Mexico Looking to Branch Out

When Mexican President Vicente Fox opens today’s two-day summit of leaders from the European Union, Latin America and the Caribbean here, trade will be near the top of his busy agenda. Fox is eager to form an alliance with the nations of Mercosur, the South American common market. Earlier this month, he barnstormed three European capitals trying to lasso more business for Mexican firms.

That’s a lot of hustling for a country that’s already far and away Latin America’s No. 1 exporter. But just as he did when he was a business executive, Fox has scrutinized the numbers.

He doesn’t like what he sees.

While Mexico’s exports have more than tripled since the 1994 signing of the North American Free Trade Agreement -- transforming the developing nation into the world’s 10th-largest economy -- Mexico finds itself almost totally dependent on a single customer, the United States. American consumers and businesses purchased nearly 90% of Mexico’s $165 billion in exports last year.

Such a heavy reliance on a single buyer and one primary industry, manufacturing, has left Mexico vulnerable in a changing world.

The recent U.S. recession pummeled Mexico’s economy, particularly the all-important maquiladora export factory industry, which has shed nearly 275,000 positions, 20% of its job base, since employment peaked in the fall of 2000.

What’s more, Mexico’s 10-year head start into the American market under NAFTA is shrinking fast. China last year surpassed Mexico as the United States’ No. 2 source of imports, behind Canada. And the Asian nation is attracting billions in foreign investment and factory jobs that might otherwise have flowed to Mexico.

With the U.S. now looking to boost its trading relationships with the rest of the hemisphere through a Free Trade Agreement of the Americas, some fear that Mexico’s 11% share of the U.S. import pie has nowhere to go but down.

“It’s very worrisome,” said Luis Martinez Arguello, president of the Foreign Trade Business Organizations, a Mexico City-based consortium of trade groups. “The American market is one that everyone wants to get into.”

And though Mexico is inextricably linked to the partner that has helped make it one of the world’s premier trading nations, Fox is clearly trying to elevate Mexico’s vision beyond the boundaries of North America.

“We need to move rapidly on other fronts” and diversify trade, Fox said earlier this week. “I would say that we have lost decades, particularly the last 10 years.”

It won’t be easy. America is close, rich and familiar, and its economy is recovering, signaling better times ahead for Mexico. Factory employment here is perking up, along with overall economic growth. Another U.S. boom and recent woes could be forgotten.

But that’s what makes Mexico’s predicament so insidious, said Antonio Ortiz Mena, an economist with the Center for Economic Research and Teaching, a Mexico City think tank.

“The risk of doing nothing is a gradual decline in Mexico’s export performance,” Ortiz said.

Scrambling to diversify, Mexico has inked 13 free trade pacts covering 44 nations, more linkages than any country. But so far those deals have benefited Mexico’s trading partners more than its own exporters. In fact, Mexico is running a trade deficit with every region except North America.

Mexico’s trade gap with the European Union, for example, has grown by nearly one-third since 2000, to $3 billion last year. Its deficit with China is rocketing even faster, despite the fact that Mexico has no trade deal with that country and can impose duties of up to 500% on some of its goods. Mexican shoppers last year snapped up more than $9 billion worth of Chinese-made clothing, shoes, toys and appliances. Mexico sells China virtually nothing in return.

The early years of NAFTA saw an explosion of foreign investment in Mexico as multinationals built plants to take advantage of Mexico’s cheap labor and privileged access to the U.S. market. Now China is beating Mexico at its own game. With factory wages anywhere from one-third to one-fifth of Mexico’s, China has a cost advantage that Mexico can’t match. In addition, China is spending big on superhighways, ports and other infrastructure, making Tianjin seem as close as Tijuana for many U.S. firms and other companies looking to outsource production.

Add China’s alluring domestic market, whose population is double that of Latin America, and that giant sucking sound that Ross Perot once warned about is now coming from across the Pacific.

Preparing to showcase his nation to foreign dignitaries at the Guadalajara summit, Fox bragged this week that Mexico “is the most attractive place on Earth” to invest. But the numbers tell a different story. Foreign direct investment in Mexico fell 26% last year to $10.7 billion, its lowest level since 1996. Meanwhile, China attracted a record $53.5 billion in investment from outsiders in 2003, according to Chinese government figures.

China’s threat has prompted plenty of hand wringing here. But some analysts say Mexico’s biggest problems are home grown, as it has failed to supplement its early NAFTA gains with domestic reforms needed to keep the nation competitive.

While the hemisphere’s trade with Asia explodes, Mexico lacks a world-class Pacific port, much less a modern highway network to whisk cargo to and from the docks. Electricity from the state-run monopoly is expensive and expected to fall short of the nation’s needs within a decade. Tax collection is so low that maintaining even basic public services is a challenge. Corruption and crime continue to scare foreign executives, adding huge costs to doing business here. Small and medium-sized businesses are hobbled by a lack of financing.

Under pressure from forces within and beyond its borders, Mexico seems paralyzed by the challenge. Fox’s attempts to pass energy, tax and labor reforms have gone nowhere, leaving some analysts pessimistic about Mexico’s prospects.

“We’ve been speaking about these reforms for a number of years, but there is not even a national consensus on the need to do it,” economist Ortiz said. “If we can’t even agree on the basic facts, how can we develop a competitive strategy?.... We can’t even agree on whether trade agreements are part of the problem or part of the solution.”

There has been vague talk of Mexico staying a step ahead of China by moving up the production chain to manufacture higher value-added goods. But China is already striding swiftly into such areas as aerospace and semiconductors. What’s more, such ambitions require a highly skilled workforce. While China is graduating more than 300,000 scientists and engineers annually, fewer than 25% of Mexicans have a high school education.

“It’s hard to compete with the weight of your own people on your back,” said Robin Rosenberg, a researcher and Latin American trade expert at the University of Miami.

Rosenberg said political and economic pressures were compelling Fox to forge stronger trade ties with other parts of the world. But breaking out of the NAFTA comfort zone might be the biggest hurdle Mexico faces in diversifying its export base, he said. With a shared border and millions of Latinos living in the United States, differences in language, culture and logistics simply aren’t the issues that they would be elsewhere.

“A lot of Mexican companies have found a quick and easy living off supplying that food chain,” Rosenberg said. “It’s just so much easier to plug into an established network ... than go and forge new markets and take risks.”

But some entrepreneurs, like Jose Carlos Rodarte, are still looking to join the crowd reaping sales to the U.S.

The owner of a crocodile farm in Sinaloa in northwest Mexico, Rodarte sold 6,000 of the beasts last year, many to diners and tanneries in Asia and Europe. He wishes it weren’t so. His real ambition is to sell to Americans.

“It’s much easier to sell in the United States. People speak my language. I understand the culture. We’re neighbors,” Rodarte said of the U.S., whose wildlife protection laws prevent him from shipping north of the border.