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Nafta: The Results Are In

Published on Thursday, September 01, 1994

The results are in. The North American Free Trade Agreement (Nafta) is working well for America. In the first half of 1994, U.S. exports to Mexico were up nearly 17% over 1993's record numbers; exports to Canada are up 10%. By comparison, on a global basis U.S. exports are projected to grow this year by 6%.

At the current rate, U.S. exports to Mexico will total almost $49 billion this year, a vast improvement over 1993. Thus, Mexico will likely replace Japan as the second largest market for U.S. goods, after Canada.

Ross Perot's "giant sucking sound" of U.S. jobs moving to Mexico hasn't materialized -- and won't. On the contrary. In this year alone, Nafta could support 100,000 new jobs in the United States. Not bad for a trade agreement.

Nafta has contributed significantly to the success that U.S. manufacturers have recently encountered in Mexico. For example, in the first five months of 1994, the U.S. automobile industry exported 12,380 passenger vehicles to Mexico, a large improvement over the 3,630 units shipped during the same period last year. In fact, Chrysler, Ford and GM are expecting to export a combined 55,000 to 60,000 cars and trucks to Mexico by the end of the year.

In the first quarter of 1994, numerous other industry exports were up considerably from the same period last year. These include:

• Transportation equipment: Up 29.8%
• Electrical and electronic equipment: Up 15.6%
• Industrial machinery and computer equipment: Up 14.1%
• Fabricated metal products: Up 31.5%
• Rubber and plastics: Up 33.6%
• Stone, clay and glass products: Up 34.2%
• Printing and publishing: Up 22.9%
• Forestry products: Up 27.9%

Manufacturing is not alone. U.S. agricultural exports to Mexico also rose tremendously. From January to June 1994, the following commodity exports showed sizable growth compared to the same period last year:

• Corn (feed grain): Up 471%
• Beef and veal: Up 54%
• Pork: Up 45%
• Poultry and poultry products: Up 28%
• Fresh fruits: Up 78%
• Vegetables: Up 25%

Its no surprise to see these early gains. The benefits of free trade already have been proven through a variety of pacts through out the world. In 1983, New Zealand and Australia implemented an accord liberalizing trade between them. For the three years preceding the accord, Australian exports to New Zealand grew at an average of 10% each year. After implementation, through fiscal year 1985, exports rose 18% annually. New Zealand's exports to Australia also increased as trade barriers declined.

Between 1959 - 1969, trade within the European Community, now referred to as the European Union, rose by 347%. In contrast, trade outside the bloc rose by only 130%. In this same period, U.S. global trade rose by 124%, while Canadian global trade rose by 130%.

The value of Spain’s bilateral trade with Portugal increased over 79% the first year the two joined (1986). During the first ten years of Britain’s membership in the European Community (1973 - 1983), its exports to the other member states grew by 28% per year, while its imports increased by 24%. Trade with the rest of the world during this time period went up 19% per year.

Free trade detractors cling to the false beliefs that the United States cannot compete in an increasingly competitive global economy. In an attempt to protect the United States, they suggest isolating ourselves from the rest of the world by erecting barriers to trade. They have forgotten the disastrous lessons of the past. The Smoot-Hawley Bill, signed by President Hoover on June 17, 1930, raised tariffs on imports. Our trading partners retaliated and raised their barriers on our goods. Export markets dried up. The result was a steep decline in international trade, which significantly contributed to a U.S. unemployment rate of 25% in 1930 and a severe depression.

As one becomes familiar with the global trends of the 90s, the strengths and weaknesses of the United States, and the opportunities in North America, it becomes evident that global free trade is clearly in our best interests.

The Congressional decision to ratify Nafta did not simply concern a trade agreement among the United States, Canada and Mexico. Rather, it was a decision on the direction of America, defining our perceived strengths and weaknesses, our level of confidence and courage, and a determination on how we, as a nation, will conduct ourselves in the new post-Cold War era. The world was closely watching this vote. Ratification of Nafta signaled that the United States is ready for the challenges of the Twenty-First Century. A "no" vote, however, would have been perceived as a retreat by the United States into policies of isolationism and protectionism. European and East Asian nations would have been more likely to turn inward. Most importantly, well-paying American jobs would have been lost.

A primary economic goal of the United States is to maintain a high and rising standard of living. In order to achieve this, the United States must continuously increase productivity, create high-wage jobs, successfully compete in the dynamic global economy, invest in people and in the industries of the future -- and not in the industries of the past. It's no surprise that high-technology industries dominate the list of fastest growing American industries. And it is essential that these producers have access to growing international markets. Nafta achieves this.

Industries of yesterday will perish whether or not they are insulated from international competition. Clinging to the past and its outdated methods will unequivocally lead to our demise. In order to succeed in the twenty-first century we must welcome -- not resist -- change. Nafta addresses this reality. Nafta is not part of the problem... it's part of the solution.

Exporting Industrial Machinery and Machine Tools to Mexico Under NAFTA

Published on Thursday, September 01, 1994

Industrial machinery and machine tools are highly related sectors. Industrial machinery includes farm, packaging, construction, mining, oil and gas field, textile, paper, printing, and food products machinery, as well as refrigeration and heating equipment. Machine tools includes metal-working machine tools, wood-working machine tools, and machine tools for working other hard materials, including minerals, ceramics, concrete, glass, hard rubber and hard plastic.

Mexico's need to modernize its industry has directly resulted in its demand for foreign machining and industrial equipment. Improvement in Mexico's highway system, modernizing of its ports, and the expansion of its farms and their becoming more mechanized has increased demand for construction and farming machinery. Additionally, the need for more packaged and refrigerated food in Mexico has increased as its consumer market grows.

During the period 1989 to 1991, U.S. exports of industrial machinery to Mexico rose by 71%; exports of construction machinery rose by 165%; and exports of gas and oil machinery rose by more than 85%. Also during the same period, U. S. exports of machine tools rose 14% to $185 million worth.

In 1991 Mexico became one of the fastest growing markets in the world for U.S. exports of construction and mining machinery. The United States currently supplies Mexico with more than two-thirds of its imports of farm, construction, and mining machinery, and air conditioning and refrigeration equipment. In 1991 alone, Mexican consumption of metal-working machine tools was $255 million whereas domestic production was $15 million. This huge disparity not only reflects Mexico's inability to produce such capital-intensive goods for itself, but its ardent need to import them in order to industrialize.

Selling Machine Tools in Mexico

To begin introducing machine tools in Mexico, new-to-market U.S. companies must have a service-oriented, long term commitment to the market. The traditional way to sell machine tools is through representatives and distributors. Large end-users sometimes buy directly from manufacturers.

New- to-market companies may wish to participate in trade shows, prepare brochures and promotional materials in Spanish, contact companies directly with sales agents, if possible in Spanish, join local associations and chambers of commerce, put on technical seminars to inform manufacturers about new technologies and innovations, set up a representative office in Mexico and/or establish a joint venture with a reputable Mexican firm. Financing, price, quality and delivery times are extremely important selling factors.

The demand for imports comes from manufacturers in the automotive, steel, railroad, hand tool, electric consumer goods and other industries. These industries are heavily dependent on imports of metal cutting and metal forming machine tools. The end-user market includes some 140,000 manufacturing industries and metal working shops. The majority of end-users are small metal working shops that use 15 to 20 year-old machine tools and machinery. Approximately 200 companies considered medium and large end-users have modern machine tools, often custom made outside of Mexico.

A great majority of end-users are located in Aguascalientes, Chihuahua, Celaya, Guaymas, Guadalajara, Hermosillo, Lazaro Cardenas, Leon, Mexico City, Monclova, Monterrey, Puebla, Queretaro, Saltillo, San Luis Potosi, Santiago Tianquistenco, Tampico, Toluca, and Veracruz.

Mexican importers often prefer 60 to 90 day credit terms. However, large companies that order custom-made machine tools usually pay 20% of the total value when placing the order, 30% when the machine is completed and 50% when the machine is delivered and tested. High value sales usually are made through letters of credit. Note that the supplier's reliability is a priority over price.

Mexican Tariffs and Non-Tariff Barriers

Prior to Nafta's implementation, Mexico's effective trade-weighted duties on U.S. industrial products ranged from 10.1% for textile machinery, to 15% for construction machinery, to 16.7% for refrigeration and heating equipment. According to the Petroleum Equipment Suppliers Association, U.S. companies that did not have a manufacturing facility in Mexico faced stiff obstacles in doing business there. Thus, prior to Nafta, most Mexican imported oil field machinery was assessed a duty of 20%. Mexican tariffs on U.S. machine tools averaged 13%.

For the majority of U.S. machine tool exports to Mexico, the effective rate of duty was 13%. However, for products such as the metal-working machines, most important for manufacturing operations, the effective rate of duty was 17%. The majority of machine tools subject to the higher tariffs were concentrated in a few categories of metal-cutting machine tools (horizontal lathes and certain drill presses, and numerically-controlled multistation transfer machines) and in a wide range of metal-forming machine tools (machines specifically designed for punching, stamping, bending, shearing, and pressing). These machines are extremely important for the further development of Mexican manufacturing. To illustrate, these metal-working tools accounted for 83% of U.S. exports of machine tools to Mexico in 1991. Mexico's need for such tools and equipment is essential for its continued industrialization.

Rules of Origin for Industrial Machinery and Machine Tools

North American materials used to build machinery constructed in North American will undoubtedly qualify for preferential Nafta treatment. Industrial machinery may qualify if 1) the value content is satisfied, or 2) the non-North American materials are not classified in a tariff provision that specifically provides for parts of machinery.

In general, parts of industrial equipment would qualify under the rules of origin if they are sufficiently processed in North America -- requiring a change in the tariff classification from one heading to another. Note that other requirements and exceptions apply to various parts and subassemblies. Compared with the rules or origin established in the United States-Canada Free Trade Agreement, Nafta rules applicable to industrial machinery are similar, but more stringent with regard to value content.

For machine tools, the rules of origin are generally more stringent than the rules for other industries. Nafta preferential treatment is limited to those that contain originating parts. For example, machine tools which incorporate non-North American electric motors, pumps, electrical control panels, lasers, and major structural elements from which machine tools are built will be denied Nafta treatment. Additionally, a subassembly for a machine tool containing non-North American parts will not be considered a North American product and therefore denied preferential access to the United States, Mexico or Canada. It should be noted, however, that exceptions to the rules exist which allow goods to qualify for preferential treatment even though they do not meet Nafta's origin requirements.

Nafta's Impact on the U.S. and Mexican Industrial Machinery and Machine Tool Sectors

Under Nafta, almost all U.S. duties on Mexican imports of industrial machinery were eliminated immediately on January 1, 1994. Due to the fact that U.S. trade barriers on these goods were minimal, their removal under Nafta is expected to have little impact on U.S. imports.

Upon implementation, Nafta eliminated duties on 54% of Mexican tariff classifications on U.S. industrial machinery exports. This included eliminating duties on approximately 80% of U.S. textile, paper making, printing, and farm machinery, and 85% of food products machinery. Additionally, approximately 17 to 33% of U.S. exports of mining, oil and gas field machinery, and refrigeration and heating equipment became duty-free immediately. Mexican duties on remaining goods will be eliminating over a 10 year period.

U.S. exports of construction machinery, farm and food product's machinery, and refrigeration equipment are anticipated to accelerate under Nafta. According the U.S. International Trade Commission, U.S. exports of industrial machinery to Mexico are expected to increase by 6% in the short term and 10% in the long term.

U.S. exports of oil and gas machinery and other goods are expected to increase through Nafta-secured access to contracts awarded by Pemex, Mexico's state-owned oil company. Based on a U.S. industry source, an estimated $1 billion to $2 billion of potential contracts exists.

For machine tools, Nafta's implementation will immediately allow 76% of Mexican imports to enter duty-free. Tariffs on the remaining 24%, which is currently assessed duties up to 20%, will be phased out over a five-year period. This category is comprised mostly of the metal-cutting and metal-forming machines mentioned earlier. For the U.S. and Canada, all qualifying imports from Mexico were immediately eligible on January 1, 1994, to enter duty-free.

The U.S. International Trade Commission has forecasted that under Nafta, U.S. exports to Mexico of machine tools will rise 9% in the short term and 11% in the longer term. These estimates are considered very conservative, and likely to be higher. As a result of increased exports, U.S. employment in these sectors will rise.

North America: Backyard Bloc

Published on Friday, July 01, 1994

Perfect Fit Glove Co., a Buffalo, NY-based manufacturer of safety gloves and apparel, currently exports their products globally. According to Frank Stucke and Joe Hoerner, owners of the company, Mexico and Canada look especially good these days. Stated by Mr. Stucke, "Under Nafta, Mexico has begun to better enforce its standard and regulations resulting in a greater demand for U.S.-made safety products. As a result, we intend to boost our exports to Mexico over the next six months."

Company exports to Canada have also increased and will continue to do so. According to Joe Hoerner, "We've increased exports to Canada for three reasons. Under the U.S.-Canada Free Trade Agreement and now Nafta, it's easier to export there. Secondly, now that Canada has emerged from its recession, the demand for our products has increased. And thirdly, Canadian distributors of our products have become more familiar with our higher technology, lower cost production processes and more advanced fibers. For example, they like our new safety products made from E.I. DuPont's latest line of kevlar fibers."

Frank and Joe are not alone, U.S. companies across the country are finding Canadian and Mexican markets very profitable.

Over the past several years, exports have been responsible for substantial U.S. economic growth. From 1989 to 1991, for example, some 70% of U.S. economic growth was attributable to exports. Although the slower global economy has affected export growth, this will change as the world economy picks up speed.

In 1993, the United States exported $41.6 billion of merchandise to Mexico resulting in a $1.7 billion merchandise trade surplus -- the third consecutive surplus. From 1986 to 1992, U.S. exports to Mexico shot up by 225%; 132% faster than U.S. exports to the world. This has made Mexico a bright feature on the U.S. landscape. Exports to Canada, registered at $100.2 billion in 1993, are strong and will continue to increase in Canada's post-recessionary environment. Thus, Canada is the United States' biggest export market, followed by Japan and Mexico.

Although Mexican per capita income is low, each Mexican consumes more than you would think. In 1992, workers in manufacturing industries in the European Community (EC) received 748% more in hourly compensation than manufacturing workers in Mexico; Japanese workers received 588% more. Yet, each Mexican bought more goods from the United States than each EC or Japanese citizen. In 1992, the average Mexican spent $440 or 44% more than the average European ($305) and almost 15% more than the average Japanese ($384) on U.S. goods. Even if you eliminate the roughly 20% of U.S. exports to Mexico that are eventually sold back to the United States, each Mexican still buys more than each EC citizen. Since Mexico sharply reduced its tariffs in 1987, U.S. exports for consumption in Mexico have grown by more than 224%. Thus, U.S. exports of consumer goods have been the fastest growing sector. Per capita Mexican imports of U.S. goods is tremendous, and is not negatively affected by lower compensation.

Mexicans seem to prefer U.S. products to European or Japanese products. And this is good news in light of the fact U.S. exports to the other two emerging trade blocs could be at risk. In an effort to achieve a higher level of productivity and in turn, economic security, the world has emerged into three primary trading blocs composed of Western Europe, East Asia and North America. Within each bloc, free trade has become more entrenched. However, trade among blocs is a different story.

The European Union (EU), formerly referred to as the EC, has achieved the elimination of physical, fiscal and technical barriers to trade among its list of growing members. And in years to come, Eastern European countries will undoubtedly become full members. East Asian nations have moved markedly toward increased economic integration. For example, both the Asian-Pacific Economic Cooperation Forum and the Pacific Economic Cooperation Council have emerged to facilitate greater regional integration. Others, such as the Association of Southeast Asian Nations, have advanced without U.S. membership.

These fledgling trade blocs are continuing to liberalize trade among members. However, as intra-trade bloc barriers are eliminated, non-members are concerned that their exports could be curtailed. Fear that competing trade blocs will become inwardly focused and protectionist will continue to make U.S. exporters nervous. An even if existing barriers remain the same to non-members, the effects of trade diversion may have a similar impact. Trade diversion occurs when members of a trade group buy more goods from each other, due to the elimination of internal trade barriers, displacing non-member goods. For example, due to preferential access, the British are likely to buy more German and French goods at the expense of the United States. To illustrate, in 1985, 53% of EC trade was with member countries. This percentage has risen to 59.6 in 1991 and it will likely continue. In 1988, 22% of East Asian trade (10 countries) was with one another. By 1991, this had risen to 35 Percent. These concerns have promoted a race among nations to achieve the largest and most powerful trade area.

The North American Free Trade Agreement (Nafta) effectively reserves Mexican and Canadian market share for U.S. companies -- giving our companies an edge over European or East Asian competitors. In an effort to better fortify our economic position, the United States established the United States-Canada Free Trade Agreement implemented on January 1, 1989. Nafta, implemented on January 1, 1994, builds on this. The Enterprise for the Americas Initiative, announced by former President George Bush in June, 1990, calls for the creation of a Western Hemisphere free trade area -- further supporting U.S. business interests in the region.

Nafta provides for the progressive elimination of all tariffs on North American goods. Approximately 50% of all U.S. exports to Mexico became completely duty-free on January 1, 1994. Approximately 66% of U.S. exports to Mexico will become duty-free within 5 years -- making U.S. products more competitive. Products included in this category include: aerospace equipment; semiconductors; computers and parts; telecommunications and electronic equipment; medical devices; rail locomotives; many auto parts; machine tools; and paper products.

Prior to Nafta, about 70% of Mexican and Canadian imports were purchased from the United States. As Mexico and Canada eliminate their tariffs and non-tariff barriers under the Agreement, U.S. exports to each country will further increase. These benefits can also be experienced in the short-term -- if you target those sectors experiencing greatest growth -- and more so if their trade barriers are on the quickest elimination schedules. To follow is a list of top Mexican and Canadian markets where U.S. companies can benefit from in the short-term.

Top Mexican Growth Prospects

Automotive Parts and Service Equipment

The original equipment market and aftermarket is one of Mexico's strongest growth sectors. A developing third market, which may be classified in terms of reconstruction operations, offers considerable potential, particularly for high cost components such as engines, transmissions, steering systems, etc. as well as for heavy trucks. The original equipment market for autoparts cover 49 percent of the market demand. Local production for aftermarket parts meets approximately 71 percent of demand. Three additional markets with growing potential are auto accessories, auto emission control equipment, and the auto maintenance equipment and tools market.

Electrical Power Systems

The demand for electric power is expected to continue growing at a higher rate than supply. Several dual oil/coal plants are scheduled for construction in the period 1994-1995. Most planned geothermal plants are under construction. The sector is expected to grow at an annual rate of 7% through 1995. The vast majority of new projects under consideration will satisfy electric power demand for industrial and commercial use, especially for the chemical, petrochemical and tourism industries.

Franchising

Franchising continues to be one of the most effective marketing systems in Mexico. In 1992, there were 4,100 franchise outlets from 173 franchisers, representing a total investment of $4 billion. The franchising industry will play an important role in helping medium and small companies to modernize and to acquire new technology. Annual growth is projected to reach 150% through 1995. Due to this, new financing support systems are being developed for local franchisees.

Machine Tools and Metal Working Equipment

Imports of machine-tools and metalworking equipment are expected to grow at an annual rate of 25% through 1995. A variety of new projects are underway in the automotive sector, which has boosted demand for this equipment. Locally manufactured machine tools only service a small segment of the market. Nafta is expected to give an edge to U.S. suppliers who have been under intense competitive pressure from Germany and Japan.

Pollution Control Equipment

According to the Secretariat of Social Development (Sedesol), the Mexican agency responsible for protecting Mexico's environment, Mexico spends more per capita on environmental protection and improvements than almost any other developing country. Nafta will further this undertaking by providing additional resources and better access to the technologies and services necessary to enhance environmental protection and enforcement in Mexico.

In 1993, Mexico's public spending and investment for environmental concerns totaled approximately $2.5 billion, nearly 1% of Mexico's gross domestic product. This represents a 139% increase over public spending in 1991, and more than a 2,000% increase over 1988. According to Sedesol, Mexico is one of only two countries worldwide that anticipates a greater than 10% annual growth rate in environmental expenditures. Private sector expenditures alone are projected to increase 15% annually into the near future.

Oil and Gas Field Machinery and Services

Since the restructuring of PEMEX, the state-owned oil producer, U.S. companies have had greater access to the Mexican market. With U.S. company involvement, PEMEX will complete a pipeline at the U.S. - Mexico border, a gas pipe in the South of Mexico, a new refinery in the Salina Cruz area, and will build thousands of new gas stations. Officials forecast more business opportunities for U.S. companies in the services, machinery and technology areas.

Computers and Peripherals

The Mexican business community and government agencies are investing more in computer equipment. Consumer preferences are generally oriented to PC's, networks, workstations and servers. The demand for mini-computers and mainframes is expected to remain steady. Mexico welcomes joint ventures and direct investments in this sector. Nafta benefits U.S. suppliers by its January 1994 duty-free treatment for some equipment; and five-year duty elimination for products such as digital computer equipment, parts and printers. Importantly, December 31, 1993, Mexico eliminated import permits for used computer equipment.

Chemical Production Machinery

Mexico's chemical industry is one of the country's most important economic sectors, accounting for over 3 percent of Mexico's gross domestic peroduct. It is intimately linked to the industrial health of the nation, supplying 42 different sectors of the economy and receiving goods and services from 31 sectors. Companies such as Amoco, BASF, Bayer, Dow Chemical, Dupont, Hoescht, ICI, Monsanto, and Union Carbide are planning to expand their capacities during the next several years by forming strategic alliances with Mexican investors. This will translate into large investments in new equipment and technology.

Telecommunications Equipment

One of the highest priorities of the Mexican Government is the development of its telecommunications infrastructure. The Secretariat of Communications and Transport (SCT) has continued to deregulate this sector. New concessions for radio, TV, cable TV, and value added services, such as satellite, paging, trunking and radiotelephony have all been granted. This continues to create business opportunities for U.S. manufacturers of telecommunications equipment. Importantly, Nafta has eliminated investment restrictions in Mexico for U.S. providers of enhanced telecommunications services and equipment.

Wood Products

In December 1992, the Forestry Law was issued by the Mexican Government in order to improve productivity, enforce environmental and safety standards and promote reforestation and natural reserves. In order to comply with this law, Mexico needs to import lumber and wood products to meet demand. The country does not have an adequate transportation infrastructure within its woodlands. Additionally, most of its production is in softwoods. There is heavy competition from South American and Asian countries. However, under Nafta Mexican tariffs on wood products have been completely eliminated, giving U.S. suppliers a competitive edge.

Top Canadian Growth Prospects

Computer Hardware and Peripherals

Although the market for mainframes and mid-range computers has declined substantially, inexpensive PC's and portable computers based on Intel-compatible processors have experienced significant market gains in Canada. In addition, Canadian companies are embracing computer-aided design and manufacturing (CAD/CAM) technology as they strive to improve productivity. U.S. firms with competitively priced products, effective distribution channels and strong customer service will continue to penetrate the Canadian market. Gradual market gains are expected in 1994-1995 as the economic recovery continues to take hold.

Computer Software

Canadians are buying more software per machine than ever before. Users now employ as many as seven distinct types of applications software, compared with one or two a few years ago. Canadian companies are now beginning to base their hardware procurement decisions on available software. Growth is expected at 11% through 1995.

Building products

New housing starts are forecast to grow by 10.6% in 1994. Opportunities in the Canadian building supply market, which is primarily price driven, will be found in home renovation products as homeowners continue to maintain and upgrade their homes, often through do-it-yourself projects; non-residential, retro-fit products which improve the quality of the work environment; materials which support energy conservation initiatives such as the new Energy Code for Canadian Buildings; and products which reflect the Canadian buyer's interest in environmental activism via recycling as applied to plastics and wood.

Pollution Control Equipment

Strong federal and provincial environmental legislation, backed by severe fines and penalties, has created a growing Canadian demand for pollution control equipment. This market is forecast to grow by 2-3 percent annually in real terms over the next few years. Many Canadian firms have allocated substantial budgets to purchase air and water pollution equipment in order to meet legislative requirements. The primary Canadian end-users are the pulp and paper, chemicals, metallurgy, and textiles industries -- all of which will be adding pollution control equipment over the next several years.

Sporting Goods

The post-recession Canadian market demand for sporting goods equipment is up, commensurate with an increase in personal disposable incomes. The trend in Canada toward fit lifestyles has had a major impact on the demand for sporting goods products. The strongest competition is from Asian suppliers of low-cost equipment. U.S. suppliers enjoy several advantages over competitors, including geographical proximity, product quality, brand name recognition and the elimination of tariffs by 1998 on all U.S.-made sporting goods products. Canadians' growing concern for product safety and performance standards give an edge to U.S. suppliers, who should emphasize this features in their marketing strategies.

Medical Equipment

Despite Canada's relatively small population of 27 million, the country has one of the world's strongest markets for medical equipment. Canada's comprehensive public health care system is responsible for generating the strong demand for medical devices, eighty percent of which is satisfied through imports. Even though cost restrictive measures and changes in health care legislation may temper the demand over the next few years, the medical system will increasingly seek technologically advanced equipment to produce efficient and cost-saving health services. U.S.-made medical equipment is highly regarded in Canada because of its high quality, technological superiority and reliable after-sales service.

Telecommunications Equipment

Despite the world-class quality of equipment manufactured by Canadian companies such as Northern Telecom, Mitel and Newbridge, the consumer and corporate segments of the market remain receptive to imports. Deregulation of telecommunications services, an increase in joint ventures between Canadian and U.S. equipment and service carriers, and advances in telecommunications technology will continue to provide market opportunities for U.S. exporters as well. Emerging technologies with an expected high degree of market penetration in the future include: applications using asynchronous terminal mode (ATM) technology, integrated services digital network (ISDN) technology, wireless technologies, and advanced remote communications using satellite technology.

Electronic Components

The electronic components market is driven primarily by the demand for telecommunications equipment, computers, electromedical devices, and defense technology. The post-recessionary increased demand for computers, electromedical devices and telecommunications equipment has improved the future outlook for the Canadian electronics component market. Market opportunities for U.S. exporters will increase as a result. U.S. companies which provide high quality electronic components at competitive prices or whose products are innovative or unique will continue to prosper in the Canadian market.

Automotive Aftermarket Parts

Demand for aftermarket automotive parts is expected to increase through 1995. Distribution of parts in Canada is similar to that in the United States. Although the industry has undergone rationalization over the past several years, the move toward smaller margins should continue to reduce the number of distributors and increase sales from the manufacturer directly to the retailer/installer. Canadian end-users remain receptive to U.S. made parts. However, U.S. companies are advised to stress quality, service, and concentrate on products where demand is spurred by technological change.

Household Consumer Goods

The demand for U.S. household consumer goods is expected to grow for the period of 1993 - 1995. Factors affecting demand for U.S. consumer goods include increased growth in Canadian housing starts, increased average household income, and reduced tariffs on U.S. products under Nafta. Canadian consumers are very receptive to U.S. consumer products and favor innovative and functional products that are recognized for their competitive prices, availability, quality, reliability and after-sales service.

Exporting Electronics, Computers and Communications to Mexico Under NAFTA

Published on Friday, July 01, 1994

U.S. High-Tech Producers Compete Well Internationally

U.S. producers of high Technology electronics compete very well internationally. For example, in 1991 trade in computers registered a U.S. surplus of $3.6 billion. The U.S. computer industry is the leader in the global marketplace.

High-technology equipment produced in low to moderate volumes, such as computer mainframes, are supported by large numbers of high-wage engineers, software specialists, and skilled technicians. The production of these products requires the smallest percentage of production workers. These product categories are high growth areas in the United States and employment in computers and data processing services has expanded -- and is rising faster than any other major industry. In fact, employment is expected to rise from 224,000 in 1978 to 1.2 million in the year 2000. Growth in software and computer services could create more jobs than are lost in electronics manufacturing by next century.

Computer firms prefer to be close to their primary markets in order to quickly respond to the ever-changing consumer tastes and demand. When categorized with peripherals, which registered a deficit of $6.9 billion in 1991, the computer industry as a whole did not appear to compete well. Direct labor for peripherals constitutes up to 50% of production costs.

The complex nature of semiconductors, for example, mandates that production be highly automated and performed by a technology-savvy work force. Because the labor content of such products is low, product cycles short, and delivery quick, it is quite cost-effective to produce in the United States. Less sophisticated, lower-end electronic products, however, have been under increasingly greater pressure from Asia for U.S. market share.

Lower Technology Producers Are Under Attack

The electronics industry as a whole, composed of electronics, computers and telecommunications equipment, has run a multilateral trade deficit since 1983. It reached $11 billion in 1991. Employment peaked in 1984, but declined by approximately 16 to 19% (307,000 jobs) to nearly 2 million by the end of 1991. The majority of goods, such as TVs and VCRs, are characterized by standardized mid-tech components, require labor-intensive production, and derive low profit margins. Consequently, competition from low-wage countries has hurt the industry.

The U.S. telecommunications industry has endured some rigorous structural changes over the last decade due to deregulation, reductions in defense spending, and intense foreign competition. The deficit in telecommunications equipment has been attributed to imports of customer premises equipment, such as telephones and fax machines -- for which labor costs constituted approximately 30% of production costs. Production of telecommunications switches, however, which require higher worker skills, are more competitive internationally and would likely remain in the United States for at least the intermediate term.

Industry growth rates in Japan and other East Asian countries have been higher than in the United States -- which has fallen behind in standardized, labor-intensive electronics. As a result, U.S. producers of these types of goods have been more likely to move low-end production offshore in order to stay competitive.

Electronics, Computers and Telecommunications Rules of Origin

Goods produced in North America entirely from originating materials will qualify for Nafta's benefits. However, the rules of origin for non-originating materials or non-North American subassemblies are complex. These rules include requirements for specified changes in tariff classification, minimum regional value-content requirements, and prohibitions against the use of certain non-originating parts or components. The general sum effect is twofold: to ensure that electronics goods with a high degree of non-North American content do not receive preferential treatment by Nafta, and to encourage North American production at the expense of foreign production.

For example, origin requirements could significantly affect U.S.-Mexican trade and investment in television production. Many TV sets assembled in Mexico for sale in the U.S. incorporate picture tubes made in Asia. Under Nafta, most or all foreign picture tubes will be denied preferential access to the United States. As a result, U.S.-made picture tubes will likely be substituted for foreign ones -- resulting in more, higher-wage U.S. jobs. The picture tube is the most expensive component incorporated in a TV and the production of these tubes commands the highest wages in the television sector. Due to the technology-intensive nature of its production, required level of skill and state-of-the-art facilities, this production is unlikely to move to Mexico.

Importantly, Nafta's rules of origin will protect against foreign competitors from using Mexico as an export platform into the U.S., while simultaneously encouraging more production and job growth throughout North America.

Nafta's Impact on the U.S. Electronics, Computers and Telecommunications Sectors

Based on 1991 trade, The pre-Nafta average trade-weighted duty on imports of Mexican electronics was 2.4%. A large portion of imports entered the United States under the tariff classification 9802.00.80 (application of duty only on the non-U.S. origin production costs, such as Mexican labor, overhead and Asian components) and the General System of Preferences allowing for duty-free entry. Thus, the removal of U.S. tariffs under Nafta, most of which were completely eliminated on January 1, 1994, will not adversely affect the United States.

Prior to Nafta, the average Mexican duty on U.S. electronics was 15.8%. Under Nafta, 40% of Mexican duties on U.S.-made electronic products were eliminated on January 1, 1994. Another 50% of duties will be phased out over five years and the remaining 10% over ten years. Consequently, U.S. producers of electronics will be more competitive in Mexico compared to Mexican, European and Asian producers.

The Agreement itself is unlikely to radically alter current trade and investment trends in the electronics industry between the United States and Mexico. Many U.S. lower-technology manufacturers of electronics are already producing in Mexico and in other low-wage countries. Since Mexico has already gained much of the U.S. labor-intensive production in this field, it isn't likely that many more firms will move there in at least the short to intermediate term.

Mexican manufacturing tends to be limited to routine assembly of components originating in the United States and the Far East. Mexican suppliers provide low-technology parts, including housings, printed circuit boards, metal and plastic mechanical parts, cable harnesses, and limited power supplies electric components. The lack of skilled technicians and more sophisticated infrastructure has prevented expansion.

In the longer term, however, Mexico's ability to produce higher-end products hinges on its investment in work force education and training. Additionally, development of other factors such as market size, interfirm linkages, supplier networks, and investment costs is also necessary for Mexico to develop a more modern electronics industry.

In the absence of Mexican government policies forcing companies to manufacture in Mexico in order to sell there, many computer firms will have little reason to produce there. Relocation of U.S. computer manufacturers to Mexico would needlessly isolate them.

High-technology goods have an increasingly declining direct labor content, which means that the relative importance of indirect labor -- engineers, technicians, managers and designers -- has increased. These are precisely the types of workers that Mexico has the least of and the U.S. has the most of. Nafta will allow the United States to exploit this competitive advantage so that high-end production will not only stay in the United States, but continue to flourish. By allocating the simpler labor-intensive operations to Mexico, U.S. electronics firms can make production more cost-effective, which allows them to create more of the higher paying jobs in the United States. The net result: a more competitive American electronics industry.