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The Mexican Economy That California Really Trades With

May 16, 1999|Jock O'Connell | Jock O'Connell is an international business consultant and a former analyst for the state Commission for Economic Development

DAVIS, CALIF. — Strong gusts of well-intentioned but ill-informed rhetoric about Mexico's growing significance as a trading partner for California can be expected this week when President Ernesto Zedillo makes an official visit. Many economists will cite numbers indicating that California's exports to Mexico have more than doubled since the North American Free Trade Agreement was implemented five years ago. Similarly, more than one politician welcoming the Mexican leader will probably observe that Mexico is on the verge of eclipsing Japan as California's primary export market.

Will they will be right? Sort of.

As it turns out, there are actually two Mexicos with which the United States does business.

The first is Mexico's developing economy of 100 million people. The other is a virtual entrepot economy comprising the maquiladoras: several hundred manufacturing plants largely owned by U.S., Asian and European corporations, largely managed by expatriate personnel and largely unconnected with the domestic economy in which most Mexicans live and work. It is this "Gringo Archipelago" that dominates two-way trade between Mexico and the United States.

Historically, the maquiladoras have not been integral parts of the Mexican economy. Originally conceived as a means to stimulate employment opportunities in northernmost Mexico, the maquiladora program was established in the mid-1960s as an exception to national trade policy, which discouraged imports to shield domestic industry from global competition. The program provided for the duty-free import of components, primarily from the United States, for assembly as finished or nearly finished products for export, primarily to the United States. The U.S. supported the program by imposing import duties on only the value added in Mexico. Until recently, nothing produced in a maquiladora plant could be legally sold in Mexico.

Although NAFTA's purpose is to eliminate trade barriers, the trade pact, coupled with the devaluation of the peso in December 1994, has been a boon for the maquiladoras. The number of companies registered under the maquiladora program has increased from 2,122, at the time of NAFTA's implementation in January 1994, to 2,985, during the first quarter of 1998.

Steps are being taken to integrate maquiladoras into Mexico's economic life. Even so, the maquiladoras remain a virtually distinct and separate economy. The latest Mexican government statistics reveal that less than 2% of components assembled annually by companies participating in the program are bought from Mexican suppliers. Everything else, including machinery used to manufacture or assemble finished products, comes from Asia, Europe and especially the United States. A December 1998 report, from the U.S. International Trade Administration, put the U.S. share of imports by the maquiladoras at 82% in 1997.

How vital are the maquiladoras to Mexico's overall export performance? According to Mexico's Department of Commerce and Industrial Development, exports to the United States from maquiladoras and similar production-sharing facilities amounted to $76.4 billion in 1997, or fully 81% of all Mexican merchandise exports to the U.S. that year.

Perhaps even more astonishing is that the maquiladora sector absorbs nearly three-quarters of all U.S. merchandise exports to Mexico. For example, Mexican government figures place the value of U.S.-originated components used in Mexico's assembly industry at $49.8 billion in 1997, or 73.2% of the $68 billion in goods the U.S. exported to Mexico that year.

It's not hard to see that a great deal of what the U.S. ships to Mexico are components and parts that soon make their way back to us in the form of finished goods. Nor does it require great insight to conclude that were the maquiladoras to shift production to lower-cost economies, Mexico's importance as a trading partner for the United States would be dramatically diminished. Ironically, it has been the remarkable expansion of the U.S. economy and its insatiable demand for goods of various sorts that, by providing ample markets for the maquiladora sector, has spurred the collateral rise in U.S. exports to Mexico.

No one knows how much California really exports to Mexico or how large a percentage of California's export trade with Mexico involves the shipment of components and subassemblies to the maquiladora industry. (Commonly cited state export figures, published by the California Trade and Commerce Agency, severely distort the state's export trade with Mexico because the data fail to account for a large volume of California shipments that enter Mexico via Texas.)

Nonetheless, it is likely that California exports to Mexico are dominated by electronics and electrical equipment, industrial machinery, computer equipment and apparel, industrial sectors in which overall U.S. trade with the maquiladoras is most intense.

To be sure, things are changing in Mexico. Its domestic economy continues to rebound from the grave recession that followed the peso-devaluation crisis in the winter of 1994-95. Real growth in gross domestic product in 1998 was reported at 4.8%. Meanwhile, the maquiladoras are becoming more integrated into Mexico's expanding domestic economy. Most of the recent expansion has been in the interior, where the number of production-sharing plants rose from fewer than 300 in 1994 to 1,092 in April of last year.

For the time being, however, we remain our own best customers.

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