AMCHAM at work: group of executives compose blueprint to improve competitiveness.

The competitiveness of any economy is closely linked to private investment and is one of the primary factors in attracting that investment. It allows for lower relative costs, higher profits and, most importantly, more possibilities of success in the short-, medium- and long-term. An economy with strong and dynamic private investment can increase its competitiveness more rapidly through access to capital, new markets and technology.

Mexico's competitive position in attracting and retaining foreign direct investment has been slipping recently. The country has fallen one spot over the past year to become the third-largest supplier to the U.S. market behind Canada and China. Adding to the worry, Mexico has stagnated or fallen in nearly all important global competitiveness and economic indices (see charts on opposite page).

The Mexican manufacturing sector has been particularly affected by declining competitiveness. According to the Economy Secretariat, foreign investment to Mexico in the sector fell from US$9.3 billion in 2000 to US$5.3 billion in 2002. Through September of 2003, it had only reached US$3.5 billion. This loss has an enormous negative impact on the national economy because the manufacturing sector has accounted for about 20% of GDP over the past two decades.

The danger is particularly notable within the electronics industry, one of the highest value-added categories in manufacturing. This sector is at the greatest threat from global competition because it is high paying and accounts for a significant portion of Mexico's wage mass. Other categories subject to loss include the production of commodity goods: mobile phones. PDAs, modems, mice, laptop computers, disk drives and hand-held Internet appliances. The Merrill Lynch Global Securities Research & Economics Group predicted the production of basically all commoditized goods would be unlikely to persist in Mexico much beyond 2003.

TAKING THE INITIATIVE

In accordance with AMCHAM'S mission to foster investment between the United States and Mexico, a high-level group of volunteer executives from member companies recently developed a series of recommendations aimed at achieving a business environment more conducive to attracting and retaining investment.

The group found that the general consensus of AMCHAM members is that Mexico's ability to regain its competitive position does not lie in countering the specific competitive and comparative advantages of certain countries. Nations like China are in developmental stages fundamentally different from that of Mexico. Mexico's challenge to improve competitiveness lies in adopting reforms that will increase national productivity while decreasing the cost of doing business.

To this end, AMCHAM is providing concrete recommendations where adjustment and reform would benefit both the business community and Mexico's long-term economic growth. Its intention is to push initiatives that could be implemented successfully as many of the suggestions encompass regulatory and other types of "red tape" issues the executive branch could resolve with relative ease.

CUSTOMS CONCERNS

AMCHAM is convinced that modernizing and streamlining processes in the Mexican customs agency would significantly lower costs to businesses. For this reason, it has proposed several initiatives designed to make improvements in customs processes. The first deals with elaborating a certified company program for firms that currently have to endure time-consuming and costly customs audits that often include a review of import declarations from past years.

AMCHAM suggests reducing or eliminating customs audits and regulations for companies operating under a certified company program. This would allow them to rectify certain fields of import declarations that are normally non-rectifiable and obtain on-site validation for goods to be exported. And finally, if during customs verification agents determine goods are in excess or not declared in the import declaration, the certified company should be able to regularize the importation and the applicable fines should be reduced.

Another suggested change in the customs area is the implementation of risk assessment procedures by customs officials. Presently, all shipments have to be inspected by a broker to match contents to the invoice and then shipments are presented to a random inspection system. Rather than examining every shipment, authorities should implement risk assessment practices to identify and selectively examine high-risk shipments.

The third customs reform AMCHAM suggests is expanding the customs agency's operating hours and adopt a schedule suitable for industry needs and eliminate delays. Customs is currently only open from 8 a.m. to 6 p.m. for imports, and requests for additional hours must be presented in writing.

Finally, we suggest hastening electronic validation of customs declarations for documentation entering Mexico since the Finance Secretariat's electronic signature approval can be delayed up to five hours. AMCHAM believes the validation process should be no longer than two hours.

LEVELING THE PLAYING FIELD

Another area that the government could make reforms is in taking steps to fully implement Nafta provisions on government procurement.

Prior to 1994, there existed a problem with the lack of transparency and user-friendliness of the Mexican government procurement process. When Nafta was signed, it included a chapter on procurement designed to make the processes more transparent and fair.

However, U.S. companies find it just as difficult to do business with the federal government and semi-state entities as it was before. The majority of U.S. companies are obligated to sell to Mexican companies who win procurement bids and find it virtually impossible to win those bids themselves.

FISCAL REFORM

Certain changes could make Mexico more competitive in the short-term, but fundamental reforms that affect business will have to be implemented to have a longer-lasting impact, according to the AMCHAM working committee.

The first proposed reform deals with fiscal issues. There is general agreement within various segments of Mexican society that there must be a substantial and integrated fiscal reform in Mexico to maintain the momentum of development and growth. One of the foremost concerns of any such initiative should be the facilitation of structures that reward companies for investing here.

AMCHAM suggests that the government implement a fiscal structure that gives companies tax credits on profits that are reinvested in Mexico instead of being distributed.

The second reform topic concerns labor issues. AMCHAM suggests the law should: allow employers greater flexibility to use temporary employees; protect employers that use temporary employment services instead of in-house support; increase training assistance; permit flexible scheduling; and, improve the ability to use performance as criteria for layoffs in lieu of seniority.

Credit issues is another area that needs to be addressed. Currently in Mexico, the inability to perfect a security interest is the main reason banks cannot easily lend money and explains why the leasing industry has not prospered in here as it has in other countries.

Suggested reforms include forming an institution resembling the United States' Uniform Commercial Code (UCC) and changing the law (Ley de Concursos Mercantiles) so as to make repossession automatic in case of non-payment.

AMCHAM also suggests that Mexico undertake a process to achieve a real and substantial reform of the country's energy sector as soon as possible. AMCHAM recognizes the complexity of this endeavor and understands the obstacles the government faces in meeting this challenge. The organization has formed a group to study these issues and hopes to develop an informal dialogue with the executive branch about the concerns of the business community.

DELIVERED TO THE PRESIDENT

AMCHAM presented a list of recommendations to President Fox's office in late 2003, where they were received by Eduardo Sojo, the president's chief aide. According to Sojo, two of the initial suggestions--one dealing with customs issues for the express delivery industry and the other with patent protection for the pharmaceutical industry--have already been implemented. AMCHAM will be following up on action with the other recommendations mentioned here throughout 2004.

AMCHAM is convinced these factors directly affect, and in many cases determine, the behavior of private investment. If they are not urgently corrected, Mexico's competitive disadvantages will only increase in coming years.

GROWTH COMPETITIVENESS INDEX RANKINGS

COUNTRY       2002 RANK  2003 RANK

Mexico           45         47
China            33         44
Costa Rica       43         51
Hungary          29         33
Ireland          24         30

Source: World Economic Forum, the ranking of 1 is the most competitive

2003 INDEX OF ECONOMIC FREEDOM RANKINGS

             OVERALL RANK  SCORE    CATEGORY

Mexico           56         2.8     Mostly Free
China            27         2.3     Mostly Free
Costa Rica       44         2.65    Mostly Free
Hungary          44         2.65    Mostly Free
Ireland           5         1.75    Free

Source: The Heritage Foundation

Gary Deaton is the director of policy analysis at AMCHAM.