Topic Category: Economy

In response to the global crisis, many countries are implementing reforms to bolster their economies. For several nations, this will lead to sustainable growth. However, in the short-term, some economies will continue to experience difficulties.

To help you reassess export markets, source goods or seek investment opportunities, you should factor in country growth projections. This is because healthy or increasing growth often results in robust demand, while decreasing growth frequently leads to lower priced products and attractive investment opportunities.

Growth Differs Markedly

In 1999, world growth is anticipated to meet last year’s expectations of 2.2% GDP, and rise 3.5% in 2000, according to the International Monetary Fund (IMF). But not all economies will move in the same direction.

Growth of advanced economies is expected to decline slightly to 1.6%, while increasing to 3.5% in developing countries. Imports, on the other hand, are expected to remain the same in advanced economies, but jump significantly in developing markets.

European Union Growth Sound

The Organization for Economic Co-operation and Development (OECD), projects the European Union to achieve solid growth of 2.2% and 2.5% GDP in 1999 and 2000, respectively.

Although slightly lower than last year, the IMF estimates 1999 growth to reach 2.6% in France, 2% in Germany, and 1.9% in Italy. The UK’s GDP is projected to achieve .9%, the lowest in the EU, but begin improving in the second half of the year.

Eastern European Direction Mixed

Central and Eastern European GDP growth is expected to hit 2.2% this year, slightly lower than 2.5% estimated last year, according to the IMF. Hungary and Poland have fared well, and both economies are anticipated to grow approximately 5% this year. However, Russian GDP, which is expected to fall again, this year by 8.3%, has dragged down the regional forecast.

In addition to concerns over reversing the reform process, Russia continues to lack the economic, financial and political policies that will restore investor confidence.

Western Hemisphere GDP to Dip

Canada primarily has been impacted by the decline in commodity prices, especially forest products, coal and base metals. Nevertheless, the IMF projects Canada’s GDP growth to reach 2.2 % in 1999.

Brazil’s devaluation of the real is creating instability that will result in lower growth projections for the region. Prior to this, the IMF projected Argentine GDP growth to reach 3%. And Chile’s economy, which has suffered a deterioration in its external accounts, mostly due to lower world commodity prices, was estimated to reach 2% GDP growth.

According to the IMF, the Mexican economy, which is stinging from lower oil revenues, is anticipated to hover around 3.5% growth this year. However, by 2000, its GDP growth is projected to exceed 4%.

Asia on the Mend

Asian growth is expected to jump from 2.6% in 1998 to 4.3% this year. Indonesia, Malaysia, the Philippines and Thailand, all negatively affected by the crisis, are expected to rise from the ashes, reducing double-digit negative growth to -1% this year. India and China are expected to top 4.8% and 6.6% growth, respectively.

Japan’s ability to strengthen its financial infrastructure is uncertain. Thus, its growth projections hover around 0%, showing minimal improvement in the year 2000.

What began last year as a financial crisis in one country has led to global financial turmoil today. In order to successfully navigate these uncharted waters, U.S. exporters need to develop finance strategies to retain existing customers, and explore new markets here and abroad.

The Dominoes Fall Harder

A decade ago, the currency collapse in a developing country barely would have been felt in the United States or elsewhere. Today, however, the impact has profound consequences.

In 1995, Federal Reserve Chairman Alan Greenspan said that the highly efficient and increasingly sophisticated international financial system “has the capability to rapidly transmit the consequences of errors of judgement in private investment and public policies to all corners of the world at historically unprecedented speed.”

This was exemplified by the Mexican peso crisis, which was ignited on December 20, 1994. What began as a short-term liquidity problem quickly sparked panic and resulted in the fall of investor confidence, followed by a precipitous drop in the Mexican stock market.

Perceiving that the crisis would erupt in other developing countries sharing similar economic and political characteristics, investor fear spread to Brazil and Argentina. As a result, their stock markets also fell, along with those of other developing countries worldwide.

Asian Crisis Fallout Continues

Having surveyed the tornado-like path produced by the Mexican peso crisis, it appears that the Asian crisis, although more severe, is following a similar course.

The financial problems that began in Thailand in 1997 quickly have spread throughout East Asia. They have added to the severe economic difficulties experienced by Japan in recent years, and have put pressure on China to devalue its currency in order to remain globally competitive.

The Indian subcontinent has not been spared. Poor East Asian economic performance has closed export doors for Pakistan, a country experiencing debt problems. India, too, is facing economic difficulties.

The Impact on Russia

Believing that too many eggs in the emerging market basket is risky, many global investors have pulled their money from Russia.

This has resulted in a downturn of the Russian stock market, the devaluation of the ruble, and increased fears of default on foreign debt by the Russian government and domestic banks. These events have compounded the country’s economic troubles caused by the failures of central planning and the dissolution of the Soviet Union.

In an attempt to stabilize the economy, retain existing investment and attract new funds, newly appointed Russian Prime Minister Yevgeny Primakov recently said Russia intends to meet its domestic and foreign debt obligations, and continue with free market reforms, with some modifications.

Although Russia’s economy is relatively small and has minimal impact on capital and trade flows, it has exposed economic vulnerabilities not only in Eastern Europe, but in other corners of the globe, as well.

Latin America and Canada Feel the Pain

The fallout of the Russian crisis is now being felt in Latin America. Venezuela and Brazil’s currencies are under pressure and stock markets throughout that region significantly have decreased in value.

As prices for commodities fall, resulting from lower world growth forecasts, countries rich in natural resources are feeling the pinch. Depressed oil prices are impacting Venezuela and Mexico, which rely heavily on oil export revenue, while Chile and Peru are hurting from the drop in copper prices. And, Argentina is marred from the fall in agricultural prices.

Even the Canadian economy is affected, primarily due to its exposure of forest products, coal and base metals. Other developed countries sharing these difficulties include Australia and New Zealand.

Creative Finance Is Required

Due to the Asian financial crisis, many companies located in impacted countries are finding it difficult to obtain financing for their purchases. In an attempt to continue exporting to these customers or to attract new buyers, U.S. exporters need to offer longer and more flexible terms. In order to limit your risks, consider utilizing export credit insurance or government guarantees.

Explore New Markets

To compensate for declining exports resulting from the financial turmoil, consider tailoring your product to satisfy the needs of new foreign markets.

Sound economic structures in Canada and the European Union should keep the crisis from doing real damage there. Durability derived from newly enacted reforms in Latin America will likely deter severe fallout. Consequently, these export destinations should remain relatively vibrant.

Also, consider domestic markets in which you’re currently not selling. For instance, from 1996 through 2020, the world’s elderly population consisting of those age 65 and over, will rise almost twice as fast as school or working age groups. You may wish to cater to the tastes of this fast-growing U.S. and world market segment.

Carefully Analyze the Opportunities and Risks

With change comes opportunities—and risks. Whichever strategy you choose to pursue, be sure to analyze the short- and long-term ramifications, and balance the potential rewards with the risks.

There’s no doubt that exports are very important to the growth and prosperity of the United States — and to companies like yours. However, succeeding internationally in today’s rapidly changing global environment is not easy.

Economic conditions, government policies and the level of confidence in a given currency can change rapidly. Successfully adapting to these changes is not only important — it’s vital.

The Mexican economy is making solid gains as it recovers from the financial crisis that struck it in December 1994. The country’s gross domestic product grew by 5.1% in 1996, and climbed at an impressive annual rate of 7% during the first six months of 1997— well above expectations and quite an achievement from its 6.2% decline in 1995.

As the economy continues to expand, Mexican trade and investment opportunities will grow.

U.S. Exports to Mexico Are Rising

U.S. merchandise exports to Mexico have risen significantly. In 1996, they reached almost $57 billion, a 23% increase since 1995, with 44 out of 50 U.S. states experiencing export growth.

And as the demand for U.S. products has grown, the Mexican share of U.S. world exports has become quite impressive. For example, Mexico now accounts for 10% of U.S. worldwide exports of agricultural crops; 23% of U.S. apparel and other textile products; 21% of rubber and plastic products; 17% of fabricated metal products; and 13% of electronic and electric equipment.

Despite the recession, increases in sectorial bilateral trade have also become significant. From 1993 through 1996, U.S.-Mexican automotive bilateral trade jumped 185.6%; textile and apparel trade increased by 119%; and agricultural exports plus imports rose by 44%, benefitting both U.S. and Mexican businesses.

The prospects this year are even better. In the first four months of 1997, U.S. exports to Mexico virtually equalled U.S. exports to Japan — the second largest American export market — even though Japan’s economy is 12 times larger than Mexico’s.

Best Export Prospects

The 10 top U.S. exports to Mexico are:

• Automotive parts and equipment
• Franchising services
• Building products
• Pollution control equipment
• Chemical production machinery
• Telecommunications equipment
• Apparel
• Management consulting services
• Aircraft and parts
• Electronic components.

Florida Exports to Mexico Are Also Up Significantly

Exports from Florida also performed well. During the second quarter of 1997, Florida’s exports to Mexico jumped 27%, compared with the same period in 1996, and reached $225 million. By industry, Florida exports that performed exceptionally well included: apparel and other textile products, which increased 130.1%; industrial machinery and computer equipment, 100%; transportation equipment, 97.3%; food and kindred products, 89.5%; textile mill products, 57%; and electronics and equipment, which expanded by 42%.

NAFTA Three Years Later

The task of isolating the economic effects of NAFTA after a little more than three years of operation is challenging. While Mexico’s tariff cuts have been substantial, its market-opening rules are not fully phased in.

The challenge is compounded by several significant events that have directly affected trade flows. These were: the strong performance of the U.S. economy, Mexico’s financial crisis since the 1930s, and the implementation of tariff cuts by the United States agreed to in the Uruguay Round and implemented in the World Trade Organization (WTO).

Nevertheless, according to a recent study released by the Clinton administration, “NAFTA had a modest positive effect on U.S. net exports, income, investment and jobs supported by exports.” This conclusion is shared by several other studies.

NAFTA’s Effect on Mexican Trade Barriers

Under NAFTA, Mexico has reduced its trade barriers on U.S. exports significantly and dismantled a variety of protectionist regulations. Before NAFTA was signed, Mexican tariffs on U.S. goods averaged 10%. Since then, Mexico has reduced this by 7.1 percentage points. This has increased the attractiveness of U.S. goods over European, Japanese, and other foreign country products.

In comparison, U.S. tariffs on Mexican goods averaged only 2.07% and more than half of Mexican imports entered the United States duty-free. Since then, U.S. duties have come down 1.4 percentage points.

NAFTA’s Effect on Key Sectors

Since NAFTA went into effect, U.S. suppliers have seen their share of Mexican imports grow from 69.3% to 75.5%. The greatest gains are in textiles, where the U.S. share has increased 17.2 percentage points to 86.4%; the transport equipment sector, which gained 19.2 percentage points to 83.1%; and the electronic goods and appliances sector, up 7.5 percentage points to 74.3%.

Weigh All the Factors and Know the Risks

Before entering or expanding into any country, it’s important to ask the right questions — and understand the risks. For example, should you adapt your product to better suit Mexican needs? What are the currency risks? How will you get paid?

It’s important to know the answers to these and other questions, and to understand the factors that could mean the difference between a business success or failure.

The Mexican economy is continuing to grow, recovering from the peso crisis that struck the country in December 1994. As a result, growth projections for 1997 are positive. The government of Mexico anticipates a gross domestic product (GDP) growth rate of 4 percent this year. According to the Mexico Consensus Economic Forecast of Arizona State University, private growth estimates range from 3.7 percent to 4.8 percent, averaging 4.3%.

Mexican Sectors Are Registering Sound Growth

Many Mexican sectors registered sound growth through 1996 and are continuing to expand. The Mexican manufacturing industry, for example, registered strong growth last year, led by the automotive sector, textiles, and the basic metals sector.

The transport and telecommunications sector also demonstrated upward trends, especially during the second quarter of last year. Financial services began to come alive during the April - June period, although banks and debtors continue to incur problems that drag the sector down. And commerce and construction both picked up in the second quarter, a sign that domestic demand is recuperating.

U.S. State's Export Growth Is Positive and Diverse

The growing Mexican economy, combined with tariff reductions and other benefits derived from NAFTA, have resulted in a healthy increase in U.S. exports there. Thus, U.S. exports to Mexico increased 22 percent in the first nine months of 1996, compared to the same period in 1995. This follows increases of 12.1 percent and 18.6 percent in the first and second quarters of 1996, respectively.

According to the Massachusetts Institute for Social and Economic Research (MISER), forty out of fifty U.S. states experienced growth in exports to Mexico in the third quarter of 1996, compared to the same period in 1995. This is good for U.S. exporters and workers.

The border states experienced very strong growth in exports to Mexico. In the third quarter of 1996, Texas exports reached almost $7 billion, a 25.1 percent increase compared to the same period in 1995. And California followed with a jump of 24 percent, reaching $2.3 billion.

In the South, Alabama's exports grew by 115.2 percent, South Carolina's exports rose by 37.5 percent, and Louisiana incurred an increase of 63.1 percent. In the Pacific and Rocky Mountain region, Oregon's exports to Mexico rose by 13.4 percent, Colorado's jumped by an impressive 102.3 percent, and Washington state's increased by 11 percent. In the Northeast, Pennsylvania's exports to Mexico shot up by a whopping 152.1 percent, New York's rose by 21.3 percent, and Massachusetts incurred an export growth rate of 54.9 percent.

26 of 31 U.S. Sectors Experienced Export Growth

Of the 31 industrial sectors classified by MISER, 26 experienced growth in exports to Mexico in the third quarter of 1996, compared to the same period in 1995.

The U.S. electronics sector, for example, incurred a 19.2 percent rise in exports to Mexico. Industrial machinery exports increased by 12.4 percent, transportation equipment expanded by 8.1 percent, textile products and apparel rose by 24.1 percent, and chemical exports jumped by 22.8 percent.

U.S. agricultural exports to Mexico also experienced sound growth, with some sectors performing exceptionally well. Third-quarter exports of crops rose 95.3 percent — rising from $1.27 billion in the third quarter of 1995 to $2.48 billion in the third quarter of last year. And livestock sales rose 134.6 percent, reaching $56.5 million. Overall, agricultural exports increased by just short of 19 percent.

The North-South Relationship Remains Strong

Trade between the United States and Mexico continues to remain healthy. It is estimated that total U.S. exports of goods and services to Mexico last year reached approximately $60 billion. Mexican exports to the United States are estimated at about $72 billion. As trade increase and U.S. and Mexican firm continue to establish partnerships, companies on both sides of the border will continue to benefit, and will become increasingly competitive compared to European and East Asian competitors.

The U.S.-Mexican relationship is further strengthened by Mexican President Ernesto Zedillo's recent announcement that his government will be paying off the remainder of the U.S. financial rescue loan — three years ahead of schedule. This not only enhances our political relationship, but also improves the level of confidence in Mexico's economy.

On September 1, Mexican President Ernesto Zedillo Ponce de Leon delivered his first State of the Nation address to the Mexican Congress. After the presentation, investors signaled their applause by pumping up Mexican stocks to a nine-month high.

As stated by Zedillo, if Mexico had taken a less resolute path in order to prevent the breakdown of the national economy, the outcome could have been considerably different. In fact, he said "The process of recovery would have taken several years and perhaps decades."

Mexico's stiff austerity measures have indeed paid off. The Mexican economy is showing increasingly strong signs of rebounding from the financial crisis which began last December 20th. As a result of President Zedillo's economic recovery plan implemented some months ago, the peso, which surpassed 7.5% last March, has stabilized at an averaged of 6.19% per dollar from June through August; inflation is estimated to have declined to about 2% for the month of August; and the interbank interest rate, which reached almost 110% in March, dropped to less than 40% in August.

New trade figures also show a strong correction in Mexico’s previously large trade imbalance. A 32.1% surge in exports and more moderate 7.5% decline in imports has resulted in a trade surplus of $3.7 billion for the first seven months of 1995. Almost 90% of Mexico’s troublesome “Tesobono” short-term debt has been retired, and very importantly, both the government and private sector have been able to reenter the capital markets sooner than expected.

As recently reported in The Exporter, a survey conducted by the American Chamber of Commerce indicated that capital investment in Mexico by member firms is projected to actually increase by 5.1% this year -- in spite of the crisis. Some of the investment is anticipated to flow into new privatizations and openings in areas such as telecommunications, satellite operations, power generation, rail transport, secondary petrochemicals and ports.

The economic path chosen by the Zedillo administration is a courageous course, but also a difficult one, entailing significant short-term hardships. It should not be taken for granted.

In response to Mexico's earlier debt crisis in 1982, then President Jose Lopez Portillo chose a very different path -- one which nationalized banks, imposed exchange controls, and raised import restrictions and other protectionist barriers. The results were years of protracted economic stagnation.

When the December crisis erupted, Mexican authorities never wavered from their determined adherence to free markets and increased modernization. While some tariffs have increased against some non-NAFTA countries, Mexican authorities have maintained their commitment to continued trade liberalization with NAFTA members and other trade agreement partners.

Mexico has learned its lesson well. Unfortunately, the alternative of protectionism is still seen as an option by some in the region.

During the early 1990s, Venezuela was hit hard by a severe economic downturn. High interest rates and political turmoil precipitated a crisis that caused foreign investment to flee. Unfortunately, Venezuela’s protectionist response only made the situation worse.

Like Mexico in the 1980s, Venezuela nationalized its banks, imposed capital controls, and increased trade barriers. Predictably, the consequences have been dismal. Investment continues to slump and inflation and interest rates remain high.

Other countries in Latin America, feeling the pressure from the Mexican financial crisis and other factors, have also flirted with the temptation of protectionist policies. In March, for example, Brazil raised import tariffs on 109 items. In an action which negatively affected it closest trading partners, Brazil increased duties on automobile imports from 32% to 70%. Argentina recently raised tariffs by 3%. By and large, however, most countries in the region have remained committed to open markets.

Over the last decade Mexico has been an important test case for the free market model of development. Today, its steadfast commitment to free markets and trade liberalization -- while also pressing ahead with important legal, judicial and political reforms -- continues to make Mexico a role model for other developing countries.

This commitment, with assistance of the U.S. led financial package, has laid the foundation for a remarkably quick economic rebound. It is also ensuring a speedy resumption of the strong, two-way trade expansion that has characterized the growing, mutually beneficial, U.S.-Mexican trade alliance. This is a model that should continue to be encouraged.

Once again confounding its skeptics, Mexico is showing increasingly strong signs of rebounding from the financial crisis that shook its economy earlier this year. Thanks to the stiff economic discipline being administered under President Ernesto Zedillo's recovery plan, Mexico's large trade deficit is turning around, the peso has stabilized, inflation is dropping, and investment is returning more quickly than expected.

International financial observers have offered praise for this progress. But it should not be forgotten that while Mexico is choosing to follow the right path, it is also a difficult path. Mexico is redoubling efforts to modernize its economy and also imposing tough short-term hardships to get its financial house in order. This course shouldn't be taken for granted.

All one has to do is look a little further south - to a country like Venezuela - to see what might have been. After a brief economic boom earlier this decade, Venezuela was hit by a severe downturn from which it has yet to recover. High interest rates and political turmoil in 1993 precipitated a crisis that caused foreign investment to flee. Unfortunately, Venezuela's populist, but protectionist, response only made the situation worse. Investment continues to slump badly; inflation and interest rates remain sky-high. Analysts project Venezuela's economy will shrink for a third consecutive year.

A Surprising Turnaround

The picture for Mexico is much different. Despite the severity of the recent crisis, indicators point to a surprisingly strong turnaround - and renewed growth by year's end.

Why is Mexico on the road to recovery while Venezuela stagnates? Both have vast natural resources and had similar economic profiles going into the 1980s - large public sectors and a dependence on oil exports. Both resorted to protectionism and nationalization in times of crisis.

For Mexico, the point of departure came after the 1982 debt crisis, which precipitated a period of protracted economic stagnation. At that time, Mexico imposed many of the same policies Venezuela follows today - nationalizing banks, imposing capital controls, and keeping itself closed behind stiff trade barriers. The result was years of negative per capita growth.

Learning a hard lesson, Mexico rejected the state-managed model and opened itself to free markets and liberalized trade. Now most of Mexico' s economy has been privatized. It has a diversified, competitive export sector. Where oil was once the primary export, it now represents only 10 percent of exports - and manufactured products have surged to account for 79 percent.

The success of its export sector reflects Mexico's efforts to hold fast to its program of modernization rather than return to the protectionism of the past. When the recent crisis hit, the Zedillo administration maintained its determined commitment to free-market policies.

The results have been clear, and positive. New trade figures show a strong correction in Mexico's previous trade imbalance. A 32.1 percent surge in exports and a more moderate 7.5 percent decline in imports has resulted in a trade surplus of $ 3.7 billion for the first seven months of 1995.

Other key indicators are also improving quickly. Stringent fiscal and monetary measures have created a public sector surplus and rapid decline in interest and inflation rates, which skyrocketed earlier this year. The peso has restabilized at about six to the dollar, and Mexico's stock market is up more than two-thirds after hitting rock-bottom last February. Almost 90 percent of Mexico's troublesome tesobono (treasury bond) short-term debt has been retired, and both the government and private sector have been able to reenter the capital markets sooner than expected.

Another key sign of economic turnaround is continuing investor confidence. The American Chamber of Commerce found in a recent survey that capital investment in Mexico by member firms is expected to actually increase in 1995 by 5.1 percent, in spite of the crisis.

Some of this will flow into new privatization and investment openings - in telecommunications, satellite operations, power generation, rail transport, secondary petrochemicals, and ports - resulting from President Zedillo's economic plan.

Continuing direct investment also reflects an important trend in US-Mexican trade: the growth of production partnerships. Production sharing - where manufacturing is divided up to take advantage of local efficiencies - is an increasingly significant business strategy for improving global competitiveness.

One of the primary goals of the North American Free Trade Agreement is to encourage expansion of business partnerships among North American firms, to more successfully counter the fierce competition of imports from the Far East and Europe.

So far, evidence shows this strategy is bearing fruit. A July 1995 study published by the US International Trade Commission reports that nearly half of Mexico's exports to the United States now come from production partnerships, and that "having US materials processed or US components assembled in Mexico increases the competitiveness of US producers of labor-intensive articles with Asian producers in the US market."

This is a positive trend for US businesses and workers. Goods produced with Mexico as the partner contain a much higher portion of US-made content than products from other countries. This means retaining US jobs that might otherwise have been lost.

Mexico as Global Test Case

Over the last decade, Mexico has been an important test case for the free market/free trade model of development. This model was envied and largely adopted by developing economies throughout Latin America and the world. But the alternative of protectionism and closed doors continues to lurk in the shadows.

Last December, unfortunately, Mexico also became a test case for the dangers of economic integration in the new world of volatile international capital markets. Capital that flowed in quickly showed a disturbing predilection to flow out even more quickly when spooked by signs of political and economic trouble.

Fortunately, Mexico chose a path out of crisis based on steadfast adherence to free markets - while also pressing ahead with important legal, judicial, and political reforms. This commitment, with help from the US-led international financial package, has laid the foundation for a remarkably quick rebound.

Mexico's recovery remains very much in the US interest. Alternatives to continued economic partnership and integration, wisely, have not been seen as realistic options by either country. That is a partnership we should continue to cheer.

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.

The full impact of the Asian economic crisis on U.S. exporters and importers is yet to be seen. However, given a textile or apparel manufacturer's level of export dependency on the region, it may be necessary to focus on new markets. Given the level of import dependency, it may be wise to further scrutinize your existing sources of supply or look for new ones.

Understanding the Asian Crisis

A number of factors led to the Asian economic crisis. Thus, during the 1990s, Southeast Asian countries increasingly pegged their currencies to the U.S. dollar. After mid-1995, the dollar began to appreciate vis-à-vis the Japanese yen and major European currencies. Shortly thereafter, China devalued its currency. As time wore on, Southeast Asian exports became more expensive and less competitive, and pressure mounted on exchange rates.

As foreign investment flowed into East Asia, a rising share was directed into speculative real estate ventures, which promoted a building boom that fueled domestic demand and stimulated imports. Bankers borrowed a great deal of money from abroad, much of it in U.S. dollars at lower interest rates than could have been obtained domestically, and they did not always lend it wisely.

Loans were made to domestic developers in local currencies, that in turn, became exposed to exchange risks. Compounding weakening financial systems and unsustainable exchange-rate regimes were fragile legal and regulatory systems.

As China opened its doors to foreign investment, capital was diverted there from East Asian countries. Unprepared for this, Thailand, which had few investment controls in place, and failed to address its current account deficit, invest in higher technology manufacturing/infrastructure, or sufficiently educate its labor force, found it could not compete with China in labor intensive sectors.

In late 1996, increasing numbers of foreign investors began to question Thailand’s ability to repay its loans, and proceeded to move their money out of the country. Fearing this would result in a loss of value in the Thai baht, in February 1997, foreign investors and Thai companies began to convert the baht into U.S. dollars — accelerating a loss of confidence in the currency.

In response, the Thai central bank began buying up the baht with its dollar reserves and raised interest rates in hopes that this new demand would increase the currency’s value and make baht-based savings and bonds more attractive investments. The rise in interest rates, however, made borrowing more expensive and drove down demand and prices for stock and real estate. With diminished reserves, the central bank was forced to float the baht, resulting in its downward spiral.

Since it took many more bahts to pay off dollar-denominated loans, defaults become common. Investors and businesses in neighboring Philippines, Malaysia and Indonesia concluded that these economies shared some of the same weaknesses as Thailand. Fearing the local currencies would also tumble, they began converting them into dollars, resulting in a self-fulfilling prophecy. Malaysia, compared to Thailand, was better able to compete with China in low technology sectors. However, its economy was not able to support the country's mega-projects and poor real estate ventures that had diverted huge resources.

Exports of Textile and Apparel Have Secured Many Benefits

During the past decade, U.S. exports of goods and services accounted for one-third of U.S. economic growth. From 1988 through 1997, they rose from $430.2 billion to $932.3 billion, an increase of 117 percent. In 1997, the Office of Economic Affairs, Executive Office of the President reported that U.S. exports of goods and services supported 12 million American jobs. What’s more, workers in jobs supported by exports (directly or indirectly) typically earn 13 percent more per hour than the national average, while workers in jobs supported directly by exports earn 20 percent more.

Companies that export expand their employment base approximately 20% faster than others, and are 10% less likely to fail. Thus, a primary economic goal of the United States is to maintain a high and rising standard of living. In order to achieve this, the United States, which accounts for only 4% of the world’s population, needs to sell to the other 96%.

In 1997, U.S. manufacturers exported almost $17 billion of textiles and apparel globally. This represented an increase of 46 percent over 1994. During this period, exports of yarn rose by almost 47 percent; exports of fabrics increased by 35.9 percent; exports of made-up and miscellaneous textiles edged up 32.5 percent; and apparel exports jumped by 57.5 percent. As a result, the companies and workers responsible for these achievements benefited a great deal.

U.S. Export to be Down

Prior to the crisis, more U.S. merchandise trade crossed the Pacific Ocean than the Atlantic, and in 1997, U.S. exports to Pacific Rim countries reached almost $194 billion. This performance is unlikely to continue in the short-term. This year, U.S. exports to East Asia are anticipated to decrease. How much is unknown at this time.

According to Federal Reserve Chairman Alan Greenspan, “With the crisis curtailing the financing available in foreign currencies, many Asian economies have no choice but to cut back their imports sharply. Disruptions to their financial systems and economies more generally will further dampen demands for our exports of goods and services.”

During the first two months of 1998, U.S. world exports of textiles and apparel rose 7.63 percent. This was dragged downward by a decrease in exports to Asia. Thus, During January and February of this month, U.S. world exports of textiles and apparel to the Association of Southeast Asian Nations (ASEAN) was down by almost 21 percent. ASEAN is comprised of Malaysia, the Philippines, Singapore, Thailand, Brunei, and Indonesia. In other examples, exports of apparel during this period was down more than 83 percent to South Korea and 53 percent to Thailand.

The Impact on U.S. Regions

Certain regions that are more dependent on exports to East Asia will be affected to a greater extent than regions that are less dependent. Western states, such as Washington, Oregon, Arizona, California, and Alaska, are expected to be affected the most, due to their higher concentration of general exports to East Asia which include aircraft, semiconductors, electrical equipment, and processed foods.

Parts of the farm belt, the industrial Midwest and Southern states will be affected to a lesser degree. The Northeast, including New York, New Jersey, Pennsylvania, and Connecticut, should be impacted the least since a smaller percentage of their exports target the affected region.

In 1996 (most recent available statistics by state), 29% of U.S. merchandise exports were shipped to the “Asian 10,” which is comprised of China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand. Of these countries, the economic crisis more severely affected Indonesia, Thailand, Malaysia, Philippines, and South Korea, whose currencies experienced significant devaluations.

Eight states, however, exported at least 50% of their goods to the “Asian 10” in 1996. New Mexico exported 68.8% of its goods there; followed by Hawaii with 64.6%; Oregon, 63.9%; Alaska, 57.9%; Nebraska, 55.7%; Washington, 54.6%; California, 51.9%; and Idaho, 50%. California was the biggest global exporter by far among all U.S. states. And the “Asian 10” are among California’s top 22 export destinations. As a result, the Asian weakening demand for imports will impact California to a greater extent than many other states. Five states — Florida, Michigan, Montana, North Dakota, and Vermont — shipped 10 percent or less of their exports to the “Asian 10.”

U.S. Import Will Rise — But Not as Much as Predicted

Analysts predict that in 1998, U.S. imports from Asia will rise significantly resulting in a large U.S. trade deficit. Thus, imports from Asia of low technology-produced goods, where materials and other inputs are sourced domestically, including textiles and fabrics for apparel, is anticipated to increase in large amounts.

Jim Schelley, vice president and general manager of the New York City-based CIT Group/Commercial Services, has been financing the apparel industry in Southeast Asia for 20 years. He said, Japan, China, Malaysia and the Philippines pose the most immediate threat to U.S. manufacturers due to more competitive export prices as a result of the Asian currency devaluations. In terms of the textile industry, Schelley contends "these countries are able to use domestic raw materials for the manufacturing of textiles" and "will not hesitate to compete on price with goods produced in the U.S."

On the other hand, imports from East Asian manufacturers who typically source their components outside their countries, and require foreign currencies to buy them, is not expected to rise as fast. Thus, when a country's currency depreciates by half its value, it takes twice as much of that currency to import the same value of goods as it did before. As a result, it will import less because costs are twice as high.

Impoverished by currency devaluations and a precipitous drop in domestic demand, Analysts predict that East Asian manufacturers will attempt to work off inventories and export themselves back to health. Japan, with economic and financial problems of its own, will not provide the economic engine required to absorb additional imports. As such, the U.S. market is expected to become primary target, with Europe following, putting downward pressure on domestic and foreign prices.

In the long term, these predictions may be accurate. However, thus far, U.S. imports of textiles and apparel from East Asia have not risen significantly. U.S. imports of textiles and apparel from Latin America, for example, have not been replaced by less expensive East Asian imports. One reason for this: many of the Latin American production facilities are owned by or have long term contracts with U.S. firms. As a result, imports of textiles and apparel from Latin America has not changed very much.

Keep a Close Eye on Asian Import Sources

In terms of sourcing product, it would be wise to ensure that your suppliers are, in fact, able to purchase their inputs and ship you your goods. Schelley cautions, "If your company is doing business in Asia, you need to reevaluate your risks and question past assumptions. In situations like this, the greatest risk can usually be found in the supply chain."

Schelley said South Korea, Indonesia and Thailand are in poor standing compared to other East Asian countries and "face a long, grueling journey back to economic prosperity." "These countries have such severe financial and liquidity problems that companies simply cannot get working capital. Even the Korean subsidiaries of U.S. Fortune 500 companies have been unable to get letters of credit from Korean banks." Consequently, suppliers in these and other Asian countries may not perform as they have in the past.

Investment Opportunities Likely to Increase

U.S. direct investment in Asia on a historical-cost basis jumped by 74 percent from 1991 through 1995 to reach $126 billion. This rate of growth is 42.6 percent higher than the rate of growth in U.S. direct investment worldwide. However, investment in the region is expected to decline over the next few years, holding down growth rates there.

In an attempt to lure fresh investment, East Asian companies will increasingly seek foreign partners with the ability to provide capital and technology. In return, they will make attractive offers that will provide lucrative opportunities. And severe adversity in East Asia is forcing adaptations that would not have been politically feasible during favorable economic times. The crisis has become an impetus to liberalize investment laws and open sectors once reserved only for domestic companies.