NEWS ANALYSIS : Mexico Pinning Its Hopes on Free Trade Agreement

The payoff for Mexico’s economic reforms--achieved through a decade of austerity--seems to be riding on passage of a North American free trade agreement.

Even as businesses begin to realize that specific provisions will bring in more competition to an economy that until recently protected its industries with high tariffs and other import restrictions, the need to reach an agreement is felt urgently here, especially by foreign investors.

An agreement with the United States and Canada--which would give all three countries access to a continental market of 360 million people and assure that Mexico’s free market reforms will continue into the next presidential administration--has become the main reason to invest in Mexico.

“Expectations in Mexico are very tied in with the free trade agreement,” said Jonathon Heath, chief economist at Macro Asesoria Economica, a Mexico City consulting firm. “A lot of the future of the economy hangs on that.”

The Mexican government has worked hard toward that economic future, reducing inflation from 159% in 1987 to 18.8% last year, cutting import tariffs that once reached 200% to an average of 9%, balancing the federal budget and liberalizing foreign investment laws.

Despite those accomplishments, without an agreement, Mexico is not going to get the foreign investment and technology needed to modernize the country’s aging factories and make them internationally competitive, Heath said.

European companies, from Mercedes-Benz to Lois jeans, are building or expanding manufacturing plants here, basing their strategies for Mexico on expectations of access to a continental market. If those expectations are not fulfilled, the money will stop flowing.

For an indication of just how critical the free trade agreement is to foreign investment in Mexico, one need not look any further than the Mexican stock exchange, a magnet for international money for the last 18 months.

It crashed two weeks ago when undeclared U.S. presidential candidate Ross Perot expressed reservations about the proposal. But reports that a handshake agreement could come out of next week’s meeting between Presidents George Bush and Carlos Salinas de Gortari had the index bouncing back last week.

Foreign investors’ emphasis on the agreement is not entirely misplaced, said Katrina Burgess, former associate director at USC’s California-Mexico project, who is studying the relationship between the proposed agreement and economic reforms.

“Although many U.S. investors recognize and support the changes that have occurred in Mexico over the past eight years, they view the free trade agreement as necessary to lock in the reforms, to guarantee they will not be changed in the future,” she said.

At the same time, there are signs that the initial excitement over free trade is being tempered by concerns that greater competition could hurt individual industries.

“Free trade euphoria is turning into free trade realities,” said Carol Wise, an assistant professor at the Center for Politics and Policy at the Claremont College graduate school, who is analyzing the issue.

Mexican industry has believed that the government’s decision in 1985 to join the General Agreement on Tariffs and Trade, an international free trade organization, had already brought in foreign competition. An onslaught on imports has forced companies here to improve quality, increase productivity and slash profit margins in order to keep their customers.

However, as the North American free trade negotiations progress, it is becoming clear that further adjustments will be required.

The new bankers, who recently bought the country’s 18 commercial banks from the government, are among the biggest worriers, concerned about foreign competitors with international reputations and sophisticated operating systems that allow them to deliver services quickly and cheaply.

Finance Minister Pedro Aspe Armella clearly stated earlier this week that financial services will gradually be opened to foreign companies under free trade.

Currently, foreign brokerages and banks--with the exception of Citicorp--are permitted to have only representative offices in Mexico.

On the other hand, Mexican cement and textile companies want free trade as quickly as possible. Their worry is that they will not get what they believed free trade promised: a chance to sell northward without restrictions.

Mexican cement makers must now pay high tariffs to export to the United States because they were found to be dumping--selling products north of the border for less than they charge in Mexico.

Free trade talks do not seem to be aimed at changing the U.S. laws that imposed those tariffs, which virtually block Mexican cement companies from the U.S. market.

Textile companies, already battered by imports and economic reforms, sees little hope that the free trade talks will give them what they need, as quickly as they need it, to survive.

U.S. garment workers say their industry will be allowed to wither against competition from lower-cost producers in Mexico, in exchange for concessions in other areas. However, old-line Mexican textile companies are not well-positioned to benefit from any concessions.

One of the tightest sticking points in the negotiations is corn, precisely because the implications of opening the Mexican border to imports is so clear.

Because of government subsidies, Mexican maize costs roughly twice as much as U.S. hybrid corn. But even at those prices, Mexican small farmers, who produce nearly all the nation’s corn, are starving.

Opening the door to U.S. corn would drive them out of business, off the farm and into the crowded cities or across the border, according to studies by UCLA researcher Raul Hinojosa-Ojeda.