National Agenda : Mexico Races to Join Regional, World Markets : The question is: Can it compete? The slumping economy isn’t geared to exports. Foreign investment is urgently needed.

As Mexican President Carlos Salinas de Gortari nears the end of his six-year term, he’s taking the steps two at a time.

The pace he is setting suggests that there’s no turning back now from the free market policies that have been the hallmark of his administration.

Last week’s double play on trade--U.S. congressional approval of the North American Free Trade Agreement and Mexico’s admission to the Asia-Pacific Economic Cooperation forum--confirms his determination to carve his country a permanent niche among the world’s trading nations.

In just two days, Mexico became a founding member of the world’s largest free trade zone and the first Latin American nation admitted to an organization expected to play an increasingly important role setting the political, economic and commercial agenda for the Pacific Rim.

Those are impressive accomplishments for a country that barely 14 years ago withdrew its application for membership in the General Agreement on Tariffs and Trade, the broadest organization for international trade.

By contrast, Mexico is now a key player in efforts to complete the long-stalled negotiations for the Uruguay Round of GATT, which the country finally joined in 1986.

The creation of NAFTA is a strike against protectionism, said Peter Sutherland, director general of GATT.

“There is not a negotiator in Geneva who is not breathing a little easier” because of NAFTA’s creation, he said.

Implementation of NAFTA is also likely to speed Mexico’s trade negotiations with Latin American neighbors. Colombia, Venezuela and Costa Rica are expected to sign free trade agreements with Mexico before year’s end, and Ecuador expressed an interest in talking trade with this country right after the U.S. House of Representatives approved the agreement to gradually eliminate trade barriers among the United States, Mexico and Canada.

“Among the North American nations, we will advocate the generous application of the admission clause of NAFTA to open spaces for Latin American countries,” Fernando Solana Morales, Mexican foreign relations minister, said in a statement.

Moreover, membership in NAFTA and APEC is sure to strengthen Salinas’ hand for his trip to Asia next month in search of more trade and investment.

Thus, Mexico is set to become an important part of international commerce.

But as Salinas himself noted earlier this month in his state of the nation address, “The significance of trade agreements lies in their capacity to provide a more precise frame of reference for internal work in order to compete better in one’s own domestic market and in the world.”

Mexico must now turn to that internal work.

The reality is that exports currently represent a smaller percentage of Mexico’s total production--just 17.5%--than they did in 1986, when the country joined GATT. In part, that reflects low prices for oil and coffee, traditionally Mexico’s most important agricultural export.

However, it also shows how poorly prepared most of the country’s industry is to take advantage of the opportunities presented by Mexico’s new international status.

Only half of the country’s small-business owners have more than a grade-school education, said Vicente Gutierrez, president of the National Manufacturing Industry Chamber, whose members are mainly small businesses. Many have barely survived the import competition they already face as Mexico has slashed tariffs.

Meanwhile, imports have become an increasingly important part of the overall economy, reaching 22% of gross domestic product last year, compared with 17% in 1986.

“The Mexican economy has confronted the difficult task of keeping prices stable and trying to reactivate growth, particularly in agriculture and small business, in a context of discrepancies between winners and losers in the market opening,” according to the U.N. Economic Commission on Latin America and the Caribbean.

Mexico is taking a two-pronged approach to trying to become more competitive internationally.

First, it is trying to attract urgently needed foreign capital, through both the stock market and direct investment.

Salinas has actively looked for investment from Asia and Europe as well as the United States, which accounts for two-thirds of the foreign investment in Mexico.

Membership in APEC is important to Mexico in part because of the opportunities for technological cooperation, Solana said.

Salinas will also be sending the Mexican Congress a long-anticipated revision of the foreign investment law, meant to encourage money from abroad rather than regulating it in the style of the two-decades-old law now in force.

Mexican companies have also linked up with foreign partners. For example, Mexican glass giant Vitro has joint ventures with both Ford Motor Co.--its principal windshield customer--and Corning Inc., the Upstate New York glassmaker, as well as several smaller companies.

Over half the foreign money in Mexico has entered through the stock market, and the hope is that more will follow NAFTA. That money could be used to modernize plants and equipment, now that manufacturers here know free trade is on the way.

To direct more money into smaller companies, the stock exchange recently inaugurated a second-tier market, similar to the U.S. over-the-counter market. That market received a cool initial reception but is expected to attract more risk-oriented investors as blue-chip prices rise.

The second part of Mexico’s drive to increase its international competitiveness involves encouraging Mexican companies to export more.

The government has made it easier to import components for finished goods that will be exported, such as those car radios that Ross Perot mentioned in his NAFTA debate with Vice President Al Gore.

Currently, 1,393 Mexican companies have received permits to import components temporarily without paying a tariff, as long as they are re-exported as parts of finished products. The system for issuing import and export permits has also been automated to speed processing.

Besides the practical problems of preparing Mexican business to compete in the world economy, Salinas also confronts significant philosophical opposition to his vision for Mexico’s future.

Like Canada and the United States, Mexico is in an economic slump. In addition, the country will elect a new president next year, because the constitution prohibits Salinas from seeking reelection.

However, his party’s as yet unnamed candidate will nevertheless be running largely on the issue of NAFTA--a pact that opposition presidential candidate Cuauhtemoc Cardenas has already termed “a bad agreement, poorly negotiated.”

So, even as he double-times toward the end of his term, Salinas knows that next year’s election will in part reflect how his compatriots judge his rush into the international marketplace.

Mexico’s Largest Trading Partners

All Nations 1992

(in millions of U.S. dollars)

Exports Imports Total UNITED STATES 32,624 40,598 73,222 JAPAN 1,130 3,805 4,935 GERMANY 517 2,797 3,314 CANADA 2,207 613 2,820 SPAIN 1,227 879 2,106 FRANCE 639 1,287 1,926 BRAZIL 288 1,111 1,399 SOUTH KOREA 157 905 1,062 ITALY 156 879 1,035 HONG KONG 87 587 674 BELGIUM-LUXEMBOURG 253 327 580

SOURCE: International Monetary Fund Yearbook