U.S Investment in Mexico

Economics 580
Dr. Leon
Haitham Boukhadour
Fall 96

Mexico has established itself as one of the biggest emerging markets in
the world today. It has exhibited many of the signs of a high growth economy,
offering several advantages to prospective investors. Some highlights of the
Mexican economy include " single-digit inflation, a balanced public budget, real
economic growth (presently at a rate of 12 percent), a deregulated economy and a
favorable investment climate" (Risk Management/ June 94, P.32). Mexico also
possesses a strategic geographic location as a gate way to Latin American

Mexico is among the fastest- growing export markets for the United
States. In 1985, Mexico became the third largest market for total U.S. exports,
behind Canada and Japan. In 1992, Mexico surpassed Japan as the second largest
export market for U.S. manufactured goods. Mexico now accounts for $1 out of
every $10 of total U.S. exports.

After the passing of NAFTA, bilateral trade was quite balanced in 1994,
with the U.S. registering a surplus of $1.3 billion, virtually unchanged from
1993. However, there was a sharp increase in trade opportunities, as both import
and export growth exceeded 20 percent. One-fifth of the total trade that occurs
between the United States and Mexico was created in 1994.

One of the major sectors that holds a large promise for the U.S.
manufacturers is that of the automobile industry. The Mexican market for auto
parts is expected to grow by 24 percent from 1994 levels to $16.9 billion in the
year 2000. It is also expected that NAFTA will help increase the U.S. export
share of the Mexican market to around 70 percent by the year 2000. In the long
run, Mexico\'s location could profit the U.S. industries that establish
themselves there, through an expanded free trade area in Latin America, which
could include Argentina, Brazil, Venezuela, and Chile. Such expansion could
prove crucial to the U.S. industry, as a strong export orientation helped
sustain industry growth. Exports increased from 18.5 percent of total output in
1989 to 27.2 percent in 1991. And the level of employment which could be
attributed to exports increased from 116,500 in 1989 to 154,200 in 1991.

Mexico also offers some intriguing possibilities in terms of production
facilities for U.S. based firms. In 1994 alone Mexican car and truck production
totaled 1.173 million units, up 8.6 percent from 1993. The Mexican government
had along term plan in terms of automobile production in Mexico, and it is in a
phase now that favors foreign investors and exportation out of the Mexican
market. Check the figure bellow to see how the plan has progressed so far.

Assembly Manufacturing ISI Export Promotion Liberalization
1925-1962 1962-1969 1969-1989 1989-

In previous years there were many barriers to trade, to date some still
exist while many have been lifted or reduced substantially. U.S. firms seeking
to take advantage of low Mexican wages, established many joint ventures in
Mexico. These plants were known as maquiladora plants. These plants started as
basically a "screwdriver and nuts operation" where firms merely assembled their
cars in Mexico with no real manufacturing performed within these plants. There
were several obstacles to the U.S. firms taking full advantage of the low
Mexican wages. For a long time in Mexico, any cars sold domestically within
Mexico had to contain 60 percent locally produced parts, including the engine.
That rule has changed requiring 34 percent locally produced auto parts , falling
to 29 percent by the year 2003 through NAFTA measures.

Another major impediment to full-scale car production in Mexico was the
20 percent import tariff imposed on auto parts imported into Mexico. Also cars
imported into the U.S. that were produced in Mexico used to incur a 2.5 percent

Since NAFTA\'s implementation at the beginning of 1994, half of all U.S.
exports have been eligible for zero Mexican tariffs, including machine tools,
electronic equipment, and computers; components vital to the operation of the
plants. NAFTA reduced Mexico\'s auto parts tariff from 20 percent to 10 percent
on January 1st, 1994 and lowered other barriers. And cars coming into the United
States no longer incur a 2.5 percent duty.

As a result of NAFTA, auto-makers have started integrating their Mexican
plants into their North American operations, shifting mid-size to luxury car
productions to their underutilized plants in the Midwest, while producing
smaller sized cars in Mexico. Mexico will probably become a center of small-car
production. That is what the local market favors, and lower labor costs will
make small-car production more profitable. U.S. firms cannot survive by merely
using Mexico as an exporting platform, rather,