Mexico’s Potential as a Trade Partner Is Starting to Show

Mexico is now the No. 2 trade partner of the United States, after Canada. In September, the total of exports and imports flowing between the U.S. and Mexico surpassed trade between the U.S. and Japan.

It was a turning point, not a fluke. Statistics for merchandise trade--more than $170 billion this year--understate the rapid growth of U.S.-Mexico commerce on many fronts. The two countries last year also exchanged $22 billion worth of services, such as education, accounting, finance and data processing.

U.S. companies have more than $25 billion invested in Mexico, in automobiles, telecommunications, retailing and many other industries. Those investments are growing at a rate of $6 billion a year.

Sure, U.S. business historically has made greater investments in Britain, Germany, Japan and other developed nations. But investment in Mexico has been building up fast since the North American Free Trade Agreement went into effect four years ago.

Americans need a new perspective to appreciate Mexico’s significance: It is not simply the poor country to the south, but the great growth market of North America. Mexico is a country of 100 million people; the potential is huge. The economy of Canada, a country of 28 million, has benefited from a sharp rise in trade with Mexico.

To be sure, the great majority of Mexico’s people are still relatively poor. Mexico’s gross domestic product of $387 billion is barely one-twentieth that of the U.S. It is less than that of Canada and much less than that of the state of California.

Mexico’s minimum wage is $3 a day and underemployment is chronic. But the economy is changing. In this tough period of Asian crisis and low oil prices, which hurt oil-rich Mexico, the economy is “not as weak as most people would expect,” says Mexico City economist Rogelio Ramirez de la O. One reason is the rise in manufacturing. “Some $70 billion of Mexico’s exports, 60% of the total, are high-tech manufactured goods,” Ramirez says.

Mexican plants make parts for U.S., German and Japanese cars, mainly as subcontractors to U.S.-based factories. It is a link in the worldwide manufacturing of computer parts. Cities such as Monterrey, Hermosillo, Saltillo and Aguascalientes are centers where such manufacturing is going on.

And U.S. business is responding to rising living standards in those cities. The H.E. Butt Grocery Co., a San Antonio-based supermarket chain with $7 billion in annual sales, has opened three stores in Monterrey and plans to open four more next year in that city and others. Ultimately the Butt company plans to have 25 to 30 supermarkets in Mexico, divided between full-service supermarkets under its HEB name and discount markets called Economax. “The customers are there for U.S.-style supermarkets,” says a Butt spokeswoman in Monterrey.

The city of San Antonio, a crossroads for U.S.-Mexican trade on the interstate highway system, plans to use the converted Kelly Air Force base as an “inland port” for goods coming from and going to Mexico. San Antonio is also a crossroads for goods from Asia, which come in at Los Angeles and Long Beach and proceed by rail through the Texas city and into Mexico, explains Jose Martinez, head of the city’s Free Trade Alliance.

Mexico plans to increase sea traffic with the U.S. by expanding ports on its east and west coasts, says Alfredo Phillips, head of economic affairs for the Mexican Embassy in Washington. “Cargo from Mazatlan, Manzanillo and Lazaro Cardenas will come right into Los Angeles and Long Beach,” he says.

Any increase in trade with California would redress an imbalance. Right now Texas does four times the amount of business with Mexico that California does, despite this state’s greater population and larger economy. Gov.-elect Gray Davis has vowed to encourage more economic interconnection with Mexico when he takes office.

And other public officials are eager to help. In Santa Ana, Mayor Miguel Pulido sees business with Mexico as “the next great opportunity” for this region. Pulido, who was born in Mexico City, is not looking for ethnic ties but business ones. “We have 12,200 companies here in Santa Ana and 197,000 jobs. We can use the work,” he says.

Politicians in Mexico think along similar lines. The Mexican states of Guanajuato and Sinaloa have opened business development offices in Los Angeles and Zacatecas, and other states are contemplating such offices. Enthusiasm is growing.

Yet expectations for Mexico’s economy have been on the rise many times before, only to be repeatedly disappointed. Each time its economy would get up a head of steam, something would throttle the engine. The country lacked investment capital or the industrial infrastructure to sustain expansion. “We could not grow fast without setting off inflation,” explains Francisco Gil Diaz, an official of the central bank.

The fall in the price of oil hurt Mexico badly in the 1980s, and devaluation of the peso in late 1994 plus evidence of scandal in the regime of former President Carlos Salinas de Gortari have hobbled its economy in recent years.

Even so, this time may well be different. Foreign investment is going into Mexico, and increased domestic investment could become a factor as the country develops a knowledge-based economy. Of the 27 Mexican issues listed on the New York Stock Exchange--most of them steel and construction companies--the best performer is Empresas La Moderna, a Monterrey-based agriculture-biotech firm specializing in fruit and vegetable seeds.

Finance will change. With bank interest rates of 40% stifling most hopes of small business, “we need a new mechanism of financing,” says John Rhoads, a U.S.-born Mexican businessman who is organizing a Nasdaq-style stock market with backing from the Mexican government. “The potential venture capital is here and the entrepreneurial companies are here,” Rhoads says.

This time the promise of Mexico is not a fluke.

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.