U.S.-Mexico Trade Paralysis : Austerity Plan Likely to Worsen Outlook for U.S. Exporters

U.S. business has seen its export trade with Mexico come to a virtual halt in the past few days, and the tough austerity program announced by the Mexican government is likely to make the outlook for U.S. exporters even worse.

Mexico’s economy “will go through a lot of pain,” said Jeffrey Schott, senior fellow at the Institute for International Economics in Washington. “The peso is weaker, and Mexicans will also feel the brunt of higher interest rates and taxes, which will reduce business and increase unemployment.”

The political chaos and economic volatility of the past several days have caused new business to all but evaporate and ongoing transactions to be canceled or put on hold as players watched events in Mexico with dismay, numerous business executives reported.

Even Friday’s sharp rebound of the peso to 6.25 per dollar from 7.45 on Thursday, coming after a week of steep and worrisome declines, only served to underscore the volatility that has made cross-border deal making a form of potential suicide.

“Mexico is at a standstill in terms of transactions,” said Marlene Martin, a Texas bank executive and board member of the San Antonio-based Free Trade Alliance. “Trade is paralyzed because there is so much uncertainty (about) what the exchange rate is going to be and because there has been a tremendous loss of confidence in the Mexican government’s ability to deal with the crisis.”

*

Until the economic measures take hold and the peso finds a floor, that paralysis is likely to continue, despite the peso’s rebound Friday. “One day does not a recovery make,” Martin said.

Michael Jourdan, a San Antonio-based exporter of truck and bus parts who has already seen orders drop 80% this year, said it will take six months or more to recoup business because Mexicans’ purchasing power is declining.

“My initial reaction is not good, because everything in Mexico is going up--gasoline prices, electricity, taxes,” he said.

Business has been slow ever since the peso began its decline in December for Manhattan Fitness, a San Antonio-based exporter of gymnasium equipment to Mexico. But in the last week or so--as doubt over a U.S. bailout emerged, top Mexican political leaders were jailed and the peso slid even faster than the U.S. dollar. Orders slowed to a trickle or dried up altogether.

“The last three days have been the worst,” Manhattan Fitness co-owner William McKee said. “If people just knew in advance where the peso would stabilize, they could begin to budget and plan. . . . But this impacts directly on our operation. We may close our doors in two weeks unless it turns around.”

Manhattan, which was expecting $7 million in sales this year, has firm orders for a mere $400,000 and just laid off 26 of its 40 employees. It’s a shocking reversal for a company that spent hundreds of thousands of dollars to promote itself in Mexico in anticipation of a big 1995.

The math is easy enough to follow. Mexican companies placing orders for U.S. goods two weeks ago “had the expectation that they would be paying less than 5.6 pesos for $1 worth of goods,” Martin said. “Yet if they make payment today, they would be paying more than 10% more than what their expectation was . . . . If you are operating with slim profit margins, you can’t function that way.”

Another inhibiting factor is skyrocketing Mexican interest rates--now 60% and higher--which have made financing impractical. Moreover, Mexican companies now have less need for U.S. products because the currency crisis has caused business to contract, said Jourdan, whose company, Intrac, ships 80% of its products to Mexico.

“One of my customers is a Mexico City truck fleet owner who has parked 50% of his trucks. To maintain the other 50%, he is taking parts from the parked vehicles and using them instead of buying from me,” Jourdan said.

The bottom line is that Mexican customers are trying to find domestic sources of supplies whenever possible to avoid paying in dollars, he added.

Gardena-based Rotonics Manufacturing said Thursday that it canceled an agreement with an unnamed Mexican partner to form a joint venture for making molded parts in Mexico City, blaming “the economic and political turmoil” in Mexico. The maker of plastic containers said it will reconsider a venture later if conditions stabilize.

Aviation Distributors, an Irvine seller of aircraft parts to Mexican airlines, said business is down 40% this year and getting worse.

“We’re not going to see any improvement for a while,” President Sam Bakhit said, adding that many of his Mexican customers are bartering and exchanging for needed parts among themselves instead of buying from him.

Not all southbound trade has stopped. The flow of U.S raw materials and components to the 2,000 foreign-owned maquiladoras (border factories) in Mexico is still strong, customs brokers say, because the owners make their sales in dollars but pay their workers in pesos.

Atlas Industrial Supply in Houston, for example, which sells tools and factory equipment to maquiladoras , has seen sales jump 20% since January.

“The maquiladora market is the only thing that is doing anything,” said Warren Carter, marketing director at Casas International, a customs brokerage in San Diego that monitors trade flows. Overall “exports to Mexico are down 38% as opposed to this time last year. But if you took out maquiladoras , it would be a lot worse. Traffic is seriously slow.”

But most U.S. manufacturers that sell directly to Mexico have stories like that of Rain Bird of Glendora, an irrigation systems maker. Exports to Mexico, which totaled something under $1 million annually in past years, “went off a cliff” in recent weeks, said Mitch Wolf, international sales administrator.

“Customers are sitting back, waiting for something to happen to stabilize the peso,” Wolf said. “They are afraid that they are going to order something today that will cost twice as many pesos when it comes time to pay for it.”

* MIXED REACTION

Zedillo plan sparks consumer fury but peso rallies. A1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Economic Plan Stokes Markets

An economic austerity plan designed to prop up Mexico’s faltering economy calls for tax increases, steeper interest rates, higher energy prices and deep government spending cuts. Although officials say the plan will cause a 42% temporary increase in inflation, the peso soared dramatically against the dollar following Friday’s announcement. Here’s a look at some of the plan’s key provisions:

FISCAL POLICY

* Increases the value-added tax to 15% from 10%.

* Cuts government outlays by 1.6% of the gross domestic product for the 1995 fiscal year.

* Increases gasoline prices 35% and electricity rates 20% immediately.

BANKING POLICY

* Assigns up to $3 billion in resources from the World Bank, Inter-American Development Bank, and other sources to strengthen Mexico’s commercial banks.

* Directs the deposit insurance agency to meet the short-term capital needs of banks.

* Sets up loan restructuring plans of up to 12 years for business.

WAGE AND SOCIAL POLICY

* Authorizes a 10% increase in the minimum wage on April 1. All other wages will be freely negotiated.

* Extends health benefits for unemployed workers and provides minimum income for rural workers.

Source: Mexican government. Researched by JENNIFER OLDHAM / Los Angeles Times

Peso Rebounds

The battered Mexican peso gained Friday on news of the government’s economic measures. Daily closes since Jan. 2, in pesos per dollar (inverted scale):

Friday: 6.25

Source: Datastream International