The impact of war: although on the sidelines, Mexico faces consequences of U.S.-led Iraq campaign. (Spotlight).

The waiting has been the hardest part for business in a Mexican economy hobbled by the uncertainties of the Iraq conflict. War could slow traffic to a standstill at U.S. border crossings and ports of entry--a prickly problem for Mexico, which directs more than 80% of its exports to the United States.

Financial and political analysts warned of a graver economic danger than war, however, as U.S. President Bush made final diplomatic appeals in mid-March to rally support for the forceful disarmament of Iraq.

"The paralysis that a war is going to generate is not a huge concern," said Diego Prieto Seyffert, an economic analyst at Invex Grupo Financiero. "The greater concern is in waiting another year for a war."

Fear of the unknown put a big damper on the Mexican and U.S. economies in early 2003, as rumblings of war drove up worldwide oil prices and helped sap the strength of industry in both countries.

Mexico's new, nonpermanent seat on the United Nations Security Council helped aggravate private-sector anxiety.

BUSINESS BACKS U.S. MOVES

As U.S. consumers lashed out against France for its confrontational stance against the U.S. policy in Iraq--proudly abandoning french fries for "freedom fries" at restaurants--Mexico's private sector leaders broke a long silence in March, urging Mexico to support its most important trading partner.

Hector Rangel, president of the Business Coordination Council (CCE) led the way in stating the economically obvious concern of Mexican business: a vote against the United States on the Security Council, while politically popular in Mexico, could have severe financial repercussions. Similar concerns were expressed by leaders at the Mexican Employers Confederation (Coparmex), the Confederation of National Chambers of Commerce (Concanaco), the Bankers Association of Mexico and the Confederation of Industrial Chambers of Mexico (Concamin).

Analysts predicted that cooler heads would prevail when it comes to U.S.-Mexican relations.

"As part of the game, the Bush administration is trying to turn up the heat," Armand Peschard-Sverdrup, an analyst specializing in bilateral relations at the Center for Strategic and International Studies in Washington, D.C., said when the United States was still lobbying for a U.N. authorization of force.

"When everything is said and done, the two countries are so intertwined that there is a reality [in the United States] that you have to live with the country on the southern border and you don't have a choice," he said. "I think it's going to end up tempering some of the high emotions that are coming out."

Prieto also downplayed the potential for diplomatic fallout.

"There are people who think they're going to toss aside the North American Free Trade Agreement," Prieto said. "I don't think it will get that far."

STRENGTH THROUGH OIL

Mexico has made the most financially of the crisis, using soaring crude oil prices to decrease its trade deficit and fortify public finances.

The economic uncertainties provoked by a bellicose United States and a divided United Nations helped drive oil prices to a 13-year high in January, a boon for a Mexican government that derives more than 30% of its revenues from oil.

The good fiscal news was followed by good monetary news in mid-March when Moody's Investors Service changed the outlook for Mexico's currency ratings to "positive" from "stable"--citing the country's fiscal discipline and continued integration into the North American economy.

The shift in outlook means Moody's could soon upgrade Mexico's international credit rating. Among Latin American nations, only Chile currently has a higher rating.

The private sector can be forgiven for not celebrating the news. Oil prices have translated into increased spending on energy, transportation and oil-derived products, forcing industry to cut costs and hone efficiencies.

A sustained oil-crunch, economic experts testify, eventually will force many companies to reduce production, slowing economic growth.

SHATTERED CONFIDENCE

Anemic consumer confidence, meanwhile, has made it difficult for businesses to pass energy increases on to the consumer, according to Mark McGuiness, president of the chemical company Industrias H-24, which is based in the State of Mexico.

The privately held company provides an illustrative example of what some manufacturers have been up against this year. High oil prices have made it more expensive for Industrias H-24 to buy petrochemical raw materials and glass and steel containers, which are energy intensive products.

Meanwhile, Mexican consumers have had little money and scant motive to spend freely.

The dynamic amounts to inflation on the purchasing side and deflation on the sales side of the business--a vicious combination.

"Our philosophy is to try to maintain our cost as low as possible and increase volume," McGuiness said. "But we're going to have to react."

Industrias H-24 sells only in Mexico, limiting the direct impact of the United States economy. Exporters are dealing, however, with a U.S. economy where all major business decisions--from hiring to essential purchasing--have been placed on hold because of the Iraq confrontation.

"I don't know to what extent the U.S. economy can wait out the diplomatic back-and-forth that's taking place," said Peschard-Sverdrup of CSIS. "The uncertainties in this have created an economic slowdown. To some extent the conflict could at least put an end to that."

Take away US$290 million in oil sales, and Mexican exports showed almost no change in January compared with the same month in 2002. The export of manufacturing goods increased by a small fraction of 1% in January compared with January 2002.

Mexico's auto industry, a spectacular engine of economic growth in the late 1990s, reported a 12% decline in exports during the same period.

"Mexico has been able to profit from the price of oil and build up certain reserves," Peschard-Sverdrup said. "This may help it cope with some of the negative aftershocks on the economy. A lot of that will be determined by the duration of the conflict in Iraq and whether there are any kind of reprisals on U.S. territory."

WORRIES OF BORDER LOCKDOWN 

How wartime security measures might affect commerce between the United States and Mexico remains guesswork for many business executives and analysts.

The U.S. Homeland Security Advisory System, the color-coded system of alerts against terrorism devised by the Bush administration, has yet to reach Code Red, the "severe" stage. And the United States has provided no indication of what the highest alert would do to security at the northern border.

A fresh bureaucratic restructuring in the United States might only add to the confusion in the event of a high alert. The fledgling U.S. Department of Homeland Security officially came into being on March 1, merging 21 agencies--including the U.S. Customs service.

The young department is vast, containing about 177,000 people.

An array of analysts have publicly estimated that a border slowdown would only be temporary.

High-level diplomatic fallout remained a possibility as the United States in early March unsuccessfully sought to rally support at the United Nations.

After U.S. President Bush said "there will be a certain sense of discipline" in reference to diplomatic talks with Mexico, the U.S. Embassy in Mexico City quickly issued a clarification, saying the comments did not mean the U.S. will take disciplinary action.

U.S. Ambassador to Mexico Tony Garza told a group of Texas journalists that Bush will remain committed to strong bilateral relations with Mexico. But he cautioned that Congress may not react the same way.

BIGGER ISSUES AT HOME

For the time being, the U.S. Congress rates as a distant concern in Mexico, where the political focus turned months ago to the country's own mid-term congressional elections. Support for U.S. military intervention in a country widely opposed to war in Iraq could spell trouble for Fox's National Action Party (PAN), which suffered setbacks in local elections in the State of Mexico in early March.

The outcome of July elections could decide the fate of Fox's proposals for economic reform that would overhaul outdated laws regulating labor, oil and electricity.

Mexico still faces "daunting development challenges," Moody's warned as it upgraded its currency outlook. And yet the rating service struck a positive final note in its analysis.

"While delays in furthering its structural reform agenda limit Mexico's development prospects, they are not expected to impede the country's continued economic integration with the U.S. economy," Moody's said.

Morgan Lee is a correspondent for the Albuquerque Journal and a Mexico City-based freelance writer.