North American Free Trade Agreement: A perspective from Mexico.

Looking at NAFTA to reinforce its economy and boost growth, Mexico could provide a "bridge" to future markets of the south.

Over the last five years, the Mexican government imposed a strong transformation on its commercial practice. This change was part of the official strategy to restructure the Mexican economy and improve the critical unbalanced situation that affected the country after 30 years of industrial development.

The problems stem from the substitution of imports and the dependence on oil sales as a main source of income--mostly at the end of the '70s.

Faced with the critical problem of the foreign debt and the erratic behavior of the international oil market, officials were convinced that the best solution for the crisis rested on a new strategy of development. They realized they needed to focus on external markets, primarily by strongly promoting the exportation of goods.

To achieve this position, Mexico adopted a new peso-foreign currency policy and commercial liberalization, together with an international strategy of negotiation that eases access to external markets.

U.S.-Mexico Trade

Undoubtedly, one of the most important consequences of the commercial liberalization policy during the last few years was the concentration of Mexico's external commercial links with the U.S. This development will help Mexico reach an outstanding position concerning the volume and content of the trade between the two countries.

This change is shown through an important increase of the bilateral trade of $57 million.

Mexico's role in this trade is no longer as a traditional supplier of raw materials and agricultural products. Mexico has now become a supplier of manufactured goods to the U.S. market.

In fact, in the beginning of the '70s, food, liquor, tobacco and textile products were the traditional products sold to the American market--totaling 60% of the Mexican exports.

At the present, these products represent only 15% of the total. In the past, more sophisticated products like machinery and equipment represented only 20% of Mexico's exports. Now, they total 60% of manufactured products exported to the U.S.

Mexico's exported goods to the U.S. market include cars, engines, spare parts and other complex industrial products.

Another important consequence of the commercial liberalization is the growth of the tool industry. The number of tool companies increased from 350 in 1972 (with 45,000 workers) to 2000 in 1992 (with 475,000 workers).

Growth through NAFTA

Mexico's main objective in the North American Free Trade Agreement (NAFTA) with the U.S. and Canada is to reinforce its economic policy and to promote its growth--resulting in improved employment conditions.

NAFTA can help Mexico: gain access to the biggest market of the world; create a much better ground for foreign investment; and obtain new loans to finance economic development. The agreement also provides the opportunity for co-production with the U.S. and Canada.

As a group, Mexico, the U.S. and Canada form a very rich area in natural resources (especially hydrocarbon products), capital and labor. Using the strengths of U.S. capital and technology, Canada's natural resources and Mexico's labor and natural resources, the three nations can work together to create economic prosperity for the entire area.

As a whole, Mexico, the U.S. and Canada cover an area of more than 21 million sq km (13.1 million sq miles), with a population of 360 million people and an internal gross income of $5 trillion.

By comparison, the 12 countries in the European Community (EC) cover 2.25 million sq km (1.4 million sq miles), with a population of 324 million people and an internal gross income of $4.15 trillion.

Motives for NAFTA

There are four main factors that justify Mexico's interest in developing NAFTA:

* U.S.-Canada Trade. The existing Free Trade Agreement between the U.S. and Canada is a feasible model of economic cooperation in the region.

* Economic Interaction. The high degree of economic interaction between the three countries has accelerated during the last few years.

Mexico and Canada export 60% of their production to the U.S. At the same time, the U.S. exports only 30% of its production to Mexico and Canada. These figures represent a much bigger proportion than trade between the U.S. and the EC. Therefore, Canada and Mexico are the first and third commercial partners of the U.S.

On the other hand, the U.S. is an important investor in Canada and Mexico. Likewise, Canada is an important investor in the U.S.

* Economic Protection. The agreement is a mechanism of defense against the consolidation of markets in Europe and Asia.

* Consistent Commercial Trade. The Free Trade Agreement is attractive and will create commercial trade among the three countries while compensating for the inconsistent payment program, which is a problem to be solved in the three countries.

Effect on Foundries

How will commercial integration affect the foundry industry as a whole--including suppliers?

The gradual reduction of duties helps the flow of goods and services between the three countries and leads to a competition, in which the winners will be companies prepared to offer the best quality, service and prices.

At the present, the technological situation of most Mexican foundries is poor, due to the difficulty in securing credit--a critical problem, since most plants are obsolete. The agreement will make it easier to get credit, allowing interest rates that will tend to decrease along with longer terms of payment.

Through this new horizon, Mexican plants will have more modern installations, better equipment and the latest technology.

Regardless of size, all foundries need to adopt training programs for their personnel, as well as total quality programs.

All this implies that the future "Quality Certificates" are going to be demanded by consumers to internal and external suppliers of raw materials. Foreign purchases, therefore, will be justified due to quality.

There are aspects of every sector of the foundry industry in Mexico that offer niches of opportunity under the agreement.

Gray Iron

Gray iron is the sector offering the most potential in Mexico's metalcasting industry.

Out of Mexico's 1500 foundries, 80% are ferrous. Of the ferrous foundries, 30 companies are producing about 80% of all iron castings, basically for the automotive industry (Fig. 1).

Gray iron foundries in Mexico are expected to grow and modernize, since most are operating with equipment from the World War II era. Obviously, this equipment needs to be replaced to ensure lower costs and higher quality.

Another important aspect concerns environmental regulations that are leading officials to seriously consider installing more efficient systems at reasonable costs.

Gray iron foundries need a considerable investment for most equipment, especially with this "cupola" industry. They must change to more efficient melt systems with less pollutants, with a strong tendency to electric furnaces or with plasma furnaces. But with the only alternative to electricity costing four times more than in the U.S. and Canada, foundry officials may have trouble finding efficient anti-pollutant systems that justify their cost.

The niches of opportunity are very wide, due to the vast number of small foundries that produce 100-2000 tons of iron castings per month.

Steel

The steel industry is badly contracted, operating at only 25% of its capacity. Consequently, this sector is probably the one that needs more technological help. This is a must to ensure low-cost labor based on productivity.

The steel industry has a good degree of quality, although it hasn't reached the level of the automotive industry in Mexico.

The most important raw materials for this sector are scrap and sand. It is expected that the steel industry will benefit from NAFTA in terms of an improved scrap supply.

A reduction in the freight costs of sand also is needed to reduce overall operational costs.

The steel foundry needs to be modernized. This includes installing new equipment and stronger investment, which is difficult at the moment because interest rates are probably 10% higher than those in the U.S.

Better service and quality are needed for ferroalloys, as well as lower prices. At the moment, 100% of the ferroalloys consumed in Mexican foundries are imported.

On the other hand, this sector needs the technological support of companies that are considered specialists on anti-pollutant systems--a topic that is causing a great deal of worry.

At the moment, steel foundries that have anti-pollutant systems in their plants are only controlling the prime emissions. But it is necessary to control the secondary ones, as well.

Aluminum

Generally, the competitiveness of the world aluminum industry depends mainly on the availability of resources and sound technology.

In 1990, producers and suppliers of the global aluminum market included the U.S. with 22.2%, the Soviet Union with 13.5% and Canada with 8.2% of the total world production.

Regarding North America, Canada comes first in production of primary aluminum. On the other hand, the U.S. is an important manufacturer of intermediate segments of aluminum products, specifically those in which capital investment is important.

Mexico is heading for a much wider segment in the processes that require less complex equipment and more labor, such as extrusions, as well as producing aluminum frames for construction.

The consolidation of Mexico's competitiveness in aluminum products, extruded products and aluminum alloys depends on the modernization that foundries have already initiated.

All these actions will finally propel Mexico--apart from having its plants properly equipped--to offer high-quality specification castings. In addition to meeting the needs of the industry in respect to international prices and productivity, one of the main goals is to meet world regulations of environmental protection.

In 1990, aluminum industry workers represented 0.03% of the total economic force of Mexico.

Altogether, there are 239 companies producing aluminum products in Mexico. Casting companies are ranked first in number with 140 firms and second in production with 128,000 metric tons--conceding only to recycled aluminum products.

The aluminum industry is integrated in vertical form, since it doesn't have sufficient supply of raw materials, which presents competitive limitations in the production of ingots and sheet. In both cases, this is due to the high cost of energy in Mexico.

One advantage is the fact that the aluminum market in Mexico demands a great deal of labor. This is probably the reason why many companies introduced extrusions in their processes, mainly in the manufacturing of construction materials.

In 1990 the value of exports of aluminum products from Mexico, the U.S. and Canada was $108.9 million. The exported products included high-conductivity wire and coils, and warpers for the textile industry.

Mexico also exported aluminum scrap such as ladders, platforms, doors, windows, kitchen utensils and, probably in smaller amount, construction frames and wire.

Raw Materials

Because Mexico is not a producer of ferroalloys, inoculants or nodulizers, it depends a lot on ferroalloys supply.

The U.S. has better sands than Mexico, although some of Mexico's sands are of relatively good quality. It is necessary in every case to reduce costs of transportation of sands or other raw materials that are imported. More than any other one, this factor definitely impacts the total cost of foundry operation.

Strategically Located

Mexico is located in the most strategic place on earth. Therefore, industry officials are getting ready to perform as a world financial center to integrate the biggest trade market of this nature.

Mexicans believe the profile they are "solidifying" is the most important in comparison with EC and the Asian countries.

Traditionally, Mexico has been considered the elder brother of all Latin American countries. Consequently, Mexico envisions itself as the future "bridge of trade" between the northern countries in America and the nations of South America.

This information was presented during the summer meeting of the Casting Industry Suppliers Assn. (CISA), held July 16-19, 1992 in Oak Brook, Illinois.