NEWS ANALYSIS : MEXICO’S FINANCIAL UPHEAVAL : The Other Side of the Devalued Coin: Trade Should Benefit : Currency: Mexican exports are likely to become more competitive and its trade deficit should narrow soon.

Even as Mexico’s currency plunge has sparked a financial crisis and tarnished the nation’s image, its long-term effects could yield quite the opposite: Mexico’s exports are likely to become more competitive, and its global trade deficit should narrow soon.

A cheaper peso “should stimulate Mexican exports to the United States--no question about it,” said Richard N. Rosencrance, director of UCLA’s Center for International Relations. In fact, he added, the cheaper peso “is a very positive advantage” for Mexico’s export efforts worldwide.

Indeed, one lesson of recent U.S. history is that a decline in the domestic currency may help narrow the trade gap.

In the mid-1980s, when the United States’ global trade deficit was a source of financial instability and political embarrassment, the government encouraged the dollar to fall, particularly against the Japanese yen. Although the degree of the fall varied with each foreign currency, U.S. exports took off and have remained a far more important part of the U.S. economy.

Certainly, the peso’s plunge of some 35% this week has the potential to shift fundamental trade realities in North America, economists said Friday.

A permanently weaker peso would mean Mexican products can be sold more cheaply to the United States and Canada. Similarly, it could make the products Mexico buys from its North American neighbors more expensive.

But in the space of a week, Mexico has positioned itself to enjoy greater sales to the United States, accelerating a trend that began emerging when the North American Free Trade Agreement took effect in January.

“Obviously, Mexico is doing this partly because of (its worldwide) trade deficit,” said Jerry J. Jasinowski, president of the National Assn. of Manufacturers.

For companies like Kaydon, an industrial bearings manufacturer in Monterrey, Mexico, that ships most of its products to the United States, the devaluation will be beneficial. The firm is in essence enjoying a windfall from its U.S. customers, who are now paying 30% more in pesos per product.

“If you sell to the American market, you will have a big increase in revenue,” predicts plant manager Alfredo Sanchez, who now expects to hire 20 more workers this year to meet a growing demand.

Obviously, the peso’s jarring fall--reflecting global investors’ questions about the stability of Mexico’s economy--has had negative effects. Suddenly, the Mexican market poses new uncertainties for American exporters whose prices are rising--to the consternation of their Mexican customers.

Investors from the United States and other countries have lost money on the stock market and are pulling much-needed capital out of the country. Some U.S. firms are reconsidering their expansion plans. Wal-Mart may delay the opening of new stores in Mexico.

James Meinert, director of international marketing for Snider Mold, a Wisconsin toolmaker, recalls the reaction of his Mexican customers to the peso devaluation.

“The first thing that happened was the phones started lighting up, and people wanted to make advance payments on their tooling,” he said. For now, management at the Mequon, Wis., firm is wary: “I’m not alarmed, but I’m watching things real close,” Meinert said.

Soaring interest rates and inflation are also compounding Mexico’s problems. Mexican companies that use a lot of dollars, common for enterprises near the U.S. border, now must pay a lot more for their greenbacks.

To combat inflation, the Mexican government this week imposed along with the devaluation wage-and-price controls that were meant to stabilize the peso on foreign currency markets.

If costs continue to shoot up, though, the devaluation would be for naught, and capital will continue to flow out of the country, said Tony Ramirez of San Diego-based Made in Mexico, a firm that consults for U.S. manufacturers moving operations to Mexico.

U.S.-Mexican trade in both directions has been rising sharply over the past year, and Mexico is already close to achieving a trade surplus with the United States. (The United States ran a $1.7-billion trade surplus with Mexico for the first 10 months of the year, but the surplus has dwindled of late.)

The troublesome aspect of Mexican trade, apart from that with the United States, is the tens of billions in deficits it is running with other countries, a key source of concern among investors and of pressure on the peso.

Reducing that deficit is the first target goal of the peso devaluation. But such a strategy will only work if it is buttressed by real strides in industrial efficiency, said Jasinowski. Referring to the more orderly decline of the dollar in the 1980s, he said, “The U.S. devaluation was for the most part successful because it came in tandem with real improvements in competitiveness.”

Mexico has also moved to boost its industrial efficiency in recent years, but it has often relied on foreign technology to enhance its uneconomical older facilities. With a weaker peso, equipment purchases--such as tooling from Snider Mold--will now cost more.

But the long-term view of Mexico’s industrial competitiveness remains positive, provided an atmosphere of stability settles over the economy. “The key is for the peso to go down and stay there in a stable way,” Rosencrance said. “If it does, that will be acceptable financially and economically.”

Peterson reported from Los Angeles and Kraul from San Diego.