The North American Free Trade Agreement (NAFTA) was implemented on January 1, 1994. The purpose of the Agreement is to eliminate barriers to trade and investment—including tariff, import quotas, import licenses and investment restrictions—among the United States, Canada and Mexico so as to ultimately increase our standards of living. NAFTA has been hailed as a success by many. However, recent events have clouded its benefits.

NAFTA: A Success In Year One

During the first year of NAFTA, U.S.-Mexican bilateral trade rose 22%, up from $81.5 billion to $100 billion. U.S. exports to Mexico increased at about the same rate -- and almost four times faster than U.S. exports to the rest of the world.

Since NAFTA was implemented, there has been a proliferation of joint ventures and strategic alliances between U.S. and Mexican companies.

A survey conducted in May 1994 by KPMG/Peat Marwick, a leading consulting firm, revealed that nearly 40% of the 1000 respondents said their industry had already benefited from NAFTA. The American Chamber of Commerce in Mexico conducted a survey of its members in the Spring of 1994. Most respondents expressed confidence that NAFTA would be beneficial to their productivity and profitability.

Coopers and Lybrand, another leading consulting firm, interviewed executive officers of 410 of the fastest-growing U.S. product and service companies. According to the report issued, for growth companies, NAFTA has meant export opportunities, not job relocations.

NAFTA: The Second Year Will Be Poor

On December 20 of 1994, on the verge of entering the second year of NAFTA with flying colors, the situation drastically changed. An attempted currency adjustment by the Mexican Government that some say should have occurred earlier but at a more gradual pace, accelerated out of control.

The Mexican Government expanded its exchange rate band by 15% in an attempt to allow the peso to adjust downward. Within two days pressures mounted -- currency reserves used to prop up the peso were quickly dwindling. As a result, the peso was allowed to float freely. Shortly thereafter, it nose-dived.

From December 20, 1994, to July 1995, the peso dropped about 40% in value compared to the U.S. dollar. Like falling dominos, what began as a short-term liquidity crisis drove down confidence and sparked panic. The Mexican stock market dropped precipitously. Most investors whose money came due did not reinvest in the country. Prior to this, Mexican political events pressured the situation.

The assassinations of Luis Donaldo Colosio, the PRI presidential candidate, and Francisco Ruiz Massleu, a senior ranking PRI official, combined with unrest in the southern state of Chiapas, further fueled investor unrest.

U.S. exports of consumer goods, which include sporting goods, are expected to be most affected by the devaluation, according to David Hirschman, Director of Latin American Affairs of the Chamber of Commerce of the United States. Stated by Robert Hall, Vice President of Government Affairs at the National Retailers Federation based in Washington, D.C., Mexican retailers fear that the industry won't bounce back for years. Other retailers are not as pessimistic, but have delayed expansion plans pending how quickly the economy recovers.

JC Penny, Footlocker, Dillards (which operates 227 stores in the United States), Wal-Mart and Sax Fifth Avenue have delayed plans to open new stores.

President Clinton's announcement on January 31 to provide Mexico with about a $50 billion U.S./international package of loans and loan guarantees was met with considerable relief in the Mexican and U.S. business communities. Although economic indicators have fluctuated since then, greater stability and confidence in the economy has resulted.

On March 9th, Guillermo Ortiz, Mexico's Minister of Finance, announced an economic program designed to restore economic stability. The measures call for an increase in the national value-added tax from 10% to 15% and the elimination of some exemptions; reductions in government expenditures to 1.6% of GDP for fiscal year 1995; a rise of 35% in gasoline prices and 20% in electricity rates; a continuation of the floating exchange rate; and a 10% hike in the minimum wage (which was bumped to 12%).

As a result of the crisis and new austerity program, the Mexican Government anticipates a temporary increase in inflation of between 40% to 50% and a reduction in GDP of 2% to 3% this year.

NAFTA: Year Three Looks Bright

Earlier this year, Salomon Brothers projected Mexican GDP to rise by 3.4% next year. More recent estimates anticipate 3% -- indicating a short-lived crisis. These projections are partly based on strong anticipated exports -- which have already been registered. Lower inflation is also predicted for 1996.

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.

Exports of sporting goods (including games, toys and accessories) to Mexico increased almost 55% from 1993 to 1994. Exports to Mexico this year will be poor. However, as a result of renewed confidence and investment in the economy, Mexico's sporting goods and retail industry as a whole will slowly strengthen.

The Canadian Sporting Goods Market Improves

The Canadian economic recovery has positively affected its retail sporting goods market. Reportedly, Marcel Rousseau, co-owner of Sports Gilbert Rousseau, a Quebec City sporting goods chain specializing in hockey equipment, anticipates his sales figures to increase substantially over the next several years.

Paul Levine, a buyer for Sports Distributors of Canada, a 200-store chain based in Calgary, said his sales are on the rise. Levine believes that confidence in the economy has been restored and as a result, anticipates greater sales. The chain plans to expand into team sports, ski and cycling merchandise.

The Canadian sporting goods market is very receptive to U.S.-made sporting goods. From 1993 to 1994, U.S. exports of sporting goods there increased by 16%. As the Canadian economy grows stronger, U.S. exports will likely increase at a faster pace.

The Sporting Goods Market Is Growing in Chile, the Next NAFTA Partner

Chile, with a population of 14 million, is a growing market for sporting goods. The sector grew by 41% from 1991-1992, and by 47% from 1992-1993. Even though some specific subsectors such as bicycles and related products have increased by as much as 107% (1991-1992), the growth of the Chilean sporting goods market appears to have slowed to about 20%. Approximately 80% of sporting goods sold in Chile are imported.

Local production consists mainly of bicycles and related products, billiard and other game tables, and boats, motorboats, sailboats and yachts. Imports come mainly from Far East countries such as Taiwan, Korea, Hong Kong and Malaysia, as well as from Europe. Many of these products incorporate U.S. technology and licensing rights. More recently, China and Japan are becoming significant competitors.

American sporting goods are regarded as being of excellent quality. U.S. market share has increased from 18% in 1991 to 20% in 1992, and to 23% in 1993. U.S. imports increased by 59% during the period 1991-1992 and 63% during the period 1992-1993. The Chileans are increasing interested in manufacturing locally under licensing agreements.

The market for sporting good products in Chile has grown steadily. This increase is fueled by a combination of factors, including improved economic conditions of consumers and a greater interest in health and fitness.

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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