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.

This article appeared in World Trade Magazine, July 1994.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author of several books, and a nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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