That Humming Sound

When NAFTA took effect three years ago, Alfonso Salazar, a Mexican trade-promotion official, expected more Americans to turn up at his office. He expected more Canadians. What he didn’t expect was Tunky Ariwibowo and 30 calculator-toting Indonesians.

“Look!” cried Salazar, flipping delightedly through consonant-rich business cards from the Indonesian delegation, which had just visited. “They’ve already got 18 or 20 projects in the works.”

Ariwibowo, who is commerce minister of Indonesia, and the 30 businessmen represent a critical but little-noticed way in which the North American Free Trade Agreement is benefiting Mexico.

In addition to the expected investment by Mexico’s neighbors to the north, companies far from the North American continent have been pouring funds into brick and mortar here: Germans, British, Asians and others are erecting new factories, warehouses and hotels.

In fact, since NAFTA was signed, the annual amount of direct investment has nearly doubled--reaching $7 billion in 1995, according to the central bank, and heading for $8 billion this year. That’s despite a disastrous recession that nearly wiped out Mexico’s domestic market.

The reason is that NAFTA has made Mexico an attractive steppingstone into the rich U.S. consumer market--so attractive that Mexico’s profile has been raised around the globe, helping to redraw the world’s commercial map.

“With its access to the U.S. and Canadian markets, Mexico is today a much more attractive country for foreign investment than before,” Commerce Minister Herminio Blanco said.

That means winners--and losers. Workers from Europe to the Caribbean to Asia are hearing echoes of that “great sucking sound” first detected by U.S. presidential candidate Ross Perot as employers rush to set up shop in Mexico.

“It’s a risk for us Europeans, the dislocation of businesses from Europe,” acknowledged Jacques Lecomte, the European Union representative in Mexico. “It’s a problem in terms of the disappearance of jobs.”

To Mexico, attracting such direct investment is key to future growth. With a small pool of savings, the country is relying on foreign money to finance imports and build factories and power plants. Investment also creates desperately needed jobs.

Direct foreign investment--the kind that goes into factories and offices--is especially important because it’s unlikely to suddenly flee the way stock market money did after the peso collapse of late 1994.

Of course, NAFTA is not the only reason foreign companies are investing in Mexico. But by reducing tariffs and quotas, enhancing legal guarantees and requiring a hefty share of “Made in North America” content in products, the treaty has proved a powerful tool.

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Just consider the changes it has brought to Volkswagen’s Mexico subsidiary, based in the southern city of Puebla. At its sprawling plant, overall-clad workers hunch over the gray skeletons of Golf compacts and Jetta sedans, attaching parts as the cars cruise by on an assembly line, many bound for the United States.

A few years ago, parts such as brake pads, door-lock mechanisms, shock springs and engine blocks were imported from Germany. Today, they’re as Mexican as the Virgin of Guadalupe portraits glowing under Christmas lights above the assembly lines.

Indeed, VW’s assembly plant has been here for many years. But to comply with NAFTA’s requirements to use North American parts, Volkswagen has persuaded about 80 German auto parts firms to start producing in Mexico in the last few years, said Bernd Leissner, president of Volkswagen de Mexico.

“The advantage from NAFTA is that we changed our supplier base from Europe to the North American region,” Leissner said.

Forty more firms are expected to arrive soon as Volkswagen begins to build a new version of the beloved Beetle, using the Puebla plant. That means the Beetle can enter the United States duty-free while VW’s dozens of suppliers escape German wage scales, the highest in the industrial world.

Analysts note that the multimillion-dollar investments by the auto parts companies do more than just create jobs for Mexicans. Gradually, they are helping to create a world-class industry.

“What is taking place, in effect, is the establishment of a very low-cost supplier base that ultimately will have German levels of quality--or higher,” said Harley Shaiken, an economist and auto industry expert at UC Berkeley.

Not far from the Volkswagen plant is the noisy whir of another industry being transformed. It is the country’s textile and clothing business, which was in dire straits before NAFTA.

These days, the factories surrounding Puebla and Mexico City are busily producing cotton thread, colorful knits and garments ranging from T-shirts to hospital gowns, most for export.

Aided by lower U.S. tariffs and the abolition of U.S. quotas, Mexican companies are now competing fiercely with Asian firms. Indeed, Mexico recently shot past South Korea and Taiwan to become the No. 3 provider of clothing and fabric to the United States. It could soon surpass Hong Kong to become No. 2, behind China.

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“NAFTA was one of the most important watersheds ever for the clothing industry,” said entrepreneur Victor Miklos, who is expanding his bathing suit factory in Mexico City to stitch swimwear for a U.S. company.

The promise of NAFTA benefits is luring Asian textile makers, such as Ariwibowo’s delegation from Indonesia. By producing in Mexico, with local materials, they can avoid the stiff U.S. export quotas they’d otherwise face.

One of the most ambitious plans: a $40-million “textile city” of Mexican and American firms--including Burlington Industries, DuPont and Guilford Mills--in the town of Emiliano Zapata. This is work that might otherwise have been done in Asia or the Caribbean.

But if Mexico’s textile revival shows how NAFTA can breathe new life into a faded industry, it also points to the wreckage caused by shifting production and investment from one country to another.

Some Caribbean countries have been devastated by companies switching their garment making to Mexico. The Dominican Republic, for example, has lost an estimated one-third of its 166,000 export industry jobs in the last year, as most of the garment jobs shifted to Mexico. (See related story.) German manufacturing unemployment has soared as companies such as Volkswagen and Mercedes-Benz build plants overseas.

In the U.S., more than 26,000 garment jobs have vanished in three years, unable to compete with 50-cent-an-hour Mexican labor, according to the UCLA Center for North American Integration and Development.

But if NAFTA has cost some U.S. jobs, it has helped maintain others. Capital-intensive U.S. fabric companies, for example, are thrilled by the rise of the Mexican clothing industry, their customer. About 28,000 American workers now produce fabrics for Mexico and Canada, according to the American Textile Manufacturers Institute.

During a recent visit to Mexico, German Chancellor Helmut Kohl acknowledged workers’ fears about losing jobs to Mexico. But, he argued, the country had to pay the price of some job shifts if it wanted to stay competitive.

“If we want Germany to be a world leader in terms of exports, we can’t limit ourselves to producing within our country,” he said.

Despite concerns about job losses, many countries are actively promoting investment in Mexico, seeing it as a way to capture new business.

The British agriculture minister, for example, recently toured Mexico with British executives hoping to co-produce seafood, pork and other goods here for export to the United States and other countries.

“We very much see Mexico as a gateway to the Americas,” said the minister, Tony Baldry, who spoke enthusiastically of combining British know-how with Mexico’s strategic position.

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To encourage European investment, the European Union helps finance 123 business projects in Mexico. One example: a French-Mexican venture in Baja California that exports oysters to the United States. European investors account for about 20% of Mexico’s direct foreign investment.

Meanwhile, Asian companies have announced plans to sink $1.18 billion into plants and factories this year, a 247% increase over 1995.

They have especially stepped up their investment in Baja, where six of Japan’s eight top television manufacturers and several Korean competitors have turned Tijuana into the world’s biggest center for TV production. Significantly, they have boosted Mexican production of components that they once simply imported and assembled in Mexico.

Citing the requirements of NAFTA, Korean conglomerates are now discussing the outright purchase of the Port of Ensenada, 90 miles south of San Diego, the building of a north-south rail spur and the construction of a steel mill.

Altogether, Mexican officials are expecting direct foreign investment to rise to its second-highest level ever this year, perhaps hitting $8 billion.

An impressive number, far above the pre-NAFTA level. Still, that’s well below the record $11 billion in direct investment that flowed into Mexico in 1994, the first, euphoric year after the free-trade pact was signed.

A main reason is the still-depressed domestic economy. Many of the companies pouring money into Mexico in 1994 envisioned a rapidly developing domestic market of nearly 100 million consumers, in addition to the U.S. export market.

Instead, they faced a peso crash, soaring interest rates and a severe recession that put consumer spending on ice.

“While NAFTA is a critical factor facilitating trade and investment, it alone is not sufficient,” warned a recent report from the American Chamber of Commerce of Mexico after a survey of its members.

In addition to the depressed local economy, the Chamber said, Mexico’s other familiar problems continue to put off some investors. They include red tape, the soaring rate of kidnappings and robberies and the unstable political situation, especially the rise of a violent new rebel group, the Popular Revolutionary Army.

Officials are hastening to increase the country’s appeal for investors. They have begun to slash red tape and have opened industries such as electricity and long-distance telephone service to foreign participation.

They have also been negotiating a web of free-trade agreements with Central and South American countries that would allow manufacturers here to trade in all directions. For example, a Mexico-based company making television sets can export duty-free to the U.S. and also to Chile, which previously slapped an 11% tariff on the TVs.

“This is part of our strategy,” said a Commerce Ministry official, speaking on condition of anonymity. The idea, he added, is “to make Mexico attractive on all its perimeters.”