O.C. Companies Weigh Fairness of U.S.-Mexico Free Trade Pact : Border: Unions fear the agreement could cost American jobs. But high-tech and service industries expect to benefit.
Juggling phone calls while lording over his hectic workshop, Tom Tran paused just long enough to grouse about what he fears could be the next threat to his fledgling apparel business, the proposed free trade agreement with Mexico.
Imported clothes from Mexico and Asia are already choking the domestic clothes-making industry, said Tran. Now along comes this proposed agreement that would relax tariffs at the Mexican border, flooding the market with even more cheaply made togs.
“If that happens, it will hurt the American economy,” said Tran, whose 10-employee Precision Sewing is tucked away in the rear of a Garden Grove industrial complex. “It’s very much a struggle for us.”
A few miles south in Irvine, Koll Co. executives gush with enthusiasm about the trade agreement. The agreement would cement trade relationships between U.S. and Mexican companies that have grown over the past decade, creating opportunities on both sides of the border.
“It will mean a lot to Mexico and to California and mean a lot in terms of job creation,” said James Watson, president of Koll’s international commercial real estate development arm, in a telephone call from Cabo San Lucas, where the company is building a couple of world-class resorts.
Such is the debate that engulfs Orange County companies as they assess the effect of the proposed North American Free Trade Agreement, which would lower the tariffs and trade restrictions between Mexico, the United States and Canada.
Former President George Bush signed the agreement last fall and President Clinton says he supports it. But Clinton has called for amendments to require Mexico to pay closer attention to environmental concerns and working conditions, two of the chief issues raised by opponents.
Some supporters worry that the agreement is a low priority for Clinton, and could face a tough time in Congress. If the agreement is ratified, it would take effect next year.
Unions are worried that the agreement could cost tens of thousands of U.S. jobs. Industries that employ large numbers of mostly unskilled workers, such as apparel and agriculture, could suffer because Mexican wages are lower. But high-tech or service industry employers, from semiconductor makers to real estate developers, are expected to prosper as the Mexican government seeks to build the country’s weak infrastructure.
Because Orange County has more service firms than manufacturers, it should benefit from the eventual implementation of the agreement, according to studies recently conducted by UC Irvine and Cal State Fullerton.
“We are specialized in the high-tech products and machines that Mexico is eager to import in order to be productive,” said Vincent Dropsy, a Cal State Fullerton economics professor who conducted a study of Orange County exports that focused on impacts of the free trade agreement.
Fueled partly by excitement over the agreement, Dropsy predicts total exports from the county to rise as much as 15% this year. Some $6.5 billion worth of goods were exported in 1991, the most recent year in which statistics are available. That was about 9.6% of the county’s total production, he found.
UC Irvine’s Orange County Executive Survey predicts an increase in the percentage of companies, from 24% today to 33% in 1998, exporting to Mexico. The number of companies exporting to Mexico from Orange County will rival those trading with Canada, which is 31% at present and predicted to climb to 35% by 1998, according to the study. Canada already has a free trade agreement with the United States.
Some business owners are not as enthusiastic as economists, however, about the proposed accord.
Tran, whose sewing shop is one of several run from a squat gray building, said he fears that Mexican sewing shops would have an unfair advantage. While he has to cope with California’s many business regulations and workers’ compensation system, his Mexican competitors “have no regulations. They can do anything.”
Orange County sewing companies are already under pressure from the cost disadvantage, but Tran said his workers can produce clothes of higher quality. Also, he said Southland clothing companies appreciate being closer to the subcontractors who actually make the clothes they sell.
Susan Crank, president of Lunada Bay Corp. in Anaheim, which designs and arranges for the manufacture of women’s wear for Ocean Pacific Sunwear, Mossimo and her own Runaway Bay brand, said that the agreement will make producing clothes in Mexico too good to pass up.
Crank said she now contracts with Southern California companies for the sewing of Lunada Bay’s garments because she can keep a close watch on correct fit.
But she added that she is already exploring the possibility of contracting in Mexico, just as her competitors are doing, because of California’s restrictive business climate. “I would like to stay local and to support the California economy,” she explained. But she said workers’ compensation costs and other state regulations have made foreign manufacture more appealing.
Agriculture is feeling the same pinch. The cost of paying benefits to farm laborers in the United States are roughly equal to the total wages paid Mexican workers, who work without any benefits, said David Moore, president of the 2,700-member Western Growers Assn., a trade group based in Irvine.
Sales of Orange County crops like strawberries and peppers could suffer under the agreement. Yet, he added, affluent Mexican consumers could present a whole new market for California fruits and vegetables.
Fullerton strawberry grower and packer A. G. Kawamura, who just returned from a fact-finding trip to Mexico, says he knows growers here will be at a cost disadvantage.
“Strawberries are one of the most expensive crops per acre,” he said as he stood over a strawberry field in Irvine last week. “They are able to produce a good product for less than we can.”
But California growers can produce a superior product, reflecting the area’s top-notch water systems, high-quality workers and transportation, he said. And since the peak harvest is usually a little later than Mexico’s, it means that the best, lowest-cost California fruit will have less competition on the shelves from the Mexican harvest.
Other companies that might be considered threatened by the agreement also share Kawamura’s optimism. They see opportunity where others only see competitive peril.
Vans Inc., which makes tennis shoes with an overwhelmingly Latino work force of mostly immigrant labor in Orange and Vista in San Diego County, says that its main competition is not from Mexico but from Asia. And Mexican consumers have been some of the best customers of its high-quality product.
“Over time, the absence of duties mean our products will be priced more competitively” in Mexico, said Vans President Richard Leeuwenburg. Besides, he said, Vans has a “highly efficient” manufacturing process that would be difficult to duplicate in Mexico.
Orco Block Co., which turns out concrete blocks at a sprawling yard in Stanton, has figured out how to make its low-tech product in a high-tech way, giving it competitive labor-saving advantages that Mexican competitors can’t match, according to President Rick Muth.
“We operate with half the production workers” of comparable Mexican block makers, he said. “We’d rather have fewer people (who are) higher skilled and pay them more than have an army.”
It’s these kinds of advances found in Orange County that lead advocates to believe that the region will fare well under an expanded free trade agreement.
The trading ties between the two nations are already deep, said the Koll Co.’s Watson. The agreement would simply formalize them, giving lenders and major companies assurances that they can make long-term deals without fear of a sudden switch in government policy.
To hasten that process, Koll Co. just last week linked with Los Angeles-based Cushman Realty Corp. to provide real estate services to U.S. and Mexican companies exploring opportunities on the other side of their respective borders. For U.S. companies, the allure to selling in Mexico is too great to resist.
“It is truly incredible. There are 90 million potential consumers in Mexico” eager to buy U.S. goods and services, he said.
Border Trading
The percentage of Orange County companies with sales in Canada and Mexico tripled from 1988 to 1989 and remained relatively steady until last year, when they climbed again. The number of companies selling in those two countries is expected to drop off slightly this year because of the lingering recession. In percentage of firms doing business in sales or operations: * Canada
Year Sales Operations 1988 11% 0% 1989 29 7 1990 33 6 1991 29 8 1992 36 7 1993 31 4
*Mexico
Year Sales Operations 1988 5% 0% 1989 17 8 1990 18 8 1991 17 6 1992 26 6 1993 24 5.5
*International Business Challenges As companies look forward to the free trade agreement, a survey of Orange County firms suggests that there has been a shift since 1988 in what companies consider to be the most difficult aspect of establishing international sales and running an operation in a foreign country.
* Difficulties of International Sales
1988 1989 1990 1991 1992 1993 Establishing sales force 4% 4% 10% 17% 22% 14% Consumer acceptance of product 6 11 18 10 6 14 Import/export regulations 9 13 12 12 18 14 Communication problems between sites 18 27 10 9 14 11 Cultural differences 18 18 10 17 18 10 Financial considerations 17 13 20 22 15 8
*Note: Numbers do not add to 100% because not all considerations are listed. *Difficulties of International Operations
1988 1989 1990 1991 1992 1993 Communication 19% 10% 25% 15% 9% 28% Cultural differences 23 24 9 30 26 22 Import/export regulations 14 21 9 7 26 17 Financial considerations 12 21 6 15 4 17 Managing local employees 9 10 22 11 17 6
Note: Numbers do not add to 100% because not all considerations are listed. Source: UC Irvine International Business Survey
