free status. Non-North American manufacturers need to produce in North American to satisfy the agreement’s rules of origin. In most cases, a product must satisfy content requirements, and in some cases must satisfy both transformation (which demand specific changes in tariff classifications) and content requirements.

For example, hair dryer parts imported into Mexico from Japan and South Korea will arrive under parts classifications. When assembled with North American parts, the sum of the parts becomes a hand-held dryer. At this point, tariff transformation rules will have been satisfied, but percentage content requirements must now be met demanding that at least 50% of the value of the components originate in North America.

Under this new trade regime, Mexican companies, U.S. companies operating in Mexico and non-North American companies manufacturing in Mexico will source more and more components and products from the United States.

The AmCham Mexico report reflects this growing trend in co-production, as well as the strength businesses see in Mexico’s overall economic fundamentals. The confidence being shown in Mexico’s growth potential by North American and non-North American firms—who continue to establish mutually beneficial partnerships and trade relationships with Mexico—should be a cause for considerable relief on both sides of the border.