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Mexican President Zedillo's Visit to the United States Marked by Greater Optimism

Published on Friday, December 01, 1995

During the week of October 9, Mexican President Ernesto Zedillo Ponce de Leon met with several organizations in the United States. Following a meeting with U.S. business leaders, several key U.S. participants announced direct investment plans for approximately $12 billion in Mexico over the next five years. This is a sign of continued growing confidence in the Mexican economy.

The Mexican manufacturing sector has continually attracted the most foreign direct investment, 40.5%; followed by the service sector, 31%; transportation and telecommunications, 8.5%; and financial services, 8.5%.

Industries expected to receive the $12 billion include some of these sectors, such as manufacturing, financial services, and telecommunications. Other industries receiving this investment -- not considered major destinations in the past -- include energy, transportation and distribution of natural gas; environmental services; agriculture and food processing; and real estate. Some of these had been announced earlier.

The Mexican telecommunications sector has attracted the interests and capital of both large and small U.S. telecommunication service providers. Plans indicate that the Mexican sector will receive $3 billion over the next several years from well known companies such as AT&T and MCI.

An investment of almost $1 billion is anticipated to launch a joint venture between AT&T and the Mexican company, Grupo Alfa, to provide long distance services to Mexican customers. AT&T also confirmed a $40 million investment in cellular telephone manufacturing at the company's Guadalajara plant.

Avantel, a new communications services company forged by MCI and the Mexican bank, Banamex, is to receive an investment of $1.3 billion from MCI. Additionally, a group of smaller U.S. companies, including Nextel, LCC, Associated Communications, and the Carlyle Group, have teamed up with the Mexican firm Grupo Communications of San Luis Potosi. Together, they have invested over $110 million in Grupo Tricom of Mexico to provide wireless communications services in Mexico.

Other investments in the Mexican telecommunications sector include more than $325 million in digital wireless infrastructure by Tricom. GTE, in a three-way partnership with the Mexican bank, Bancomer, and Mexican firm of Grupo Visa, will invest a total of $320 million.

The Mexican energy sector and transportation and distribution of natural gasis expected to attract nearly $2 billion over the next five years. Amoco Corporation announced a $250 million investment with Mexico's Grupo Femsa. Dupont's Conoco division has established an office in Mexico and is expected to invest in the petrochemical sector as the regulatory and legal framework evolves. The firm also plans to continue with an additional $100 million in nylon over the next few years with its Mexican partner, Grupo Alfa.

In the manufacturing sector, General Electric announced the company is reinvesting about $100 million annually in its Mexican operations over the next four years. Eastman Kodak revealed additional investments in the company's CD media production facility at its Guadalajara plant and an already-completed water treatment recycling plant.

An investment of $75 million was announced by International Paper for the construction of a non-woven textile plant near Guanajuato, in addition to new projects in forestry and paperboard. In the apparel sector, Warnco, which currently has six facilities in Mexico, plans to invest over $10 million in the state of Puebla. And Guilford Mills, Inc. unveiled its strategy to establish a major apparel production facility with its partners, American Textile and Mexico's Grupo Alfa, in the state of Morelos.

Some U.S. companies plan to invest in several sectors. For example, a $1 billion infrastructure investment fund was announced by American International Group, a leading global insurance and financial services company, and General Electric. Areas to receive the capital include energy, telecom, transportation and environmental services. American International Group also announced the purchase of 51% of Seguros Interamericana for $35 million, and as a result will control a greater portion of its Mexican insurance and financial service interests.

Mexico's agribusiness industry has also been on the minds of U.S. investors. Pilgrim's Pride announced a $40 million poultry-breeding project in the states of Queretaro and Puebla. The U.S. giant, Philip Morris, announced an investment of $200 million in its Kraft Foods de Mexico plants. This is expected to double their production capacity.

Reichmann International Mexico plans to continue with three major real estate projects in Mexico. These projects represent a total investment of $1.1 billion. Additionally, Journey's End announced plans to build ten executive hotels there representing an investment of $35 million.

On October 11, President Zedillo met with President Clinton at the White House. Mr. Zedillo brought with him the first $700 million installment to begin repaying the United States with interest. This early repayment of a portion of the $12.5 billion that Mexico borrowed from the United States is yet another indication that the Mexican economy is bouncing back.

Stated by President Clinton, "Today's decision sends a positive signal to the financial markets that the tough financial measures Mexico has taken are succeeding and the American taxpayer is being paid ahead of schedule."

The latest figures indicate that Mexican inflation is expected to reach 45% - 50% this year and taper down to about 20% next year. Mexico's inflation for August was already down to 1.66% -- having continuously dropped from 8% in April. Its gross domestic product for this year is expected to fall by 4.5%, but rise to about 3% in 1996 -- indicating a short-lived crisis.

From January through July of this year, Mexico ran a $3.7 billion trade surplus with the rest of the world and a surplus with the United States. However, mid-year figures indicate that U.S. exports to Mexico are down by only 10% -- much less than had been projected.

As the situation in Mexico continues to stabilize and investor confidence grows, Mexican consumption will rise commensurably -- increasing the demand for U.S. exports. This is good news for U.S. companies.

Avoid Pitfalls When Shipping to Mexico: Hear What Seasoned Exporters Have to Say

Published on Wednesday, November 01, 1995

Through much experience, many exporters have come to learn the logistical ins and outs of exporting to Mexico. When it comes to Mexican customs regulations and the clearing of goods, this experience can prove monumentally beneficial.

Many admit that even simple mistakes in documentation, for example, can result in an expensive shipment sitting idle for days at the Mexican border, or Mexican Customs even seizing merchandise for lengthy periods of time. The remedy for these problems can require a great deal of time and money.

Many helpful tips have been offered by Daniel Grimes of Emery Worldwide based in Mexico City, Jack Villari of Servicestar Corp., a retail chain with 4,400 stores globally, and other experts, who in many cases have learned lessons the hard way. In order to avoid common -- and sometimes not so common -- border delays and customs problems, you may wish to adopt their following suggestions.

1. Visit the Mexican broker who will be handling your shipments. Establish a relationship and learn as much as possible about the Mexican import process. As goods begin to flow southward and snags invariably occur, your greater understanding of the process can allow for speedier resolutions.
2. In order to claim NAFTA status and take advantage of duty eliminations under the North American Free Trade Agreement, NAFTA Certificates of Origin are required. In many cases, however, a U.S. company will import products from Asia and divert a portion of the cargo to Mexico. In this case, each product will require a non-NAFTA Certificate of Origin. Obtaining these certificates from several foreign suppliers at a later date can be a time consuming task. Thus, if you're considering diverting a portion of imported merchandise to Mexico, request the certificates when making the purchase.
3. Send copies of completed documentation well in advance of the shipment to your freight forwarder, the Mexican broker, and your customer to allow for any corrections.
4. Mexican tariffs are still applied to the value of the goods, plus the cost of insurance and freight. As a result, an itemization of all values and costs is important to avoid insurance and freight costs from being added twice to the bottom line by Mexican Customs.
5. It's important to provide the fullest product description possible. Provide catalogs or complete descriptions of the product to the Mexican broker to assist the customs appraiser in determining or confirming the accurate tariff product classification.
6. Ensure that all Mexican labeling requirements are satisfied and in Spanish.
7. Mexican Customs officials place a great deal of emphasis on the accuracy and completeness of the documents. Consistency is essential. Discrepancies can result in allegations of contraband, followed by stiff penalties.
8. Properly package the merchandise to allow for easy and secure loading and unloading to avoid product damage.
9. Contact your freight forwarder or broker to determine if any export or import restrictions, permits, special documentation requirements, or extra fees apply. Regulations have been known to become effective with minimal notice.
10. Never ship products to your freight forwarder or Mexican customs broker without prior notice.

Trade Agreements Have Far Reaching Implications

Published on Wednesday, November 01, 1995

Economic Integration Is the Wave of the Future

In an effort to gain secure access to foreign markets, and in turn achieve a higher degree of economic security while maneuvering into the twenty-first century, many countries have entered into trade agreements with one another. Some of these agreements are between two countries; others are among many, creating trade blocs. Three agreements, however, have grown to encompass countries with massive economic might, to the extent that they have already come to dominate continents.

Within each bloc, small and large, free trade has and will likely continue to become more entrenched. However, future trade among blocs is not so clear. Some argue that these blocs are a stepping stone to global free trade. Others believe they will turn inward and become protectionist. And others feel that although global free trade may eventually come to be, the path will be full of mine fields and dangerous for quite some time. Fear that these trade blocs will become inwardly focused and protectionist, not allowing cost-efficient, non-member producers to sell their products on the basis of competition, has promoted a race among nations to achieve the largest and most powerful trade area.

Whether or not trade blocs become protectionist, one thing is for certain: any outcome will have a profound affect on international trade and investment.

From 1947 to the end of 1994, a total of 108 regional trade agreements were notified to the General Agreement on Tariff and Trade (GATT), the international body that governs approximately 90% of world trade. These trade agreements include: the Central American Common Market, Asia-Pacific Economic Cooperation Forum, Arab League, Andean Pact, Economic Community of West Africa, Lome Convention, Association of South East Asian Nations, and the East Asia Economic Caucus.

Over the years, three powerful trading blocs have emerged: the European Union, chiefly involving West European countries; the North American Free Trade Agreement among Canada, the United States and Mexico; and an informal bloc in East Asia dominated by Japan. Based on past trade patterns and policies, and anticipated policies, these blocs will continue to develop, gaining increased strength and influence.

The European Union Is Expanding into Eastern Europe

The 15-member European Union (EU) encompasses Belgium, Britain, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. On January 1, 1995, Austria, Sweden and Finland became members. In years to come, it is likely that East European countries join the 350 million population of the EU, expanding the market to include 850 to 900 million consumers.

The implosion of Soviet Communism and the fall of the Berlin Wall have exposed East Europeans to a free market economy for the first time in several decades. In an attempt to shift from central planning to a free market, the economies and political systems of most East European countries have experienced chaos to various degrees. And the eruption of ethnic conflict in former Yugoslavia and elsewhere in Eastern Europe has accelerated the economic deterioration.

Much of the EU's vested interest in allowing East European countries to eventually become full members is primarily aimed at preventing a potentially large mass migration westward. By integrating East European economies with the EU, the economic and political stability of the region will likely improve.

The North American Free Trade Agreement (Nafta) Will Likely Expand Southward

In an effort to increase the competitiveness of the United States and the region as a whole, The North American Free Trade Agreement (Nafta), which built on the achievements of the U.S.-Canada FTA, was implemented on January 1, 1994.

Preferential access to Mexico and Canada, guaranteed by Nafta, has put U.S. companies at a competitive advantage relative to rapidly expanding European and East Asian trade blocs. Nafta not only opens up the Mexican market of 92 million customers, but creates a trade area of 360 million consumers ensuring secure markets for U.S. products. Importantly, Nafta promotes greater efficiency, making U.S. products more competitive not only in North America, but in Europe, Asia and throughout the world.

On December 9, 1994, the leaders of 34 Western Hemisphere nations met in Miami for the Summit of the Americas. The goal: to establish a free trade area of the Americas by the year 2005, further building on the achievements of Nafta. During the Summit, Chile was invited by the United States, Canada and Mexico to begin negotiations to accede to the trade bloc.

Trade Representative Mickey Kantor says that by the year 2010 the United States will export more goods to Latin America than to Japan and Europe combined. The pursuit of an expanded Western Hemispheric trade bloc goes further, and again ups the ante with regard to our economic strength and negotiating position compared to the EU and East Asia.

East Asian Economic Integration Is Accelerating Under Japanese Domination

In recent years, trade among East Asian nations has increased at a much faster pace than trade outside the region. Through the development of several trade agreements, such as Asean, with a population of 325 million comprising Malaysia, the Philippines, Singapore, Thailand, Brunei and Indonesia, the region is becoming more trade-cohesive. However, economic integration is mostly influenced by Japanese investment in the region, which is creating an informal trade bloc.

According to Harvard Professors Kenneth Froot and David Yoffie, Japan appears to be the only major industrial country whose domestic market remains protected from both foreign trade and direct investment. They conclude that with Japanese expansion in East Asia, North American firms may increasingly lack access to an East Asian bloc.

The Uruguay Round Agreements of the GATT Promote Global Integration

The GATT Uruguay Round Agreements (URA), implemented by the United States and well over 100 other countries on January 1, 1995, further integrate trade policies among its members. It phases out quotas and cuts tariffs by about one-third on most products traded globally.

GATT is responsible for reducing international tariffs from an average of 40% in 1947 to 5% in 1990, and has permitted international trade to expand enormously, national incomes to substantially increase and international competition to flourish resulting in higher quality, lower priced goods.

The new World Trade Organization (WTO), created under the URA and replacing GATT, is expected to enforce international trade rules and settle disputes among members to a better degree than its predecessor. The new WTO will attempt to police the forces that may promote protectionism among trade blocs.

What All This Means

Whether or not you are a manufacturer, exporter, importer, foreign investor or simply work in a business limited to the domestic market, the development of global trade agreements and emerging trade blocs will undoubtedly affect you business. Even if you are retired, these global trends will still affect you -- at least through the selection of consumer goods and their prices.

Under the Uruguay Round, all signatories to the Agreements are phasing out their trade barriers. As a result, it is unlikely, at least in the short-term, that trade blocs turn inward, become protectionist and raise their tariffs. Nevertheless, as a result of trade diversion or regional trade preferences, the effect may be similar.

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 French are likely to buy more goods from the Germans at the expense of United States. Should this diversion become significant, future U.S. exports to the European Union may be curtailed.

Trade within blocs and regions has indeed increased. For example, in 1928, 50.7% of Western European trade was with Western European countries. By 1993, this increased to 70%. During this period, internal North American trade increased from 25% to 33%; internal Latin American trade increased from 11% to 19.4%; and internal Asian trade increased from 45.5% to 49.7%.

In light of these trends, it may be wise to target several diverse markets instead of relying on one region or market when deciding upon an export strategy.

In order for companies to sustain themselves and generate growth well into the next century, they are advised to establish strategies designed to gather and analyze information from throughout the world -- and use this to achieve international expansion. Companies that rely solely on their domestic market will likely go up against greater foreign competition seeking the same market share. Their level of risk will likely increase as the degree of foreign competition increases.

With the advent of Nafta and the benefits derived from the GATT Uruguay Round, international trade and investment opportunities will flourish. However, these opportunities will only benefit those companies whose corporate cultures view the world as one global village -- and act on it.

Trade Agreements Impact Where A Product Is Made and Where Its Components Are Sourced

The rules of origin established under Nafta, for example, favor U.S., Canadian and Mexican manufacturers who source their components in Nafta countries. Under the agreement, a minimum component requirement is necessary in order to classify goods as North American, allowing them to enter any North American country at a reduced duty rate or duty-free depending on the Nafta duty phase-out schedule. Consequently, U.S. and Canadian firms, and others that wish to sell into North America, are likely to choose Mexico as their low-cost manufacturing location.

As a result of the Mexican peso devaluation which brought Mexican wages down about 40%, U.S. companies manufacturing in East Asia and in other low-wage countries for North and South American markets are now more likely to move production to Mexico. This will boost U.S. exports of components to Mexico, which are widely used in Mexican production and assembly, strengthen the Mexican economy, and very importantly, increase North American global competitiveness.

Production sharing, permitted under the U.S. Tariff Code, allows U.S. materials assembled, processed or improved abroad to be shipped back to the United States incurring duty only on the foreign added value. This has allowed some low-skill, labor intensive manufacturing processes to be conducted in lower-wage countries, while the high-skill, capital intensive processes are retained in the United States. According to the U.S. International Trade Commission, production sharing has also been responsible for retaining jobs that would have been lost due to intense foreign competition. Expanded co-production has been a primary goal of Nafta.

The benefits derived from U.S. production sharing have been enhanced when used in conjunction with Mexico's maquiladora program. Mexico's maquiladora law allows the Government to grant licenses permitting companies to import components and machinery free of duty under bond. The components are assembled, processed or improved and eventually exported. Most of the finished goods are exported to the United States -- many of which displace East Asian exports. Because these goods incur no duty in either country and are subject to low-cost labor, their prices are more competitive internationally.

The U.S.-Mexican production sharing program, combined with other factors, resulted in Mexico becoming the United States' largest production sharing partner in 1993. From 1991 to 1994, Mexican production sharing exports to the United States increased more than 60% and accounted for almost half of all Mexican exports to the United States.

Of all the countries currently participating in the U.S. production sharing program, Mexico, by far, utilizes more U.S. components in the finished products. U.S.-made components account for over half the value of U.S. imports from Mexico under the production sharing program; U.S. parts typically account for only 25% of the value of such imports from Asian newly industrialized countries. Because of this, U.S. industry and labor benefit more from greater co-production of goods with Mexico, compared with goods co-produced elsewhere.

Under Nafta, low-cost U.S. production will continue to shift from low labor-cost countries to Mexico. Its no surprise that Japanese production will continue to move to lower-cost producers in East Asia and EU production will continue to move to Eastern Europe and Northern Africa.

Debunking the NAFTA Job Loss Myth

Published on Sunday, October 01, 1995

Some old myths never seem to die. This is certainly true of the latest accusations being cast at the North American Free Trade Agreement (NAFTA).

Habitual NAFTA critics Pat Buchanan and Public Citizen are back in attack mode, this time using the recent U.S. visit by Mexican President Ernesto Zedillo and Mexico’s economic difficulties to charge that NAFTA is wrecking havoc on U.S. jobs.

Fortunately, a more objective look at the facts shows these attacks to be as far off the mark as ever.

Myth #1: After nearly two years, NAFTA is a proven failure.

Reality: NAFTA continues to deliver, on jobs and more.

U.S./Mexico trade grew at a record rate in NAFTA’s first year, jumping more than 20% to reach $100 billion in 1994. According to the U.S. Department of Commerce, $10 billion in new sales were made to each nation’s market, and total U.S. jobs from trade with Mexico grew to more than 800,000.

This year, U.S. export growth has been dampened by Mexico’s financial crisis. What NAFTA critics don’t say is that U.S. exports to Mexico are still higher than pre-NAFTA levels, despite a 7% decline in Mexico’s GDP for the first half of 1995.

It is also important to remember that NAFTA is a long-term instrument, reducing tariffs and other trade barriers over 15 years. Judging it based on short-term shifts in the business cycle, or Mexico’s economic downturn, is premature.

Moreover, NAFTA isn’t just about opening new U.S. export markets. It’s also about encouraging increased partnerships among North American businesses. NAFTA’s success here is clear -- evidenced by the steady growth in U.S./Mexico joint ventures and intermediate good imports by Mexico for use in production partnerships with U.S. firms.

Why is this important for U.S. jobs? Because, says the U.S. International Trade Commission, U.S./Mexico production sharing is a key strategy for countering stiff competition in trade from Asia and Europe, and keeping more U.S. jobs and business at home instead of migrating overseas.

Myth #2: U.S. benefits from NAFTA went down the drain with the peso crisis.

Reality: NAFTA is helping ease the crisis and secure U.S. trade gains.

NAFTA didn’t cause the crisis. That was more a product of financial miscalculations in Mexico. But NAFTA is helping to solve it.

Without NAFTA, Mexico could have shut its doors to U.S. goods, as it did after the 1982 debt crisis. Then, U.S. exports plummeted 50% and didn’t recover for six years. Had that happened today, hundreds of thousands of U.S. jobs would have been at risk.

NAFTA has legally obliged Mexico to maintain its open markets with the United States. As a result, the impact of the crisis on U.S. exports and jobs has been relatively modest. This is backed up by trade figures and U.S. Department of Labor data, which shows no appreciable rise this year in the rate of applicants for its NAFTA Training and Technical Assistance program (NAFTA-TAA).

NAFTA is also helping Mexico hasten its recovery by growing its own exports. Mexico’s 33.3% export rise and only 7.7% import drop during the first 9 months of this year is correcting its large trade imbalance. A return to economic health will restore Mexico’s demand for U.S. goods and the balanced trade of NAFTA’s first year.

Myth #3: Mexico’s trade surplus will cost more than 300,000 U.S. jobs.

Reality: The facts show U.S. job dislocation from Mexico trade is only 21,000.

The most far-fetched charge is that Mexico’s new trade surplus could cost 340,000 U.S. jobs. To arrive at this, critics take the formula economists use to project job growth from exports -- every $1 billion in new exports creates 12,000 to 20,000 jobs -- and mistakenly apply it to overall trade balances. Department of Commerce data shows that history doesn’t support such a correlation.

• From 1982-1987, the U.S. trade deficit quintupled. But employment grew by 12.9 million and unemployment dropped from 9.7 to 6.1%.
• From 1987-1991, the trade deficit was reduced by half. Employment again rose, by 6.3 million, but unemployment increased to 6.7%.
• From 1991-94, the trade deficit more than doubled. Employment was up again, by 5.2 million, while unemployment declined to 6.1%.

While trade balances matter, they have too many variables to accurately measure job loss. Better figures come from the NAFTA-TAA program. As of Sept. 24, nearly two years into NAFTA, the Department of Labor has certified 41,201 dislocated workers for training assistance -- 21,643 from trade with Mexico, 13,508 from trade with Canada and 6,050 with no assigned country of cause.

Myth #4: NAFTA-TAA only shows the tip of the U.S. job loss iceberg.

Reality: If anything, NAFTA-TAA overstates job dislocation from NAFTA.

NAFTA-TAA doesn’t analyze whether NAFTA itself causes job loss. For example, the certification of 520 workers at Mattel's Fisher-Price facility in Medina, New York -- highlighted by Public Citizen -- cites Mexican imports for the dislocation. But the removal of tariffs on imports of Mexican toys preceded NAFTA. Clearly, NAFTA wasn’t the cause.

NAFTA-TAA certifications also don’t represent current unemployment. U.S. data shows average new job searches last about 18 weeks. Based on this, U.S. workers still unemployed among the 21,643 Mexico certifications are less than 7,500.

While every job loss is important, this must be kept in perspective with the 800,000 U.S. jobs that rely on trade with Mexico, and more than 1.5 million jobs that turn over in the U.S. economy every year.

Instead of seeing the glass as 99% full, NAFTA critics are obsessed with the 1% empty. The facts, however, are clear. In today’s global economy, NAFTA isn’t part of the problem -- it’s part of the solution.