Fact sheet: Mexico - a solid market continues to serve US companies - trade between US and Mexico

Following is an article by Rebecca Reynolds Bannister reprinted from the April 19, 1993, edition of Business America, which is published by the US Department of Commerce's International Trade Administration.

Mexico is the fastest-growing US export market. Total merchandise exports to Mexico in 1992 were up 22% to a record $40.6 billion, three times their level as recently as 1986. While 1993 may not quite approach last year's impressive growth rate, it is expected that Mexico will continue to be a stellar market for US products, boosting exports to the $47-48 billion range.

Last year was a banner year for trade with Mexico on several counts, especially in manufactured goods. Mexico surpassed Japan as the second-largest market for US exports of manufactured goods. (The United States' other North American Free Trade Agreement--NAFTA--partner, Canada, is the largest market.) At the same time, the United States trade surplus in manufactured goods with Mexico ($7.5 billion) was the largest with any country in the world, larger even than that with the entire European Community. Mexico prefers American products and spends 15 cents of each dollar of per capita income on US goods (compared with 2 cents in Japan and the European Community).

Imports from Mexico also set a record in 1992, increasing 13% to $35.2 billion. Export growth exceeded import growth for the third year in a row, a phenomenon that is expected to continue next year as well. As a result, the overall US trade surplus with Mexico widened to $5.4 billion in 1992 and should improve further next year.

The strong, positive growth in the US trade surplus with Mexico runs counter to the arguments of some that exports to Mexico are largely returned to the United States after further processing. Quite the contrary: Production sharing comprises only about 25% of US exports to Mexico, and its share is declining. Mexico represents a vibrant market of 82 million consumers with a preference for US goods--nearly 70% of Mexico's imports come from the United States. (Compare this to the 22% US share of imports in Japan and 7% share in the European Community.)

Since reducing its trade barriers beginning in 1986 and undertaking major economic reforms, Mexico has been on a steady growth course of roughly 3% per annum for the last 4 years, and this is expected to continue. Strong growth has increased the demand for capital goods and equipment as well as consumer goods and agricultural products. It may surprise some, but even traditionally import-sensitive industries like textiles, footwear, apparel, steel, and auto parts have found a receptive Mexican market. The North American Free Trade Agreement promises to improve this outlook by phasing out and eliminating remaining barriers. Congress is expected to vote on NAFTA later this year in order to meet the target implementation date of January 1, 1994.

Some of the Most Promising Mexican Markets

Descriptions of some of the most promising Mexican markets for 1993 and beyond follow.

Infrastructure. Most exciting for US exporters is the investment Mexico is making in infrastructure to support the needs of its growing economy. Mexico's President Carlos Salinas de Gortari has made a major and highly visible commitment to bring Mexico "from the third world into the first world" by the end of the decade. What this amounts to is massive investment in infrastructure--all kinds, from telecommunications, to roads and ocean ports, to building and modernizing enough electrical power plants to effectively service the needs of its growing industry, to water purification and distribution systems, and to environmental cleanup infrastructure such as sewage treatment plants and incinerators. Billions of dollars in private and leveraged public dollars are being spent this year in what has to be one of the most ambitious national infrastructure improvement projects in the world. Many of the purchases of equipment and technology to improve Mexico's infrastructure are from the United States (33% of US exports to Mexico are capital goods).

Telecommunications. In telecommunications, Mexico is making great strides to modernize its infrastructure. Telmex, Mexico's privatized telecommunications company, has embarked on a huge capital investment program calling for a 63% increase in total infrastructure, with expenditures of around $13 billion by the year 2000. (In 1991, $1.8 billion was spent; 1992 and 1993 expenditures should total $4.6 billion.) US exports of telecommunications equipment to Mexico totaled $1.5 billion in 1992.

A concrete example of this upgrade is Hughes Aircraft Company's $200-million contract for two new communications satellites for the Mexican Government to be launched in November 1993 and February 1994. (Hughes built the two satellites that are currently used by Mexico's Communications Ministry.) This contract will support an average of 250-300 jobs over 36 months in Hughes Aircraft's Long Beach [CA] facility and various US subcontractors.

Related to the Telmex modernization, Jefa International, a Native American-owned radio telecommunications service company, recently won a multi-million-dollar, multi-year contract with Telmex's Telcel cellular company to engineer and install the cellular microwave interconnect system for several Mexican cities.

Energy. Big changes are also happening in Mexico's energy sector. Market liberalization, which has been so dramatic in most segments of the Mexican economy, has been slow to reach the energy sector, largely because Mexico's constitution restricts ownership of oil and gas resources and control over electrical power generation to the state. Nevertheless, changes are being made in response to demands for more efficient and reliable energy. It is estimated that Mexico will have to invest $20 billion to $30 billion by the year 2000 to upgrade its energy capabilities.

In June 1992, the Mexican national oil company, PEMEX, reorganized its operations into four separate subsidiaries: an exploration and production unit, a refining unit, a natural gas and primary petrochemicals unit, and a secondary petrochemicals unit. Other internal reforms within PEMEX indicate that there is a willingness to explore creative methods of working with foreign suppliers/contractors in order to move to the level of production and efficiency in energy services that Mexican producers need to compete. These changes, combined with the market access achieved in NAFTA, promise new opportunities for US firms.

In 1992, US exports of chemicals to Mexico totaled $3.2 billion. NAFTA eliminates import and export licenses on all petrochemicals, except for five remaining "basic" petrochemicals reserved to Mexican state control.

In the area of electrical power generation, NAFTA provides new investment opportunities for electricity-generating facilities for "own use," co-generation, and independent power production. It allows NAFTA investors to acquire, establish, and operate such facilities without any involvement from the state energy monopoly, CFE. Investors may also purchase or build independent power production (IPP) facilities.

A recently announced $675-million contract between General Electric and Bechtel and Mexico's Federal Electricity Commission to build a 700-megawatt electrical power plant is a big success story, resulting from Mexico's push to modernize and expand its energy grid. The fact that these two US companies are committed corporate citizens in Mexico and that they formed a consortium with a major Mexican engineering/construction firm, ICA, gave them the knowledge to present a winning bid. This contract alone will directly result in 1,000 jobs in New York and South Carolina over the next 3 years.

Procurement. Although Mexico has privatized nearly all state-owned enterprises, government purchases still represent a major market opportunity. However, except for those purchases involving multilateral lending, there is no requirement to open government procurement to foreign bidders today. New rules on NAFTA government procurement will open up opportunities to US firms seeking government contracts in Mexico and Canada. NAFTA gives North American suppliers immediate and growing access to the Mexican Government procurement market, not only in parastatal firms such as PEMEX and CFE (national electric company) but other government entities. NAFTA also breaks new ground by including services for the first time, substantially increasing export opportunities for North American providers of a wide variety of services--construction, environmental, and software to name just a few areas.

Environmental Products and Services Market. Mexico spends the equivalent of 1% of its gross national product on environmental improvement. In 1992, the total market for pollution control products and services in Mexico was approximately $1 billion. Average growth of the Mexican pollution-control products and services market is expected to reach 20% per annum through 1994, and US exports of environmental products and services to Mexico are expected to grow by 20% during 1993.

Currently, very few non-tariff barriers impede sales of US pollution-control equipment and services in Mexico. Tariffs on pollution-control equipment and services range from zero to 20%. Under NAFTA, tariffs on most pollution-control equipment will be eliminated on the date of implementation of the agreement or within 5 years of implementation, stimulating US exports by further enhancing the relative price competitiveness of US pollution control and equipment vis-a-vis non-NAFTA products.

Continued growth of the Mexican economy, spurred by NAFTA, will encourage increased sales of new US pollution-control equipment and services in Mexico as citizens demand a cleaner environment and the financial resources exist for these purchases.

Increasingly strict Mexican enforcement of its sweeping 1988 General Law of Ecological Equilibrium and Environmental Protection will necessitate diligent maintenance of existing environmental control equipment.

Mexico's recent intensification of enforcement of its environmental laws is also contributing to increased sales of US environmental products and services in the Mexican market. In 1992, Mexico created a new superagency, the Secretaria de Desarrollo Social (SEDESOL), which is empowered to set and enforce Mexico's environmental norms and regulations. Notable increases in both the number of SEDESOL inspectors employed and the frequency and seriousness of their inspections have made compliance with Mexican environmental law a high priority for firms operating in this market. Implementation of NAFTA is likely to reinforce this trend by strengthening enforcement efforts and by generating additional resources in Mexico to address environmental problems.

Services. The market for services is another very important new opportunity under NAFTA. The agreement opens Mexico's $146-billion services market for US telecommunications companies (both equipment and services); banks; insurance, law, and accounting firms; and transportation companies. To make it possible for service providers to have real access to these markets, NAFTA allows professionals to cross the border. This means, for example, that an equipment vendor can offer follow-up services to its clients--a very important advantage when it comes to sales.

Export Assistance Services

To join the expanding ranks of successful small, medium, and minority firms that have added Mexico to their sales base, tap into these Department of Commerce services.

* For quick answers about the Mexican market, call the Commerce Department's Flash Facts Information Hotline. Over 1,000 businesses call this resource hotline 24 hours a day, 7 days a week to order Mexico market information that is sent via fax. Call (202) 4824464 and order the Flash Facts Menu (Document #0101) to see what you can learn about: NAFTA, tariffs, permits, and customs regulations; marketing, distribution, and finance; statistics; and even tips for traveling in Mexico.

* If you are interested in Trade Shows and Direct Marketing Help in Mexico, the US Trade Center in Mexico City provides a range of services to promote US exports to Mexico. The Trade Center provides facilities for exhibiting products, as well as market research and other services. In addition, the Trade Center's facilities are available for private business-sponsored events such as product promotions, sales meetings, product demonstrations, seminars, and workshops. Eleven trade events are scheduled at the center between April 1993 and March 1994. For further information, contact the US Trade Center at (011-525) 591-0155.

COPYRIGHT 1993 U.S. Government Printing Office
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