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Free Trade? They Can Hardly Wait


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FREE TRADE? THEY CAN HARDLY WAIT

The Blue Diamond Growers didn't wait until the North American Free Trade Agreement was formally signed before flavoring its cocktail almonds with chili peppers, cheese, and lemons to appeal to south-of-the-border tastes. "Nuts are very popular in Mexico," explains Walt Payne, president of the 4,500-member Sacramento almond cooperative. "We figure our almonds will fit right in."

By January, 1994, when NAFTA is scheduled to eliminate the 25% tariff on U.S. almonds, Blue Diamond aims to be dropped onto every tray-table on every major commercial airliner flying over Mexico. Meanwhile, it's designing a label for Latin American consumers and working on a marketing plan with two Mexican consulting firms. California's happy almond growers expect retail sales in Mexico to grow more than 50% in the next 12 months.

In Washington and on the campaign trail, NAFTA is the stuff of controversy, as politicians argue about how many jobs it will create or destroy. Democrats, led by House Majority Leader Richard A. Gephardt (Mo.), have threatened to hold up the congressional approval the Bush Administration needs unless Mexico corrects human-rights, labor-rights, and environmental abuses. The first hearings on NAFTA start on Sept. 8, when the final draft of the agreement will be made public.

BLOCKBUSTER. To U.S. businesses such as Blue Diamond, though, the sound and fury from Capitol Hill signifies little. Companies see the pact as simply a political acknowledgment of a market that's even now taking shape. American and Canadian companies have already laid the groundwork for the official advent of the world's largest free-trade zone, encompassing 360 million people and a combined economy of $6 trillion. Anticipation of lowered import barriers, coupled with Mexico's economic reforms and capital-spending boom, has spurred a 300% hike in U.S. exports to Mexico over the past five years. Mexicans now buy more per capita from the U.S. than do citizens of the European Community--$350 a year vs. $266.

Mexican trade has been one of the few sources of growth for the sluggish U.S. economy. While Mexico accounts for less than 5% of the North American market, it will provide about 15% of the region's growth this year, says the Conference Board. Mexican capital spending is projected to surge 14% in 1992, while business outlays through 1995 should grow nearly three times as fast as in the U.S.

No wonder U.S. multinationals have long had their eye on the Mexican market. Now, many smaller, more entrepreneurial companies are jumping in. Take Dynamo Corp., a company in Richland Hills, Tex., that rings up $45 million a year selling coin-operated amusement games. Dynamo already ships some 15% of its output to Canada and Mexico. The elimination of a 20% tariff in Mexico will make the games cheaper, and the higher Mexican wages the trade pact promises should provide extra pesos to drop into Dynamo's pool tables, air-hockey machines, and video games. "Although we're going to get some competition, we're very bullish about our ability to compete," says Vice-President Mark L. Struhs.

Even Mexico's dire pollution presents an opportunity. Mesa Inc. Chief T. Boone Pickens plans to provide natural-gas automotive technology to Mexico City to clear up the filthy air. Allied-Signal Inc. is building a $4 million plant in San Luis Potosi to manufacture the smog-fighting catalytic converters that will eventually be required for all Mexican-produced autos.

LOOKING UP. Heavyweight U.S. exporters are also bullish on Mexico. Caterpillar Inc., which in 1983 sold only 12 pieces of heavy construction equipment to Mexico, shipped 1,200 there last year. NAFTA will remove tariffs of 15% to 20% on North American equipment sold in Mexico, while maintaining duties against Japanese rival Komatsu Ltd. And as protections are lifted from the Mexican car industry, Rockwell International Corp. will sell more door latches, sunroofs, and window mechanisms. It already plans to build a new plant in Mexico.

Canadian auto parts suppliers are also raring to go. Magna International Inc., Canada's largest parts maker, is building its first Mexican production facility near a Volkswagen assembly plant in Puebla.

Likewise, another big Canadian company, Northern Telecom Ltd., senses a giant opportunity. Northern, which in 1988 had only 10 employees in Mexico, now has 100 Mexican workers and plans to build sales from an estimated $200 million now to $500 million by the mid-1990s. That's not unreasonable, since industry experts foresee the Mexican telecommunications market expanding at a 15% annual clip.

Canadian lumber producers also are counting on the expected removal of restrictions on exports to Mexico. "Our very existence depends on export markets," says Michael Apsey, CEO of the Council of Forest Industries of British Columbia. As a result, predicts Apsey, the relatively small Mexican market "will become significant for us."

Not everyone is so pleased with the agreement, of course (table). The maquiladora industry, with some 2,000 manufacturing plants employing 500,000 in northern Mexico, is vital to the border economy. Because of NAFTA, Mexicans assembling televisions, stereos, and computers from mostly Asian components will find themselves at a disadvantage. They'll pay a 15% tariff on imported Asian gear, while not qualifying for duty-free entry into the U.S. "We have a whole new set of rules and regulations we have to learn," says Charles H. Dodson, founder of Elamex, an El Paso company that operates 15 maquiladoras.

`PEONS.' Some U.S. farmers will also be hurt. The 9 1/4 -per-liter tariff on frozen orange juice will enjoy the longest phaseout of any product--15 years--but that's no comfort to Gilbert Bowen, a Florida fruit farmer for 40 years. "It may not put us under, but it will make my children and grandchildren peons," he says. Pickers' wage rates in Mexico are just 12% of those in the U.S., according to Agriculture Dept. estimates, while the growing season there is longer.

In the end, however, even American agriculture should be a big winner. It will probably be a decade or more before Mexican farms have the economies of scale, mechanization, and distribution systems to contend with U.S. farmers.

In fact, low wages alone can't make any inefficient Mexican business into a fearsome competitor. With the world's largest economy and its most diversified and flexible manufacturing base, the U.S. is well positioned to benefit from free-trade pacts. These days, when Yankee companies look across the Mexican border, they see the Big Pinata--and they're lining up to take a swing.WHERE NAFTA SPELLS TROUBLE

The North American Free Trade Agreement is a plus for most U.S. businesses. But

the deal means trouble for:

TUNA CANNERIES

Packing plants in California and Puerto Rico will lose a competitive advantage

when tariffs on imported canned tuna are dropped

BROOM MAKERS

The free-trade agreement will dramatically lower barriers to imports of

natural-bristle Mexican brooms

SUGAR PRODUCERS

The end of import quotas means tough price competition for U.S. sugar beet and

sugarcane growers

TRUCKERS

Outfits that now carry loads transferred from Mexican trucks will see a sharp

reduction in business

TEXTILE MAKERS

When tariff protection falls away, the Mexican textile industry will be gunning

for U.S. acrylic yarn, underwear, and cotton sheeting markets

DATA: BW

Paul Magnusson in Washington, with William C. Symonds in Toronto, Stephen Baker in Mexico City, S. Lynne Walker in San Diego, Calif., Wendy Zellner in Dallas, and bureau reports


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