While the recent financial crisis is still weighing heavy on Mexico, increasing evidence shows the stage is being set for the Mexican economy to make a surprisingly strong comeback.

According to a newly released 1995 Investment Climate Survey by the American Chamber of Commerce in Mexico, planned capital investment by the 374 foreign and domestic firms in Mexico that responded to the survey will increase by 5.1% this year, from $5.9 billion in 1994 to $6.2 billion in 1995. Nearly 91% of all respondents indicated that long-term prospects for growth in Mexico are favorable. Of the American-owned companies surveyed, 95.4% expressed such confidence.

This continuing confidence comes on top of recent trade figures that show a strong correction in Mexico’s previous trade imbalance. The December peso devaluation, along with Mexico’s growing export potential, has resulted in an improvement of more than 120% in that country’s trade balance from January through April, 1995, compared to the same period last year. On December 13, 1994, the peso was worth 3.45 to the dollar. After dropping to more than 7 to the dollar earlier this year, the peso has stabilized at around 6. As a result, Mexican exports have become less expensive and are expanding rapidly. Total Mexican exports to the world are up 32.9% and maquiladora exports are up 20.9%.

As Mexican global exports increase, components and materials used in Mexico’s sizable production-sharing sector are rising commensurably. And since most of Mexico’s co-production components and materials are imported from the United States, U.S. exports to Mexico are also rising—benefiting U.S. business and workers. According to the Mexican Government, maquiladora imports have increased by 33.9% from January through April, compared to the same period last year.

Mexico’s export-led recovery is evident in border towns like Tijuana, the site of the largest number of existing co-production facilities. According to Ciemex-WEFA, an economic research group based near Philadelphia, 160 new plants are likely to spring up south of the Mexican border in the next year and a half. And as these plants begin exporting globally, they will import more components and materials from the United States—strengthening North American competitiveness compared to Europe and East Asia.

Pirouz Pourhashemi, owner of Magnotek Manufacturing, Inc., a Mexican producer of injection moldings and a maquiladora operator, is very confident about what he sees in Mexico’s future. Pourhashemi, who has operations on both sides of the border, says that since the devaluation his exports have increased substantially. Because 90% of his assembly materials are sourced from the United States, he will need to increase his imports from the United States to meet his growing production needs.

The May 1995 production-sharing report published by the U.S. International Trade Commission indicates that Mexico has an advantage in the assembly of products such as electronic components, among others. High-tech companies in California’s Silicon Valley and Orange County tend to choose among co-production sites in cities such as Tijuana, Tecate and Mexicali in the Mexican state of Baja California Norte, or sites in East Asia.

Baja California’s proximity to California allows U.S. plant managers to live in Southern California, and provides for greater operational oversight, faster turnaround, and lower transportation costs than East Asia. These advantages, coupled with Mexico’s competitive labor rates, make for a very attractive manufacturing location.

In addition to growing U.S. investment in this region, Asian companies are also making substantial manufacturing investments in Northern Mexico. Asian investors are helping to transform Tijuana into one of the world’s largest television manufacturing locations. Sony, Hitachi, JVC, Matsushita and Toshiba, five of the eight largest Japanese TV manufacturers, have major assembly plants already located there or plan to begin production in the region. South Korean TV manufacturers such as Samsung and Daewoo also have or are in the process of establishing facilities there. And the Los Angeles Times reports that two Chinese delegations visited industrial parks in Tijuana this year in search of sites for textile and toy factories.

These investments are being spurred by the rules of the North American Free Trade Agreement (NAFTA). Under NAFTA, only North American-made products are accorded duty-free status. Non-North American manufacturers need to produce in North American to satisfy the agreement’s rules of origin. In most cases, a product must satisfy content requirements, and in some cases must satisfy both transformation (which demand specific changes in tariff classifications) and content requirements.

For example, hair dryer parts imported into Mexico from Japan and South Korea will arrive under parts classifications. When assembled with North American parts, the sum of the parts becomes a hand-held dryer. At this point, tariff transformation rules will have been satisfied, but percentage content requirements must now be met demanding that at least 50% of the value of the components originate in North America.

Under this new trade regime, Mexican companies, U.S. companies operating in Mexico and non-North American companies manufacturing in Mexico will source more and more components and products from the United States.

The AmCham Mexico report reflects this growing trend in co-production, as well as the strength businesses see in Mexico’s overall economic fundamentals. The confidence being shown in Mexico’s growth potential by North American and non-North American firms—who continue to establish mutually beneficial partnerships and trade relationships with Mexico—should be a cause for considerable relief on both sides of the border.

This article appeared in The Exporter, July 1995.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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