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The North American Common Market is here.

It's NAFTA or never International trade is never a zero-sum game, however much politicians like to see it that way. CE gathered U.S. and Mexican CEOs to examine how best to net the benefits of economic union among Canada, Mexico, and the U.S.

When Washington and Ottawa signed a free trade agreement in 1989, Mexico's president, Carlos Salinas de Gortari, seized an opportunity: He proposed extending the U.S.-Canadian Free Trade Agreement to include Mexico. The North American FTA, awaiting ratification by the Canadian and U.S. legislatures, seeks to phase out tariffs and restrictions on the flow of goods and services in North America. If an agreement is codified--which seems likely despite judicial hurdles and the clamor for side agreements--it would create a $6 trillion mega-market with 362 million consumers. For North American companies, the agreement is a logical response to the formation of regional trade in Europe and the Pacific Rim and the competitive advantages they entail.

In short, NAFTA will increase jobs and prosperity across the continent and help prepare North Americans to meet the economic challenges that lie ahead. But Mexico, the U.S.' third largest trading partner after Canada and Japan, stands to gain most from NAFTA's ratification. Mexico's GDP is roughly one-twentieth that of the U.S. and about half that of Canada. The U.S. accounts for two-thirds of Mexico's trade, with about 70 cents of every Mexican import dollar spent on U.S. goods and services. Experts say NAFTA will draw to Mexico increased investment not only from the U.S. but also from the EC and Japan.

Mexico began to lower its trade barriers after it joined GATT in 1982. Driven by President Salinas and such liberal-minded cabinet ministers as Secretary of Trade and Industry Jaime Serra Puche, Mexico's economic opening has been rapid and its effects dramatic. The government's budget deficit, which comprised 16.9 percent of GDP in 1982, last year became a surplus of 0.4 percent. Inflation plunged from 200 percent in 1987 to 12 percent last year. Smothered by a tight monetary policy, economic growth slipped from 3.6 percent in 1991 to 2.4 percent last year, and it is projected as low as 2 percent in 1993. But longer term, most analysts maintain, the economy's prospects remain strong. An ambitious privatization program has targeted 70 percent of government-owned businesses: Of some 1,155 state-owned companies thus far placed on the block, 972 already have been cut loose from the state's moorings, while the remainder have been authorized for divestiture.

The list of changes continues: Mexico has eliminated import licensing requirements on 98 percent of its categories, and it has pledged to press on toward 100 percent. In 1983, all imports were subject to government approval. Critically, the Mexican economy has diversified: Today, oil comprises 30 percent of exports, compared with 80 percent in the mid-1980s. But perhaps most important, Mexico has dismantled barriers to foreign investment. As a result, direct investment more than tripled to $50 billion last year from $15 billion in 1986.

On the U.S. side, several studies have attempted to gauge NAFTA's potential impact. According to the International Trade Commission, real income of skilled and unskilled American workers will rise. Not without some cost: Gary Hufbauer of the Institute of International Economics--on whose study the ITC leaned heavily--projects a loss of about 145,000 jobs by 1995. But consider the flip side: Hufbauer expects a gain of 461,000 jobs for a net gain of 316,000 during the period . There's also somewhat of a rebate effect to any jobs or income "lost" to Mexico: According to a study by MIT, Mexico spends 15 cents of every additional dollar of income on U.S. goods.

Some U.S. business sectors--including automotive--stand to profit more than others from NAFTA. Over the long haul, Detroit views Mexico as a high-growth market, and it believes the Mexican auto industry may become part of an integrated North American machine that would than hold its own against Asia. But are growth opportunities to be found in other areas, as well. Heavy equipment giant Caterpillar's 1990 exports to Mexico generated work for about 2,700 U.S. employees--900 employed by Caterpillar and 1,800 by its suppliers from Pennsylvania to Illinois. Office furniture maker Haworth increased shipments to Mexico tenfold in the last two years. Under NAFTA the maximum 20 percent tariff on furniture will be eliminated, likely driving further expansion for the Michigan-based company.

For the U.S., then, the choice is not whether to keep jobs or "export" them to Mexico. The real question business leaders must ask themselves: When jobs migrate, aren't they better kept on the continent? To determine how best to capture the benefits of a consolidated North American market, CE assembled a group of U.S. and Mexican chief executives at the Casa de Sierra Nevada resort in historic San Miguel de Allende. (There were no takers among Canadian CEOs.) Also attending were Jaime Alatorre, president of the Mexican Investment Board; and Alvaro Rebollo, former general director of the privatization office, now the secretary director general of Banobras.

The consensus: Free trade will move ahead with or without NAFTA. Mexico will continue to experience growing pains, but growth will proceed apace. And for U.S. companies--particularly for those patient enough to learn the culture and develop relationships--opportunities abound.

BACK ON TRACK

Jaime Alatorre Cordova (Mexican Investment Board): Ten years ago, Mexico faced bankruptcy. At that time, the cry went up to reduce the scope of the government, open the economy, and change the pattern of development. Slowly but surely, we have done that. Most Mexicans doubted the new economic program would yield good results. But fortunately, we have some persistent leaders.

Everything we did was aimed at restoring outsiders, confidence in doing business in our country. Wary Mexicans didn't invest in Mexico in 1982, and foreigners didn't put in any money either. Essentially, our program helped us ease the hangover caused by bad debts.

We renegotiated the foreign debt, then we started reducing the budget deficit and inflation. Finally, we decreased our dependence on imports and enhanced our status as an exporter of manufactured goods.

Foreign debt as a percentage of gross domestic product has fallen dramatically from a peak of 78 percent to 30 percent. Domestic debt is about 13 percent, so total debt is now 43 percent. We aim to bring that figure down to 30 percent: 20 percent on the foreign side and 10 percent on the domestic side.

Alvaro Rebollo Lopez (Banobras): The financial deficit was reduced from 16.9 percent of GDP in 1982 to a surplus of 0.4 percent in 1992, though the actual figures show a surplus of 3.4 percent once the privatization proceeds are added.

Alatorre: During this period, our personal income tax was a sky-high 55 percent, and everyone did their best to avoid paying it. Finally, the government made a deal with the public: The tax rate will go down 20 points, it told them, if you start paying taxes. People loved the lower tax rate, even if they didn't love the idea of paying taxes. But after a few people you knew were thrown in jail...[Laughter.]

In addition, once the government stopped subsidizing unprofitable companies, Mexicans felt it was their obligation to pay taxes, because the government wasn't wasting its money.

Rebollo: Aeromexico was a particular drain on government coffers. When Salinas campaigned for president, people asked for housing, hospitals, and basic infrastructure. No one asked for better airline service or more flights. Nonetheless, the Mexican government invested over $2.7 billion over 25 years in Aeromexico, one of the national airlines. Only 2 percent of the Mexican population travels by air. For half of the resources the government spent on the airline, it could have provided water and services to Mexico's southeastern states.

Alatorre: Aside from cutting subsidies, the government has reduced inflation substantially. Between January 1987 and January 1988, inflation was in the neighborhood of 200 percent. The goal of the Mexican government is to bring inflation below 10 percent. Last year it was close [12 percent], but didn't quite hit the target. Some private organizations think that this year inflation is going to be between 8 percent and 9 percent.

The average tariff was around 28 percent in 1982. A decade later, it was 13 percent. The effect of NAFTA on trade-related issues is not going to be substantial because as today's tariff of 10 percent on products is phased out over the next 10 years, the sum comes to 1 percent per year. That's not the same as bringing it down from 100 percent to 10 percent.

Mexico has been importing a great deal recently. Our trade balance is really an imbalance. On the other side of the ledger, the way Mexico changed the composition of its exports over the last decade is interesting. All the numbers, all the expectations, all the plans for the future in the early 1980s were based on two things: low interest rates and high oil prices. So bankers came to Mexico to lend us money at low, long-term, dollar-based interest rates. It seemed like a good ideal. But suddenly, the situation turned around, and we had low oil prices and high interest rates. In 1982, 80 percent of Mexican exports were oil-based, while 10 years later the number was only 30 percent. The total volume of exports for many years remained the same, but as the price of oil kept going down, substitutions were made.

Mexico has opened the door to its markets, both in investment and in trade. Today, 100 percent foreign ownership is possible in 75 percent of the economy. Once the free trade agreement is approved, this number will jump to 85 percent or 90 percent. Remaining protected for now will be some natural resources sectors, including petroleum.

PRIVATE LIVES

Rebollo: Aside from reducing inflation, jump-starting investment, and cutting the deficit, the Mexican government faced another major project: privatizing its businesses. As of December 1982, the government of Mexico had acquired 1,155 companies, including a bicycle shop and a soccer team. By March 1993, 972 companies had been divested, and 55 more were in the process.

When necessary, the government also has pursued alternatives to divestiture. A company is liquidated if it is not profitable or if its objectives have been fulfilled. Companies are merged whenever the direction of these companies permits a better use of government resources. A company is transferred to state and local government whenever these enterprises are considered a priority to their programs.

Of the 972 proceedings that have been concluded, 466 companies were liquidated, 309 sold, 89 merged, 35 transferred, and 73 divested by federal law.

Jeffrey L. Morby (Mellon Bank): Do you use the same privatization process every time?

Rebollo: We began by selling the smaller companies. You can make a mistake selling a bicycle shop, but you can't selling Telmex or an airline. The sales procedures resemble those of a closed auction. However, federal law established that the organized workers of a state-owned company have the right of first refusal on any proposed transaction, that is, the right to acquire a firm by matching all the conditions of an outside offer.

The process works like this: The ministry under which a company is regulated explains the reasons it should be sold. Then the proposal goes before a public spending commission, which authorizes the company to begin the privatization process.

Next, the Mexican Secretary of Finance becomes the president or the chairman of the company's board. The Finance Ministry appoints a financial agent, a Mexican commercial bank, which prepares a profile of the company and a sales prospectus. This information is given to prospective buyers, a meeting is arranged, its date is puBlished in the major newspapers, and a deadline is set to make a deposit. After a closed auction, the financial agent reviews all the bids, and gives his or her recommendation to the government's privatization office. Ultimately, the matter goes back to the commission, comprised of representatives of five ministries, for a decision.

Morby: Do you always pick the lowest bidder, or are there other criteria?

Rebollo: Good question. We may reject a high bid if it has conditions attached-such as closing the company and firing all the employees.

The conditions the buyer must adhere to usually involve presenting a short- and long-term investment plan on technology and training to modernize the company.

The revenues from the privatizations have been used to reduce government outlays and debt. In fact, debt has been decreased by approximately $7.2 billion, and the net sales proceeds from the privatization process are close to $21.4 billion.

J.P. Donlon (CE): What happened to the other $14 billion?

Rebollo: Part of it is used by the Central Bank to give stability to the exchange rate. The government can use the money to buffer the impact in the public sector revenues of the increase in U.S. dollar reserves held by the Central Bank, such as a drop in the international price of oil, and also to sell dollars in the open market in order to push down prices in the face of an increase in the demand for dollars. Some of it went to a social program called Solidarity, which provides infrastructure and services to the needy.

But there are other payoffs to privatization. By March 1993, the number of government-owned entities was slashed to 214 from 1,155. Among the most important companies and businesses sold were Telefonos de Mexico, Mexicana de Aviacion, sugar mills, commercial banks steel plants, and fisheries.

Charles T. Russell (Visa International): What's next to go on the block?

Rebollo: We are now in the last phase of the privatization process. I compare the process to going on a diet. The Mexican government was fat--it had many companies. It slimmed down, but you cannot go on a diet forever. We will stop before the end of this year. The large companies still to be sold include the insurance company, Aseguradora Mexicana, along with a package of entertainment companies. We also have toyed with the idea of privatizing airports. But that proposal is still under review.

It is difficult to measure any improvement in efficiency and productivity of enterprises recently sold to the private sector, because they've only been on their own for a short while. But preliminary statistics are revealing: Over the past two years, the work force has increased 3.4 percent at privatized companies, while capital investment is up 246 percent, and spending for personnel training rose 120 percent.

Another impact of the divestiture process can be seen in the sharp reduction of subsidies and transfers from the federal government to business from a peak of 12.7 percent of GDP in 1982 to 4.2 percent in 1992. In 1989, real interest rates were on average about 40 percent. They are now around 5 percent.

On May 16, 1989, the Mexican government published new regulations on foreign investment, providing greater certainty, stability, and transparency. In 58 sectors, a long-standing 49 percent limitation on foreign ownership was eased to 100 percent. Investor reaction was immediate and impressive: Between January 1989 and June 1992, new foreign direct and portfolio investment amounted to $29.7 billion.

Felipe Cortes (Hylsa): On the monetary side one plus is that the government eliminated price controls that accelerated the opening of the economy. Now we only have to worry about competing with the world outside. The specter of devaluations and inflation is gone. In the case of my company, productivity has doubled in the last five years. In the same period, our price have come down 50 percent in constant pesos.

GOING TO MARKET

Alatorre: "Why come to Mexico?" a prospective foreign investor may ask himself. According to the latest evaluation by the Organization of Economic Cooperation and Development, Mexico has the world's 13th largest economy. It has the 10th largest potential consumer base. Some 83 percent of its 86 million people is under 40 years old. Our baby boomers are between 5 and 10 years old. This mass of people soon will enter the work force. So, if GDP keeps expanding, and Mexico keeps expanding its purchasing power, its consumer base will be juicy.

Richard T. McNamar (Oppenheimer & Co.): Mexico has the second highest per capita consumption of soft drinks in the world, topped only by the U.S. That's a heck of a market. And in 10 years, those kids are going to be drinking beer, so the beer market will continue to grow here. Morby: American and other foreign companies also will be led to Mexico in their search for competitive advantage.

One reason: All of the older manufacturing companies, such as Caterpillar and Navistar, had large numbers of employees, but they've downsized. And now they face enormous pension fund liabilities. So, even though these companies have revamped the way they manufacture their products, costwise they simply cannot compete in the U.S. So a lot of these companies might take advantage of the labor situation in Mexico.

Alatorre: With that in mind, let's talk about labor costs and productivity. There is a big difference in the per-hour labor cost between Mexico and the U.S. or Japan. But the comparison is not fair if we don't factor in Mexican productivity, which compares favorably with other developing nations but still lags that of the economic superpowers (see productivity graphic, this story). According to the World Competitiveness Report, published by the World Economic Forum, Mexico still comes out ahead in terms of labor costs when productivity is considered, but the difference is reduced. So the ratio with Japan of 6-to-1 is probably closer to 2-to-1. And with the U.S., it's reduced to 3-to-1 from 7-to-1. Obviously, we still have room to improve our labor costs and remain competitive, but we have to do it along with productivity gains so as not to lose our edge.

Meanwhile, there's another advantage to moving to Mexico: product quality. Most people don't think "Made in Mexico" means much, but we're changing that perception fast. The quality charge has been led mainly by multinational companies and by blue-chip businesses based in Monterrey. General Motors and Ford now say their best engine plants are in Mexico.

James J. Darazsdi (Rocco): The demographics you cited before mean that many people soon will enter the labor market at the current, low, hourly wage. How will Mexico manage that problem?

Alatorre: Mexican wage rates have started to creep up recently, but slowly. And with the abundance of labor entering the pool, that will remain the same for a number of years. We have to create over a million jobs annually in the years to come, but we'll never be at full employment. We aim to raise wage rates, but in the short term that may not be possible. Look at the situation in Germany. Labor costs are much cheaper in Eastern Germany or Poland, so businesses are moving some of their more labor-intensive operations to the Eastern side, because a company just can't survive if it has to pay a worker $21 per hour.

If a lamp is produced by a company in Germany and Mexico, it costs 40 percent less here, even though it requires the same number of workers. The factory overhead and depreciation are the same; the big differences are in the areas of labor costs and raw materials. Of course, that is partly offset in Mexico by higher packaging and transportation costs.

ABCs OF MANAGEMENT IN MEXICO

Donlon: What about the comparative education and skills of Mexican workers? Roberto Barto Lowry (GE Lamparas): For many years at my company, GE's lighting products subsidiary in Mexico, our culture taught us to do one job and one job only. In GE's 23 Mexican plants, it has tried to improve the flexibility in the mind-set of the laborer, and the endeavor is working. We have improved productivity, because learning new jobs removes some of the tedium from the work. Our employee are willing to learn, and we split the cost of training time--half of the time is their own, half is the company's. There is interest in learning new skills and learning to do things in a different way.

Lawrence W. Leighton (UI USA): How much progress have you made?

Barto: People are more trainable, though that's tough to quantify. I guess how trainable they are depends on the quality of your search and screening process, and on your human resources policies. In the past, a lot of problems that were blamed on lack of education were really more related to inadequate recruitment procedures that did not clearly target the kind of people companies wanted. But the people are there. They're quick learners, and they're willing to go the extra mile.

Donlon: What about absenteeism?

Barto: In GE's case, it is vastly improved from five years ago. Absenteeism is no longer a major issue. People are beginning to understand they're not getting paid for warming a seat but rather for accomplishing something. Now they care about the company; before they just held a job.

Jorge Cortina del Valle (Asociacion de Con sultoria Tecnologica We are starting to implement the concept of teamwork. Our workers don't have a foreman controlling them; by and large, they're self-directed. We provide training courses that employees take on their own time. When they finish one--and they think they are prepared to do another type of work--we test them. If they pass, we pay them more, in some cases, even if they keep doing what they were doing before. We pay them for their increased capabilities.

Alatorre: We haven't yet touched on the labor situation. Ten years ago, Mexico had strong syndicates and labor unions, but most now have a different attitude. In the past, union leaders fought for fewer working hours and higher wages. Today, they are more focused on productivity and on training. They changed their tune after they were forced to work the same number of hours for less money during "la crisis, between 1982 and 1986, when debt soared, and the peso plunged.

Here's an example: One of Mexico's strongest unions is that in the phone company. It would threaten to strike every year. But nowadays, the phone company has one of the most progressive labor unions. Why? The employees were made shareholders. They are allowed a 4 percent share of the company. The government provided the union with the credit to enable it to buy the shares.

CULTURE SHOCK

Donlon: What must a foreign company know to successfully crack the Mexican market?

Cortina: Mexico is full of surprises. So if you come with the ability to improvise, you will succeed. But if you come and say, "Goddamn it, this should not be," you're going to end up having a heart attack.

Perhaps most important: Meet people who know the turf. There are tricks they can teach you--things you never learn in Harvard Business School.

Barto: You can't come to Mexico expecting things to work the same way they do in Canada or the U.S. or Germany or Japan. In some regions of Mexico, employees never will stop taking two hours for lunch. However, there's a trade-off: They will work until 10 p.m. or 11 p.m. Managerial effectiveness and productivity are not necessarily hampered by what appears to be cultural disorganization.

The Mexican decision-making process follows a logic that is different than that elsewhere. It's not wrong, otherwise Mexican companies wouldn't be among the world's largest in cement, glass, and communications. Outsiders who come to Mexico have a learning curve. If they insist on doing things their way, they're in trouble. If they come with an open mind, they're going to enjoy a shorter learning curve, greater productivity, and the support of their management team and their peers.

Our chairman, Jack Welch, has applied an interesting philosophy: Anticipate change. Don't assume everything will be run the way it is at home, because that won't happen.

STRATEGIC COMBINATIONS

Cortes: One way to manage change is to pair with a local partner. Our parent company, Alfa, has about 13 joint ventures--including ones with Du Pont, Amoco, and Ford--and I manage most them. These joint ventures have succeeded, because the partner brings the technology, and the Mexicans provide the know-how to manage the company on a day-to-day basis.

Alatorre: Look at GE's success with joint ventures (see graphic, this page). It used to manufacture different lines of refrigerators and gas ranges in Mexico for the Mexican market. It decided a few years ago to a venture with a Mexican company to produce gas ranges for the North American market. It worked so well that by next year, every GE gas range you buy either in the U.S. or in Canada will be made in Mexico.

GE also provides a case study in another requirement for success in the Mexican market: product customization. GE used to produce different lines of refrigerators in Mexico, but now the company only makes the one-door refrigerator here, because that's the only one that sells. It makes a better, two-door model in the U.S. and in Canada, because you all like two doors and cold water and ice for your martinis.

Darazsdi: Probably the single biggest surprise I had in the joint venture we started in Mexico was discovering the importance of social relationships. Once the join ventures we have with U.S. companies get started, I bow out. In our Mexican joint venture, however, there needs to be a continuing contact between myself and the other CEO. I don't know if that's peculiar to my situation or if it's indicative of joint ventures in Mexico.

Alatorre: It's not peculiar at all; there's a particular protocol at work in most U.S.-Mexican joint ventures. The CEO or the chairman of the Mexican company expects to be received by his counterpart at the U.S. company, even though the venture might represent a small percentage of the U.S. firm's total operations.

You have to invest a little bit of time, otherwise the deal will go sour.

Donlon: On the flip side, what do Mexican CEOs and senior managers have to change to integrate their companies in the new North American market?

Alatorre: I think Mexicans are relatively familiar with the American way of doing things, because many Mexicans go to school in the U.S. and work in American companies. In addition, because so many American companies have active joint ventures in Mexico, the exposure of Mexicans to U.S. ways is great, and an acculturation process is well underway.

Still, some changes will come. One of the things we have to do in Mexico during the next 15 years is to transform our businesses from being family-oriented and operating without partners or with only a minor partner that owns 40 percent or less of the business--to businesses that can accept a role as a minority partner. Foreign investment will flow to an opening market--Mexico must learn to accept reality.

Donlon: Do you think Mexico will always retain its business culture or will it become "less Latin"? Will recent economic developments help to forge a new North American business culture?

Barto: I don't think so. I don't think the French are less French or the British less British after 12 or 15 years of the European experiment.

I've had meetings in England, where if I'm five minutes late, the meeting's over. If I go to Italy, and I'm half an hour late, I still have to wait. I'm not sure there's going to be a change in the basic ways of doing business or making decisions.

CREATING A FRAMEWORK

Morby: We haven't spoken yet about Mexico's need to improve its infrastructure. This doesn't come under the heading of what Mexico needs to learn as much as what it needs to do to come up to speed. But it's important nonetheless. Are there any joint studies being done to determine how to improve the North American infrastructure?

Alatorre: We recently held a privatization summit at which 300 people in charge of areas such as water distribution, housing, and electricity gathered to discuss the issue. Furthermore, there's going to be a meeting in Aspen, CO, called by the Aspen Institute, to analyze the problems of financing the infrastructure for the next 20 years--for Mexico, the U.S., and Canada.

We have to identify the regional priorities. That's no simple task. I'll give you an example. We have to develop a port in western Mexico. In 10 years, that port will be competing with Los Angeles. It" not easy for us to determine which ports should be developed and which should not. In some ways, the creation of a North American market makes our life more difficult.

Morby: The location question also holds true for roads and bridges, power lines and cable systems.

Darazsdi: It doesn't sound to me like roads are going to carry a high priority, even though your baby boomers are going to start driving soon, and you already have a tremendous problem with the traffic situation in Mexico City and other urban areas.

Alatorre: Mexico City has gone more toward mass transportation--the subway systems--than roads. Maybe our next step has to be dealing with roads again.

A.T. McLaughlin Jr. (Dick Corp.): Funny you should mention that. My company builds roads. Our analysis has indicated that for the time being, the Mexican government thinks it's built enough privatized toll roads to handle the traffic. It wants to fix some road problems in Mexico City, but so far, we haven't heard of a big program that's in the works. To the contrary, our people have been told there won't be a big opportunity in the near future.

Alatorre: Then there's the problem of financing. Many of our roads operate like concessions. A company tells the government: "We want to build a toll road; we'll turn it over to you in 15 years." The problem is that there isn't enough traffic to reap a profit. Many truck drivers find alternative routes so they don't have to pay the tolls--which are expensive. I think the road from Mexico City down to Acapulco carries a toll of $79.

McLaughlin: This system does not price competitively. Instead, the company determines the income stream it needs to reap a profit and sets the price accordingly. Of course, this will not work. The traffic will go the other way.

This is especially true for trucks, because I sense that truck drivers can keep the money they don't spend on tolls. The way to resolve that would be to issue "scrip" in lieu of cash to the truck drivers to pay for tolls.

NAFTA NOTIONS

Donlon: Let's switch gears and talk about NAFTA.

Alatorre: How do these numbers strike you: a 56 trillion mega-market with 362 million consumers and $225 billion in total trade?

Morby: NAFTA will have a short-term impact, but a long-term benefit. The net result will be a larger market, more rational allocation of labor, better products, and lower costs for the North American population as a whole.

However, as we mentioned earlier, the tariff reductions will not have as substantial impact as might be expected, because as today's tariff of 10 percent on products is phased out over the next 10 or 15 years, the incremental progress comes to 1 percent per year. That's not the same as bringing it down from 100 percent to 0 percent.

Alejandro J. Legoretta (Grupo Panamericano): NAFTA provides a bridge between Mexico and the U.S. and Canada for foreign investors. Now that the Mexican economy is open, we find that we have to become more competitive, because we can't rely on subsidies anymore. We need to form alliances with foreign investors to maintain our competitive edge.

Donlon: Will NAFTA widen to include blocks of countries in South America?

Rebollo: I think eventually more Latin American countries will join NAFTA. It will be good for everybody. The U.S. and Canada will have an expanded market without having to worry about the closing of the market in Europe and the problems in Asia.

McNamar: There is a model that we might study: the free trade union of Colombia and Venezuela, which went into effect last year. Nobody had high expectations for it, but the pact has turned out to be phenomenally successful. Inefficient Venezuelan textile factories close down, because the Colombian factories are so much better, so Colombian textiles now go to Venezuela. Enormous amounts of oil and service equipment flow into Colombia from Venezuela, where the companies are better.

CLIMBING THE HILL

Russell: NAFTA seems to be in trouble. A U.S. federal judge has ruled that the environmental impacts of the agreement must be studied before anything is signed. An appeal is allegedly in the works, but if the sky should fall in on NAFTA, how will that affect Mexico?

Rebollo: President Salinas has said that with or without the trade agreement, Mexico will have to continue improving its economic situation. Even so, if NAFTA falls apart, that definitely would affect the creation of jobs and the country's ability to attract foreign investment.

McNamar: NAFTA is in serious trouble. President Clinton is going to have a health-care proposal on the Hill soon. It may or may not have a value-added tax with it. He's also trying to get his economic package through. These proposals are going to clog up the system: The president simply has too much legislation on the Hill. Making compromises on NAFTA is relatively easy to do unless there's a strong constituency that supports the agreement And I haven't seen one come forward

Alatorre: That may change: The business support is just now starting to move. I think the Mexican government has to lobby for the passage of NAFTA by harnessing those people who attend meetings such as the one in Aspen I mentioned before, and by utilizing their corporations and political connections in the U.S.

James J. Sprowls (Bozell): Free trade will go forward regardless of NAFTA. If you don't believe that, just look at the track record of trade between Canada, Mexico, and the U.S. over the years. Some major companies of all three countries are already working well together.

Cortina: Free trade will go forward, and so will Mexico. We have more cheap labor, substantially lower administrative costs and insurance rates, and high interest rates. The combination has attracted substantial foreign investment--when the foreign banks start giving loans in hard currency, there is going to be a lot more.

In addition, the government is taking steps to avoid repeating its protectionist mistakes. The march toward open markets is irreversible. If there were any backpedalling, we'd have another revolution.
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Title Annotation:CE Roundtable; North American Free Trade Agreement
Publication:Chief Executive (U.S.)
Article Type:Panel Discussion
Date:Sep 1, 1993
Words:5827
Previous Article:Using compensation to court commitment.
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