The U.S. Service Sector

The United States is one of the world's largest and most advanced exporters of services. Currently, the industry accounts for over half of the U.S. gross domestic product. In 1991, the United States exported $257 billion in services worldwide, and $8.3 billion to Mexico alone. Although Mexico has restricted trade in services, U.S. exports of services to Mexico have increased dramatically, more than doubling since 1987. This is a consequence of the United States' overwhelming competitive advantage in such a specialized and high value-added sector. For example, the U.S. telecommunications services industry is the largest and most competitive in the world, with revenues of over $90 billion in 1991, and a trade surplus of $1.9 billion.

New York City is the dominant producer of services in the United States and home to the largest firms in advertising, accounting, management consulting, engineering, diversified financial services, banking, securities and insurance. In the 1980s, corporate service firms became important export businesses and developed global expertise. The global economy has facilitated a boom in services trade due to the modern technology facilitation of long-distance interaction between the buyer and seller via electronic information flows and other modern telecommunications advances.

The Mexican Service Sector

The Mexican services industry is plagued by two problems that free trade and continued market liberalization will alleviate. First, Mexico's relatively small commercial and industrial sector has not created a large demand for a modern service sector. Mexico's highway system is so dilapidated that truck transportation can take 30 to 40% longer to go the same distance as in the U.S., with 60% higher fuel costs. As a result, the cost of services is significantly higher than in most industrialized nations. Second, extensive government regulation and mismanagement have created a service sector that is in need of modernization and improvements. The level of service that most Mexican entrepreneurs and managers are accustomed to is much lower in quality than would be acceptable in the U.S. This has been a particular disincentive for U.S. firms to do business in Mexico.

Service Rules of Origin and Nafta Provisions

Under the U.S.-Canada FTA, each country agreed to provide national treatment to those persons providing over 150 services. However, this obligation did not require that the treatment has to be the same in all respects. For example, if Canada chooses to treat providers of one service differently than does the United States, it is free to do so, as long as it does not discriminate between Canadians and Americans. In addition, a country may accord different treatment for legitimate purposes, such as consumer protection or safety, as long as the treatment is consistent. Under the U.S.-Canada FTA, regulations cannot be used as a disguised restriction on trade. For example, either government remains free to license and certify providers of a specific service, but must ensure that these requirements are applied consistently and do not discriminate against persons from the other country.

Nafta, in essence, does the same. The substance of the agreement requires each nation to treat the others' service firms no less favorably than its own. An important auxiliary rule incorporated into Nafta maintains that firms providing services cannot be required to establish a residence, office, branch, or subsidiary as a condition for providing a service. If the provider does wish to establish a tangible presence though, Nafta's rules will also prevent discrimination against that firm in the marketplace. Additionally, Nafta would extend this concept of national treatment to include provisions related to professional licensing and certification. The agreement explicitly forbids using such procedures to restrict trade or provide preferential treatment to nationals. Finally, Nafta does endow each country the right to deny benefits to firms which provide the service through a enterprise owned or controlled by a person or business of a non-Nafta country.

Nafta's Impact on the U.S. and Mexican Service Sector

Nafta will substantially add to current U.S. exports of services by further opening Mexico's $146 billion market in services. It levels the playing field, guaranteeing that U.S. service providers get the same treatment in Mexico as Mexican firms, and allows U.S. firms to provide services in Mexico without relocating their operations to Mexico.

The U.S.-Canada Free Trade Agreement established the first comprehensive set of principles governing services trade. Nafta broadens these protections and extends them to Mexico. Canada has retained its cultural exclusion from the U.S.-Canada Free Trade Agreement. Sectors covered under Nafta include: accounting, enhanced telecommunications, advertising, environmental services, architecture, health care management, broadcasting, land transport, commercial education, legal services, construction, publishing, consulting, tourism, and engineering.

According to the Congressional Budget Office, the major services that Nafta would open in Mexico include finance, business services, land transportation and telecommunications. Under Nafta, the licensing of professionals, such as lawyers, doctors, and accountants, will be based on competence, not nationality or residency. Citizenship requirements for licensing of professionals will be eliminated within two years.

Importantly, Nafta requires each country to provide for improved intellectual property protection and enforcement of the rights of inventors, authors, and artists against infringement and piracy, reducing the risk that products of U.S. creativity and innovation could be unfairly exploited in Mexico. By reducing the threat of piracy and other loss, Nafta provides additional incentives for U.S. providers to develop new technologies and products. Also, the Agreement ensures protection for North American producers of computer programs, sound recordings, motion pictures, encrypted satellite signals and other creations, including rental rights for computer programs and sound recordings. Increased protection against copyright/patent violation should lead to increased R&D spending by U.S. firms. This will undoubtedly enhance opportunities for U.S. service providers.

Although a comprehensive set of regulations modify the liberalization of trade and investment in the banking, investment, insurance, transportation, and telecommunications industries, these regulations only cover the transition period of liberalization. Afterwards, these industries will be as open to free trade and international competition as any other. For example, after 2000, Nafta would allow U.S. banks, securities and insurance firms, and other financial institutions to establish wholly-owned subsidiaries in Mexico. All current restrictions discriminating against foreign firms would be lifted for Nafta countries.

New U.S. entrants establishing joint ventures in Mexico will be allowed 100% ownership by 2000. Finally, reciprocal rights would be established for firms based in member nations. U.S. bank's share of the Mexican market is immediately expected to grow under Nafta, thus making the U.S. banking industry more internationally diversified and competitive. Financial institutions particularly stand to gain in the long run as they both finance further Mexican development, and finance and insure the growing volume of trade between the U.S. and Mexico. In insurance alone, industry experts calculate that Mexico could become one of the world's top ten insurance markets by the turn of the century. The liberalization of the financial sector is crucial to Mexico's further development because of the country's absolute necessity to institute a modern system of credit and securities markets.

The benefits to both countries extend to the transportation and telecommunications sectors, too. Since both are essential services for the furthering of business, they will grow exponentially as the volume of trade and investment increases between the Nafta countries. Under Nafta, both nations have agreed to allow reciprocal truck and bus access to the states and regions adjacent to the border by the end of 1995. By the year 2000, Nafta will eliminate restrictions on the U.S. trucking industry -- allowing U.S. rigs to deliver anywhere in Mexico. According the U.S. International Trade Commission, in 1990 two-way trade with Mexico in goods carried was approximately $65 billion, or about 37% of two-way trade with Canada. The International Trade Commission forecasts modest gains in the short run for U.S. trucking firms, with increased gains commensurate with increased trade.

The United States' overwhelming competitive advantage in telecommunications will allow it to gain the majority market share in advanced telecommunications services. In 1991 alone, U.S. exports to Mexico of telecommunications services registered a $30 million trade surplus. Providers of these services stand not only to gain from increased cross-border business with Mexico, but also from increased demand for advanced telecommunications services on the part of multinationals investing in Mexico. As a result, Mexican firms will in turn take advantage of the opportunity to purchase from U.S. providers the establishment of intra-corporate private networks. Increased trade in software and network consulting services is also likely, as Mexican firms become integrated into the North American business communications network. Increased demand for these high value-added services will in turn beget increased demand for the high-tech equipment that facilitates these services, thereby benefiting U.S. telecommunications equipment manufacturers as well.

The list of service providers who will benefit from Nafta is extensive. For example, companies such as AT&T, ITT and MCI International would gain improved access to a $6 billion telecommunications services market. American Express, a global financial services and travel company, sees a number of benefits to the U.S. economy from Nafta. According to the company, U.S. and Canadian financial institutions which have generally been prohibited from operating in Mexico, will be treated like their counterparts in Mexico. This will allow American Express to offer the same range of products and services to Mexican customers that are offered to U.S. customers. As the Mexican and U.S. economies grow as a result of Nafta, business and leisure travel will increase. For example, over 1.5 million Mexicans visited the United States in 1992, comprising the fifth largest tourist group to the United States. U.S. travelers to Mexico account for over three-quarters of all visitors there. As Nafta spurs travel between the United States, Canada and Mexico, travel-related services offered by American Express will also increase.

Firms providing construction and engineering services will benefit. U.S. firms have a competitive advantage over many Mexican firms due to their highly skilled staffs and advanced engineering techniques. Rising demand for services is anticipated due to Mexican infrastructure improvements, stricter enforcement of environmental laws, and potential contracts to be awarded for work on renovations and new construction for Pemex, the Mexican government-owned oil company.

The net effect of Nafta in U.S.-Mexican services trade is the removal of the variety of non-tariff barriers and burgeoning regulations restricting foreign access to the Mexican services market. The preferential access Nafta endows U.S. firms coupled with the U.S.'s highly competitive position creates an unprecedented opportunity for U.S. service providers in one of the world's fastest-growing markets. Continued Mexican growth and development plus Nafta's liberalizing effects will make Mexico a highly attractive market to U.S. services firms in the future.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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