The gap between the myths and the realities of Mexico in the minds of many American businesspeople is significant. Those who think about Mexico at all probably have images of a poor, rural, authoritarian society, with an exploding population, rampant crime and unending corruption and drug problems. As with most images, there is some truth in these stereotypes about Mexico. There are, however, other and very different realities. As GE’s CEO, Jack Welch, has said, "The secret of success is changing the way you think." It is high time that American business change the way it perceives Mexico so that the massive business opportunities there are not lost to erroneous misperceptions. With a new perspective on Mexico, export action will follow, which will benefit U.S. business, U.S. labor and the American economy as a whole.

A CHANGED ECONOMIC MODEL

As a legacy of its colonial heritage, Mexico relied for centuries on the export of raw materials and other commodities and the restricted import of finished goods. From the 1950’s to the mid- 1980’s, Mexico depended on an import substitution policy model, which closed its borders to most imports to protect the output of nascent national industries, many of which were owned and operated by the Federal Government. The oil and debt shocks to Mexico in the early 1980’s forced the Government of Mexico to reconsider its protectionist trade policies. In 1986, Mexico joined the General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), fully endorsing the concept of free trade. Mexico began at that point to unravel its complicated import-licensing program and to reduce its very high import tariffs. For many years, the only way a U.S. company could import anything into Mexico has been to obtain an import license from the Mexican Government. The procedure was complicated and designed to impede imports. By the beginning of 1988, maximum tariff rates in Mexico had fallen from 45 percent to 20 percent.

In 1993, Mexico negotiated The North American Free Trade Agreement (NAFTA) with Canada and the United States. Since then, Mexico has negotiated free trade agreements with 30 other countries. As recent examples, a free trade agreement with the European Union entered into force July 1, 2000 and a similar agreement with the European Free Trade Association members will enter into force July of 2001. In both cases, no tariff will be higher than 5 percent by 2003, and most tariffs will be completely eliminated by 2007. As a result, U.S. business will now feel increased competition in Mexico from European firms.

LIBERALIZED FOREIGN INVESTMENT LAWS YEILD RESULTS

Similar liberalization has occurred in Mexico with respect to direct foreign investment policy. Until enactment of the 1993 Foreign Investment Law, direct foreign investment was governed by a 1973 law that prevented foreign parties from participating in many sectors of the Mexican economy. The 1993 law, the repeal of foreign exchange controls in 1991, the more recent floating of the Mexican peso, along with the provisions in NAFTA which safeguard direct foreign investment, have prompted a massive influx of such investment. In the five years before NAFTA implementation, Mexico received $3 billion annually in direct foreign investment. In the seven years since NAFTA implementation, direct foreign investment in Mexico has exceeded $80 billion.

A CHANGED POLITICAL MODEL

There has been as profound a change in Mexico on the political front as there has been on the economic front described above. Since the early 1920’s, one Mexican political party, the Institutional Revolutionary Party (PRI), has dominated the political life of the country in a centralized fashion. The control was so complete that outgoing Presidents of Mexico virtually chose their own successors. Until 1997, the PRI also controlled Mexico’s bicameral Congress. Recent political reforms have opened more opportunities for opposition parties, expanded freedom of expression and guaranteed free and fair elections. These measures, among others, eroded the PRI’s monopoly on power. The July 2, 2000 elections in Mexico were the most free and open in Mexican history and marked the first time since the 1910 Mexican revolution that the opposition defeated the party in government. The presidential victory of Vicente Fox was stunning. This historic change in government has far- reaching implications for the United States in general, and for U.S. business in particular.

WHO IS VICENTE FOX?

President Fox, is a 58 year- old Mexican who was educated in Mexico and joined the Coca Cola company as a route salesman in 1964, working his way up the corporate ladder to CEO. He entered politics in 1987 and was elected to Congress in 1988. In 1991, he lost the race for governor of the State of Guanajuato, but ran again and was elected in 1995. Soon thereafter, he announced his intention to campaign for the Mexican presidency. He will press for his program of improved education and health standards, increased governmental efficiency, fiscal reform, increased trade and investment and improved infrastructure by dealmaking with the three major parties in Congress. He is particularly interested in the development of Mexican small and medium-sized companies and, as Governor of Guanajuato, he did much to assist micro businesses in the State. Fox campaigned on a pledge to increase Mexico’s GDP to an annual rate of 7 percent by the end of his six- year term and to create employment possibilities for the 1.3 million new entrants in the Mexican labor market per year. Expectations are very high in Mexico for the kind of change President Fox promised in the campaign, and hopes are high in the foreign business community for the kind of reforms needed to keep Mexico’s economic development in high gear.

WHY SHOULD U.S. BUSINESS BE INTERESTED IN MEXICO?

Clearly, some of the old myths about the economic and political situation in Mexico are no longer congruent with the current realities. But so what? Why should these seminal changes in Mexico affect your outlook toward Mexico? Here are at least two reasons why:

• These changes have had a major impact on the importing and exporting patterns of Mexican business. If your firm has not benefited by these changes, your competition probably has.
• These changes have had a major impact on the economic growth of the country, and will continue to do so, leading to even more export opportunities for U.S. business.

RESULTS OF NAFTA

In 1993, U.S. goods faced an average tariff at the Mexican border of about 10 percent. Today, that average tariff is less than 2 percent and falling to zero. Most U.S. exports to Mexico enter with no duty at all. The reduced tariffs, the proximity to the United States and the predisposition of Mexican firms to buy U.S. technology have helped push U.S. exports to Mexico to more than twice their pre- NAFTA values. U.S. exports to Mexico in 2000 are projected to approach $108 billion, up from $41.6 billion in 1993, the last year before NAFTA implementation. This export volume is more than five times larger than U.S. exports to France; about three times larger than U.S. exports to Germany, more than 2.5 times as large as U.S. exports to the U.K. and is larger than total U.S. exports to all of South America combined. Clearly, Mexico is not a market to be overlooked.

The Mexican market for U.S. exports is not only vast, our second largest export market after Canada, it is also growing rapidly. Between 1997 and 1999, U.S. exports to Mexico have grown more than 15 percent. U.S. exports to Mexico expanded at a 32.3 percent rate through the first 10 months of 2000. In virtually every product sector, from consumer goods, to snack foods, from electronic equipment to auto parts and textile mill products, there was outstanding U.S. export growth, not just last year, but for the last several years. Comparing the growth rates of two- way trade between the United States and Canada and the United States and Mexico, it is clear that, everything else being equal, Mexico will overtake Canada as our largest trading partner by the middle of this decade.

IMPACT ON MEXICO’S ECONOMIC GROWTH

We have seen how the economic policy changes, including membership in NAFTA, have impacted the trade patterns of Mexico. These changes also have positively affected Mexico’s economic growth patterns. Mexico has averaged 5.6 percent real annual growth since 1996, positioning Mexico as one of the fastest growing large economies in the world. With declining oil prices, and a cooling of the U.S. economy (Mexico’s largest trading partner and consumer of about 88 percent of total Mexican exports), GDP growth for 2001 is projected to decline to the 4 to 4.5 percent level. Private investment is at its highest levels ever, accounting for some 18 percent of GDP. Foreign direct investment is projected to hit $14 billion in 2000, of which about 65 percent is derived from the United States. Inflation has fallen steadily in recent years, reaching single digits (8.96 percent) in 2000 and is projected in the 8 to 8.5 percent range for 2001. The Mexican peso has traded openly and freely in the 9.1 to 10.0 to the U.S. dollar range for the last three years. Clearly, Mexico has put its economic house in great order. Solid economic growth and stability have been the results.

NOT ALL THE NEWS IS GOOD

While it is clear that there have been dramatic changes in the Mexican economic and political scenes in the last fifteen years or so, and that these changes have brought enormous benefit to the Mexican people and to those U.S. businesses which have been in the market, not all is "perfecto" south of the border. A few of the concerns are the following: Nearly 90 percent of Mexican exports are destined for the United States, and one can only worry a bit about what might happen to Mexican growth rates were our country to experience more than just a slight downward turn in 2001. The Mexican banking system is weak. Few loans are made; fewer still to the small and medium- sized Mexican businesses. The distribution of wealth in Mexico is a serious issue since at least 40 million Mexicans live at or below the poverty level. The price of Mexican oil, which accounts for more than one third of federal government revenues, is now selling for about $18 per barrel, down from $24- 29 per barrel last year. Natural gas prices are soaring, forcing some plants to temporarily cease production.

MARKETING IN MEXICO

Mexico is a natural market for U.S. firms because of the tremendous receptivity Mexican buyers extend to U.S. suppliers. There is a genuine respect for and interest in U.S. products and companies. While Mexicans are a diverse and independent people, U.S. standards, business practices and consumer styles are embraced by large segments of the Mexican population. But in spite of the undeniable affinity toward U.S. products and ideas, U.S. firms should not underestimate the need to develop distinct marketing strategies. In designing strategies and selecting in- country representation, U.S. firms should not lose sight of the geographic and socioeconomic diversity within Mexico.

There are at least four distinct marketing regions within Mexico:

• The northern swath of border cities characterized by explosive industrial growth and a melding with the southwestern United States;
• The entrepreneurial northern tier centered on Monterrey;
• The region around Mexico City, the cultural and political hub of the nation and home to 25 percent of the population and a comparable percentage of the country’s GNP;
• A resource- rich, but infrastructure poor south.

When developing a market entry strategy for Mexico, U.S. exporters should be aware of the wide variety of distribution channels. Small retailers and family-owned businesses dominate the market. Only 2.2 percent of all industrial firms have more than 250 employees; more than 90 percent employ only 10- 15 workers. U.S. firms new to the Mexican market are well- advised to take advantage of the market research, matchmaking and counseling services provided by the U.S. Commercial Service and the Foreign Agricultural Service in Mexico.

SIGNIFICANT MAJOR PROJECTS EXPECTED IN NEW FOX ADMINISTRATION

Major projects in Mexico traditionally are developed in cycles congruent with new administrations. Each new president puts his mark on the next cycle of projects. Given President Fox’s enthusiasm for the participation of the private sector in the life of the new Mexican economy, we expect many excellent opportunities to arise for U.S. companies in important sectors such as energy, telecommunications, petrochemicals, health care and transportation. For example, the modernization of some major commercial ports in Mexico, including Tampico, Altamira, Veracruz, Dos Bocas, Progreso, Lazaro Cardenas and Puerto Madero, is expected to involve investments of at least $400 million in the short term. These projects will then generate other related projects requiring a wide variety of equipment and services. This is a strategic time for U.S. firms to be present in Mexico.

The companies that become involved in the early stages of the planning should have better opportunities to snare larger parts of projects as they develop.

IMMEDIATE OPPORTUNITIES FOR U.S. SMEs

On March 27-28, 2001, the U.S. and Mexican governments are collaborating on a two-day conference entitled, "Business Opportunities for U.S. and Mexican Small and Medium Size Companies." Concurrent sessions will be presented to the U.S. and Mexican participants to cover such topics as financing exports, Mexican customs issues, NAFTA questions, Mexican standards, doing business in the Mexican cultural context and other timely topics related to the basics of exporting to Mexico. The U.S. Small Business Administration, the U.S. Export- Import Bank and the U.S. Overseas Private Investment Corporation, which just opened its small business loan program in Mexico, will also make presentations. Microsoft Mexico will speak on e- commerce in Mexico and IBM will talk about its new BuyUSA.com program in association with the U.S. Commercial Service. U.S. Ambassador Davidow will host an evening reception for all participants at his residence on the close of the first day. The second day will be devoted to Gold Key Service for the U.S. participants. This will involve a full day of appointments with Mexican companies pre- screened to meet the parameters provided to us by the U.S. firm. The total cost of the program is only $600. To register for the program, or for additional information, please contact your nearest U.S. Export Assistance Center or SBA office or contact Francisco Ceron at the Commercial Section of the U.S. Embassy in Mexico City Tel: (525) 0140-2640 or Email: Francisco.Ceron@mail.doc.gov

RepCom Monterrey will be held for the eighth consecutive year in Monterrey, Mexico, April 3- 5, 2001. The event involves two days of one-on-one pre-qualified appointments with potential representatives, distributors, joint venture partners, or buyers, and a three- day trade show, dedicated to U.S. companies. Throughout the event, appointments are held in the morning and the exhibition occurs in the afternoons. The RepCom 2000 event attracted some 3,000 Mexican buyers, representatives and distributors from all of northern Mexico. The 61 U.S. participants met with over 366 Mexican business leaders during their two days of Gold Key meetings and sold product and service with a total value of $2.5 million in three days. Monterrey is home to Mexico’s 10 largest multinational companies that control an estimated 60 percent of Mexico’s industrial base. RepCom gives you contacts with these industrial leaders, as well as with Mexico’s many up and coming small and medium size business owners. For further information, please contact Rodolfo Lozada at the U.S. Consulate General in Monterrey, Mexico Tel: (528) 343- 4450 or Email: Rodolfo.Lozada@mail.doc.gov

NEW OPPORTUNITIES FOR U.S. FIRMS IN THE MAQUILADORA INDUSTRY

Roughly 40 percent of U.S. exports to Mexico are destined to the "maquiladora" industry. "Maquiladoras" are in- bond industries that receive parts and sub- assemblies duty- free from outside of Mexico, assemble them into final products and re- export the goods. Over two- thirds of this industry is located on the border. Most, but not all, of the inputs come from the United States and most of the final products are re- exported back to the Unites States. Some maquila plants are operated by Korea, Japan or other non-NAFTA countries, and they tend to draw on input sources from their own countries. Some U.S. - owned maquila operations have also had a tradition of importing non- NAFTA-originating components for incorporation into the final product exported from Mexico. In order to limit the duty-free benefits to only those products which qualify as NAFTA-originating, Section 303 of the NAFTA agreement set a January 1, 2001 deadline for the elimination of special arrangements involving non- NAFTA parts when those parts were incorporated into goods exported to another NAFTA country.

Recognizing that the loss of duty-free status on non- NAFTA origin parts and components would place maquiladoras at an economic disadvantage, given Mexico’s traditionally high most favored nation (MFN) duty rates, Mexico instituted a program of MFN duty reduction for prescribed imported parts and components in prescribed industries. This MFN duty-reduction program, alternatively called the Industry Promotion Program, the Sectoral Promotion Program or the Pro Sec Program, applies to the following industries: chemical; plastic and rubber manufactures; iron and steel; medical equipment, medicines and pharmaceutical products; transportation, except automotive; paper and carton; wood; leather and furs; automotive and auto parts; textile and apparel; electrical; electronic; furniture; toys, games and sporting goods; footwear; mining and metallurgy; capital goods; photographic; agricultural machinery; and a miscellaneous or basket category.

What this means is that for maquila operations in Mexico that were importing parts from non-NAFTA countries will now either have to find alternative sources for these inputs within the three NAFTA members or pay the import tariffs on the final products they export into the United States or Canada. The implementation of Section 303 should provide U.S. businesses with more opportunities to sell U.S. inputs to the rapidly a growing maquiladora industry in Mexico

For more information about the opportunities for U.S. firms created by these new regulations, please contact Julia Rauner Guerrero at the U.S. Export Assistance Center in San Diego, CA Tel: (619) 557-2963 or Email: Julia.Rauner@mail.doc.gov

Return to Export America homepage