NAFTA: DOING BUSINESS IN MEXICO : End of Uncertainty Fosters New Hope

Chihuahua businessman Victor Almeida was feeling extremely good as he walked into his sales office in Carrollton, Tex., Thursday morning.

The North American Free Trade Agreement victory Wednesday night vindicated the continental strategy he has advocated as chairman of Interceramic, Mexico’s largest ceramic tile maker.

“We can get on with all the things the Mexican economy and businesses had to do and were not doing because we did not know the outcome,” Almeida said. Specifically, Interceramic will go ahead with plans for early next year on a $33-million factory in Chihuahua.

That sense of optimism--and relief--was evident throughout the Mexican business community last week, after the House of Representatives approved the pact to eliminate trade barriers among the United States, Mexico and Canada.

Companies from glass manufacturers to textile makers have been betting on NAFTA, as have the service and construction firms that cater to them.

American Textile, based here, will proceed with plans for a $3-million expansion and modernization of its plant in central Mexico, said Fredy Revah, president.

While many of the company’s new looms will be imported from Germany--the only place the sophisticated equipment is made--Revah will buy related machinery, such as dry-cleaning and fabric finishing equipment, from the United States.

“We won’t have to pay a 10% duty to import U.S. machinery,” Revah said. But more important, Mexico’s 15% tariff on imported synthetic thread will also drop, allowing the company to pay less for better-quality U.S. thread.

Like many Mexican business people, Revah sees NAFTA as putting Mexico and the United States on the same team in world trade, particularly against Asian nations that have taken over large segments of the Mexican textile and garment markets.

Similarly, Mexican exporters emphasize the competitive advantage NAFTA will give them in the U.S. market over European and Asian products, although they will also be competing with U.S.-made goods.

With NAFTA, Interceramic will have a 5% price advantage over Italian and Spanish competitors in selling tile to the United States, Almeida said. However, for the first five years under NAFTA, Mexican-made tile will have a difficult time competing with U.S.-made tile because the Mexican products will carry a 15% import duty.

To increase sales in the U.S. market, Interceramic is building a $21-million factory in Garland, Tex.

Monterrey-based glass giant Vitro has followed a cross-border strategy for seven years, buying up companies in Florida and California and starting a marketing joint venture with Corning Glass in Upstate New York. Besides selling Corning products in Mexico, Vitro manufactures table glasses in Corning patterns for export to the United States.

NAFTA will actually mean more competition for Vitro because Mexico’s high tariffs on flat glass will be phased out over eight years, said company spokesman Jose Antonio Lopez. However, Vitro expects that such disadvantages will not outweigh the larger advantages of NAFTA.

“There will be more certainty about our country’s course,” he said.

NAFTA commits Mexico to continuing the free-market economic reforms implemented over the past decade. It is expected to decrease the risk of investing in the country, which will encourage the flow of money from abroad.

Lower risk combined with greater availability of funds should cause Mexico’s notoriously high interest rates to drop. Financing costs are an important concern for capital-intensive industries such as glass.

“For us, lower capital costs mean more opportunity to grow,” said Lopez.

The certainty brought about by NAFTA will also be a boon for U.S. companies that need financing to do business in Mexico.

Laguna Niguel-based Birtcher Group is remodeling the Hyatt Regency Hotel in Guadalajara, Mexico’s second-largest city, and would like to expand its Mexican operations. Birtcher has clients--Mexican subsidiaries of U.S. companies that would like to have offices built--but financing has been a problem.

“It has been difficult to get final approval over the past few months,” said President Brandon Birtcher. “Everyone was waiting to see what happened with NAFTA.”

Now he expects to have at least two $5-million partnerships ready by year’s end to finance construction in Mexico. “The investment climate in Mexico changed Wednesday night for the institutional investor,” he said.

Mexico’s Foreign Trade

The United States is by far Mexico’s most important trading partner, buying 81% of its southern neighbor’s exports and providing 71% of all goods imported into Mexico.

1992 trade, in millions of dollars

Mexican Mexican Exports Imports United States $37,420 $44,216 European Community $3,299 $7,155 Japan $794 $3,041

Source: Bank of Mexico