After Initial Boom,
Mexico's Economy Goes Bust


By Chris Krau

MEXICALI, Mexico -- The heady early years of the North American Free Trade Agreement brought Oscar Garcia opportunities he had scarcely dreamed of.


An electrical engineer raised in Mexicali, he became manager of the biggest factory the city had ever seen — a Mitsubishi plant the size of three football fields where workers assembled computer monitors. Garcia bought a new sport utility vehicle. He paid cash for a new home.

Then, it all came crashing down. Unable to compete with more sophisticated flat-screen monitors made in the Far East, Mitsubishi in August shut the $250-million plant it had opened in 1998, putting Garcia and 1,200 others out of work and leaving most of its machinery to rust in a junkyard. A cluster of high-tech companies that had come up around the factory also closed.

"I thought I would retire with Mitsubishi. It was such a good place to work," Garcia, 36, said. "But I don't see much chance of a new industry coming along to replace it."

Garcia's story mirrors the course of the Mexican economy since NAFTA opened up cross-border commerce and investment 10 years ago.

Rising exports to the United States fueled Mexico's growth in the first years of NAFTA. Foreign companies spent billions of dollars on factories that made everything from cars to vacuum cleaners. Engineers and skilled managers were in such demand that companies engaged in bidding wars for their services.

Then, in 2000, the U.S. economy slowed down, dragging Mexico's down with it. The U.S. has begun to recover — but Mexico remains moribund, hobbled by serious problems that NAFTA had briefly masked.

Despite a history of U.S. domination, Mexicans viewed NAFTA as a steppingstone to the developed world's standards in wages, health and education, holding the promise that they would no longer have to migrate to the United States to find jobs. The treaty also was welcomed as a wedge that could open Mexico's protected economy to foreign competition, along with new consumer goods and ideas.

Government officials and many economists insist NAFTA has been a success, a catalyst for an era of economic reform and political change. In 2000, the Institutional Revolutionary Party's 71 years of continuous rule came to an end.

However, they now recognize that Mexico's 1990s boom was merely hiding profound flaws: a weak educational system that produces too few engineers and technocrats, high energy costs, low spending on research and development, and systemic corruption.

Citing these shortcomings, the Switzerland-based World Economic Forum (news - web sites) recently ranked Mexico 47th in global competitiveness, behind such countries as Botswana, Tunisia and Chile.

Carlos Salinas de Gortari, who as president of Mexico in the early 1990s fought hard for NAFTA, says the country squandered many of the opportunities the treaty provided.

"Unfortunately, from 1995 on, reforms to make sure Mexico took advantage of NAFTA were left behind," Salinas said.




The advantages conferred by NAFTA have eroded. Mexico's proximity to the U.S., the world's largest consumer market, means less in a world of ever-faster air and ocean transportation. And trade barriers have fallen around the world, devaluing Mexico's special trade status.

Mexico has lost nearly half a million manufacturing jobs in the past three years to countries as far away as China and as near as Honduras. Last year, foreign investment — an engine of job growth since NAFTA — declined to its lowest level in 10 years.

Over the summer, China displaced Mexico as the No. 2 exporter to the U.S. (Canada is first.)

"NAFTA is stuck," said Federico Sada Gonzalez, chief executive of Vitro, a glass manufacturer in Monterrey whose post-NAFTA exports to the United States grew 62% before leveling off three years ago.

Others say the reality is more complicated.

"The issue is not whether Mexico is competitive. It is that other countries have become more competitive," said Alfredo Thorne, an economist at J.P. Morgan Chase & Co. in Mexico City. Competing in the world economy is like going up a down escalator, he said: "If you stop making progress, you lose ground."

Mexico, the U.S. and Canada signed the trade accord in November 1993 and it took effect Jan. 1, 1994. Its main objectives were to boost foreign investment and phase out nearly all tariffs on goods traded among the three countries.

NAFTA opened the door to $125 billion in foreign investment in hundreds of Mexican factories and offices. At the peak of its impact, economists estimate, NAFTA generated at least 2 million jobs in Mexico, as manufacturers sought to take advantage of low-cost Mexican labor and proximity to the U.S. market.

Arrivals included not just U.S. and Canadian firms, but companies from around the world that agreed to adhere to "local content" rules, meaning products had to be made mainly from components or raw materials originating within the free-trade zone.

"The figures speak for themselves. Before NAFTA, foreign investment was $5 to $6 billion per year, and now it averages twice that, all because those companies saw opportunities in investing in Mexico," said Mauricio Gonzalez, an economist at the North American Development Bank in San Antonio.

"NAFTA was the most important economic development for Mexico in 20, maybe 50 years," said Jose de Jesus Valdez, president of the largest industrial trade association in Monterrey, Mexico's chief industrial city.

In late 1994, the trade accord's first year, a peso devaluation sent Mexico's economy into a deep recession. The devaluation slashed consumers' purchasing power, but it made the country even more attractive to foreign investors because it cut labor costs in dollar terms by nearly two-thirds.

Companies ranging from frozen food processors to makers of hotel bedspreads opened or expanded in Mexico. Ford, General Motors and other car makers invested billions of dollars in new or existing plants, and auto production grew to 1.9 million vehicles in 2000, twice the 1995 figure.

The growth of Mexico's auto industry was a special source of pride. The industry produces up to six jobs in supplies, services and transportation for each job on the assembly line. And the domestic production made cars more affordable for Mexicans.

Mexico's non-oil exports rose to $146 billion in 2002 — three times the pre-NAFTA level.

The trade pact also gave Mexicans access to a wider variety of goods, from banking services and beef cuts to cars and movies.

"The great surprise for Mexicans going shopping in Los Angeles is that supermarkets are the same as here," said Luis de la Calle, a former Mexican government official who is now a business consultant. "Ten years ago, the quality and variety of products on the shelves was less and prices were higher."

By opening the country to U.S. and Canadian imports, NAFTA also forced Mexican companies large and small to become more efficient and focused.

Sada Gonzalez slimmed down Vitro from a conglomerate with 29 different businesses to one with just four so it could compete globally. Cemex, the Monterrey-based cement giant, also shed extraneous units.

LJH Co., a bicycle parts manufacturer in Mexico City, cut its payroll by half, to 21 employees, reduced its product line from 150 to 40, and created a new market niche by providing overnight delivery anywhere in Mexico.

"Many of my Mexican competitors have closed," LJH President Luis Herrera said. "My prices are a little higher than foreign companies', but I have survived by delivering faster than they can, giving better service."

Electronics giants such as Panasonic, Sony and Sanyo invested billions in new or expanded Baja California plants, making Tijuana one of the world's largest centers of television manufacturing. Mexicali's status as a computer terminal production center seemed secure with the arrival of NEC and Mitsubishi from Japan and Acer and Mag from Taiwan.

Demand for managers and engineers like Garcia was so intense during the peak years of the late '90s that bidding wars erupted, with employers offering golf club memberships, housing allowances, free air travel and cars to job candidates.

"During 1998 and 1999, nine of every 10 hires involved that kind of thing," said Fernando Ortiz-Barbachano, vice president of Barbachano International, an executive search firm in Chula Vista, Calif.

NAFTA's limitations took longer to become apparent.

Although wealth and jobs increased along Mexico's border with the United States, chronically poor southern states such as Chiapas, Guerrero and Oaxaca have seen little benefit. A decade of free trade has done little to reduce poverty or narrow wage disparities.

But the biggest disappointment for some was that NAFTA did not shield Mexico from the broader forces of globalization.

One reason is that the special status conferred on Mexico by the treaty is no longer so special. Many other countries, including most Caribbean nations, now enjoy the same status. Textile and apparel companies have been moving from Mexico to lower-cost locales such as Honduras and Costa Rica for years.

A bigger blow to Mexican businesses was China's entry into the World Trade Organization (news - web sites) in 2001, which meant Chinese products could easily enter North America. Although Chinese products are subject to duties, they still are often cheaper than Mexican goods.

At the same time, unions' wage demands combined with Mexico's gradually strengthening peso have made Mexican factories less competitive, said Jonathan Heath, an economist with LatinSource, a consulting firm in Mexico City.

"Within a relatively short period of time, Mexican labor costs have shot up without the nation being able to offer much else in terms of competitiveness to go the other way," Heath said. "The competitive edge that Mexico seemed to have coming out of the 1994 recession is lost.

"Five years ago, Mexico was the logical place for manufacturers to go. Now China is logical," he said.

Red tape and high transportation expenses now mean that it costs the same to ship a product to Houston from Shanghai as it does from Mexico City, said Eduardo Bailey, a Mexican legislator who is secretary of the Chamber of Deputies' Economy Commission.

The luster of the Mexican auto industry also may be dimming. Total production has been declining for three years.

In deciding where to invest, big auto firms look not only at a country's production costs but also at its potential as a retail market. Judged in those terms, prospects are brighter in places such as China and India than in Mexico, said Carlos Niezen, an auto analyst with AT Kearney consultants in Mexico City.

"China threatens all of us," said Jorge Verastequi, spokesman for Grupo Industrial Saltillo, a Mexican auto parts manufacturer in Saltillo.

Garcia, the former Mitsubishi plant manager, enjoyed the post-NAFTA boom and now is struggling through the bust. He grew up and attended college in Mexicali, and realized his dream of making it big in his hometown.

But Mitsubishi was blindsided by the popularity of space-saving flat-screen computer monitors made in Taiwan, South Korea (news - web sites) and China.

Garcia worked furiously with his crew and his Mitsubishi bosses to cut costs and keep the plant open. Over two years, they reduced the wholesale price of a 17-inch monitor from $160 to $80. But Mitsubishi shuttered the factory anyway, choosing to close it rather than invest upward of $1 billion to start a new line of flat-screen monitors. Daewoo, Acer and NEC also closed or scaled back their factories.

Garcia was out of work for three months before finding a management job in Tijuana in November. Now he spends the workweek away from his wife and two infants in Mexicali. He fears it will take him years to regain his former status and income.

"I thought Mexicali would be a center of computer technology, but it's all disappeared. Not just Mitsubishi with its glass tubes, but the factories that made plastics, electronic guns and the cardboard cartons," Garcia said. "Our competition has gone to China."