Mexico - Special Advertising Section

Nation's Business, May, 1989 by Mike Zellner, Rodman C. Rockefeller, Benito Bucay

Mexico SPECIAL ADVERTISING SECTION

Why do executives in Mexico constantly remark about growing international competition? After all, everybody knows that Mexico has been a closed economy since the 1940s, right? Wrong.

Since Mexico's entrance into the General Agreement on Tariffs and Trade in 1986, the almost half-century-old walls protecting the world's 13th-largest economy have been dynamited. Import permits and other nontariff barriers practically have been cleared away. What remains is a maximum import tariff rate of 20 percent, making Mexico the most open economy in Latin America.

Mexico's total imports during 1988 exceeded $15 billion, over 30 percent more than in 1987. This remarkable increase in imports was due to the significant reduction of import tariffs in mid-December 1987 and, to a lesser extent, the frozen exchange rate starting in March 1988.

Under Mexico's anti-inflation program, known as the Economic Solidarity Pact, in late 1987 the government abruptly opened the door to imports, forcing local producers to maintain reasonable prices and to start becoming more competitive internationally. The market-oriented strategy was necessary in order to control inflation, which was raging at an annual rate of 160 percent at the end of 1987.

For almost two years before the trade opening, companies had been raising their prices in expectation of a shock plan. Because the shock plan failed to materialize, these pricing policies led to what economists call inertial inflation. Profit margins ballooned and helped feed spectacular growth in Mexico's stock exchange.

When the trade opening began to take hold, however, many companies, including multinationals, had to re-evaluate their pricing policies. These companies found that prices for their products were above international levels, making them noncompetitive in the local market. After years of protection in the guise of import substitution, the government, with the stroke of a pen, effectively introduced a new concept to local businessmen: competition.

"Everybody thought the trade opening came too fast, but it has been successful," said Raul Munoz, president of Du Pont in Mexico. "Small and midsized businesses predicted that Mexican industry was going to be annihilated. On a large-scale basis, it has not happened. That says that there is sufficient margin for maneuvering within the government's trade policy," he adds.

Arturo Garcia, head of economic analysis under the Trade Secretariat, pointed out: "The great challenge of the policy is to ensure that small and medium-sized companies are able to adapt effectively to the process of structural change. This requires time, and it is possible that some companies will close down."

The monthly trade balance slipped into the red in September 1988, mainly because import growth overwhelmed export growth. From February to July, monthly imports grew twice as fast as non-oil exports, while oil prices plummeted.

Despite the growing trade deficit, the administration of President Carlos Salinas de Gortari is committed to continuing the trade opening in order to achieve its overall goal of a more efficient and productive Mexico. In late 1988, with many small and midsized businesses calling for import protection by way of a 10-15 percent peso devaluation, the government announced that the exchange rate will slip only a peso a day against the dollar during the first seven months of 1989. That would amount to only an 8 percent devaluation from January through July.

As 3M Mexico General Director Richard Graf said: "In the long term, Mexico has to get world-class competitive. The trade opening is going to force this to happen faster, maybe faster than Mexico would be comfortable doing it. But certainly it's going to force that to happen."

Foreign Investment

With imports flooding the local market, the next logical step is a foreign-investment opening that would bring the producers of imports to Mexico and help struggling businesses to compete.

"Direct foreign investment is a method of gaining access to markets and new technology," said Augustin Legorreta, who is president of the Mexican private-sector Business Coordinating Council.

To date, foreign investors, especially U.S. firms, have played an active role in the auto, tourism, in-bond assembly, pharmaceutical, petrochemical, electronic, textile, and food-processing industries. This investment trend is expected to continue because Mexico and the U.S. are working toward free-trade agreements in some of these industries.

Total annual foreign investment grew from less than $500 million in 1983 to almost $3.5 billion in 1987. The primary reason for the large increase was Mexico's debt-for-equity swap program. Before the program was closed in November 1987, it attracted some $1.9 billion of foreign investment to Mexico. It was closed because of strong lobbying by domestic investors--who correctly claimed that it was discriminatory against them--and because it was inflationary.

Among the obstacles that dissuade foreign investors from putting their money in Mexico is the country's foreign-investment law, which limits foreigners to 49 percent ownership. Under former Mexican President Miguel de la Madrid's regime, the law was bent considerably to allow majority foreign ownership in many cases.