Is Otay Mesa the Hong Kong of the Future?

Recently, when Kelly Burt was acting as tour guide to a top Trammell Crow executive, showing him the promise of a dusty border tract which the multinational development firm had acquired on Otay Mesa, the two men crossed into Tijuana for a look around.

The unimpressed executive surveyed the seedy Mexican street scene. “This looks like a Third World country,” he shrugged.

Burt, 29, is a Trammell Crow leasing agent still climbing the corporate ladder. He is savvy enough not to correct a superior. Still, he wanted to point out to the higher-up a fact that few Americans--his boss included--seem willing to accept: Mexico is a Third World country. Just 20 miles south of the skyscrapers of downtown San Diego--including Trammell Crow’s monolithic black glass Imperial Bank Tower--is a land of vast resources, cheap labor, unstable economy and poverty, Burt points out.

Many U.S. firms located in the northeastern “Rust Belt” ignore Mexico, America’s have-not neighbor to the south. To obtain tax breaks and low labor costs, they relocate their plants halfway around the world in some Asian or African nation. Meanwhile San Diego can offer the best of both worlds, Burt says--the stability of U.S. markets and capital, just a short distance from the cheap Mexican labor and the foreign tax breaks.

Such myopia, Burt hopes, is about to be corrected.

Victory in a series of hard-fought legislative battles and changes in U.S. tax laws have combined to ensure that the 12,000 empty acres of Otay Mesa soon will bloom with building activity, Burt said. And a foreign trade zone, he predicted, will hasten the development.

The legislative victories occurred on the local, state and federal levels. San Diego City Council members gave grudging approval last month to creation of a foreign trade zone. Earlier this year, the Legislature modified the state’s unitary tax system to remove some of its negative impact on multinational corporations. And on the federal level, recent immigration reform legislation imposes stiff penalties on employers who knowingly hire illegal aliens in their U.S.-based businesses; this makes the twin-plant concept, in which Mexican nationals are employed legally in Mexican plants near the U.S. border, more attractive.

The vital bridge between the U.S. and Mexican economies--a foreign trade zone--is all that is lacking to make Otay Mesa explode with growth, Burt contends. And that missing link is being forged right now by Trammell Crow and others.

A $50-million Trammell Crow project now getting under way will turn 60 vacant acres west of the Otay Mesa international border crossing into a one-million-square-foot complex of warehouse and office space. That complex, Burt said, will become the first foreign trade zone in the San Diego area when approvals--expected to be routine--are granted by federal trade and customs officials.

In the optimistic Otay Mesa scenario that Burt paints, the zone is the key that unlocks the door to international trade and economic development.

Here’s how it works:

Raw materials shipped in sealed containers are received in Long Beach harbor and trucked to the Otay Mesa foreign trade zone. There the goods remain, free of all U.S. import taxes, until needed at Mexican assembly plants located on Tijuana’s Mesa de Otay. Not until the nearly-finished products are brought back into the United States--to be completed, crated and shipped to U.S. customers--do import duties come due. Thus, manufacturers can delay the payment of the taxes until the goods are sold, or avoid taxes altogether if the finished products are sold outside the United States.

Even more important, the zone is on the U.S. side of the border, protected from the political and financial upheavals of Mexico and its volatile economy.

“We can’t guarantee that Mexico won’t nationalize foreign holdings tomorrow,” Burt admitted. But with a foreign trade zone, only a minimum of raw material and product would be lost in such a Mexican takeover--not the plants, machinery, trucks and finished goods that some other Third World country overseas might seize in a similar nationalization move.

The raw materials stockpiled in a foreign trade zone also would be available as collateral for loans, Burt points out, while raw materials stockpiled in a foreign country probably would not qualify.

The drawbacks to foreign trade zones are few, yet many U.S. labor leaders are leery of them because the system is tied to the twin-plant concept. Goods are produced in Mexico, where wages range from 60 cents to 90 cents an hour, and are marketed in the United States--creating payrolls and jobs south of border, but few jobs on the U.S. side.

David Nielsen, management assistant with the San Diego city manager’s office, acknowledged that twin-plant economics do place the labor-intensive factories south of the U.S. border, theoretically cutting into the U.S. job market.

“But, realistically,” he said, “the competition (for jobs) is not between San Diego and Tijuana. It is between Tijuana and the Far East,” where low-wage labor is available.

The twin-plant system, which will allow Mexican nationals to work legally in Mexican-based factories, is likely to gain ground, Burt and Nielsen agree, because of new U.S. immigration laws penalizing employers for using undocumented workers in their U.S. plants.

To Burt and San Diego’s Economic Development Corp. executives, a share in economic growth is better than none at all--”which happens when a U.S. company moves overseas,” Burt said.

Paul Devermann, vice president of EDC, sees the twin-plant concept and the foreign trade zone as positive factors in Otay Mesa’s growth.

Trade zones evolved in the 1930s, Devermann pointed out, when industrialized countries took advantage of them to import raw materials into the United States, employ cheap Depression-era labor in this country, then export goods to markets around the world.

“The situation is reversed now, but the principle is the same--use of cheap labor and tax benefits to produce goods at lower cost,” Devermann said.

Lower production costs and trade zones mean lower prices and a competitive edge that is attracting not only U.S. industry but also foreign companies interested in the U.S. market.

Japanese firms, spotting the possibilities of using cheap Mexican labor and having a rich American market nearby, have made the first move on Otay Mesa. Sanyo’s 320,000-square-foot Otay Mesa plant on the U.S. side of the border is matched with an even larger, 500,000-square-foot assembly plant on Mesa de Otay on the Mexican side.

According to economic studies made on Otay Mesa’s future, 30% or more of the industrial development located there in future years will be cross-border, twin-plant facilities. Despite the fact that most of the labor-intensive production will be on the Mexican side of the border, twin plants are expected to play a major role in the estimated 75,000 jobs that San Diego’s Otay Mesa will produce in the next two decades.

“Tijuana is going to become the new Hong Kong, the new industrial hub of the world,” Burt predicts, “so long as the Mexican government continues to encourage maquiladoras and San Diego has a foreign trade zone.”