Originally published in The Akron Beacon Journal
Sunday, October 22, 1995
PLANTS WITH MARKETS IN U.S. ARE WEATHERING THE PLUNGE OF THE PESO
By DAVID KNOX
PLANTS WITH MARKETS IN U.S. ARE WEATHERING THE PLUNGE OF THE PESO
By DAVID KNOX
It was during his 1992 campaign for president that H. Ross Perot made his much-quoted prediction that the North American Free Trade Agreement, calling for the gradual elimination of trade barriers with Mexico and Canada, would be an economic disaster for the United States.
"You implement that NAFTA, the Mexican trade agreement where they pay people a dollar an hour, have no health care, no retirement, no pollution controls...and you are going to hear a giant sucking sound of jobs being pulled out of this country," Perot said during a debate in East Lansing, Mich.
But more than 1 1/2 years after the treaty went into effect on Jan. 1, 1994, the nation in the economic dumper is Mexico, not the United States.
Yet it's hard to find any Mexicans who blame NAFTA for their country's economic woes, not even in the leftist opposition party. "We believe it is good," said Fulgencio Menes Moran, regional secretary general of the Party of the Democratic Revolution in Juitepec, a depressed industrial city of about 200,000 in the state of Morelos, south of Mexico City.
Menes did have some gripes about the treaty. He argued that it should have provided more time for Mexican peasant farmers to develop the technology to compete with mechanized U.S. agribusinesses. And he charged that the United States is balking at opening its market to Mexican steel and tuna.
But Menes accepts NAFTA's basic argument that all North America is a single market.
For Mexico, that means an economic policy of "no separation -- no independence -- from the United States," he said.
There's a very good reason Mexicans see NAFTA as a solution to their economic problems: Since the collapse of the peso in December, the only companies in Mexico showing a pulse are those selling goods to the United States. The peso's loss of more than 40 percent of its value ignited inflation and sent interest rates skyrocketing, putting U.S. products out of reach of most Mexicans.
But the cheaper peso also lowered production costs by up to 40 percent for labor and rent, making Mexican products easier to sell abroad. Those exports are keeping some companies prosperous despite the economic collapse.
A prime example is the Goodyear tire plant in the Mexico City suburb of Lecheria.
While most companies are cutting back, the 1,950 workers at the Goodyear plant plan to produce 12 percent more tires this year than in 1994. This is despite a 26 percent decline in demand for tires in Mexico.
"We have not had to lay off a single associate in this whole crisis," said Hugh D. Pace, president and director of the plant.
Pace said his company has prospered despite the collapse of the Mexican economy because more than half the plant's projected 1995 production of about 4.4 million tires will be exported. Nearly half those -- about 1 million tires -- are going to the United States; most of the rest are going to other Latin American nations, Europe and Japan.
Pace, an Akron native and Firestone High graduate, has spent 17 of his 20 years with Goodyear in Latin America. Before coming to Mexico 3 1/2 years ago, he was in Argentina, Venezuela, Peru and Brazil.
The Goodyear plant couldn't always sell tires abroad when domestic demand went slack. For more than four decades after the plant was built in 1945, every tire produced there was required by law to be sold in Mexico.
The ban on exports was part of the government's policy of "import substitution." The program called for high tariffs to curb imports while encouraging foreign companies -- such as Goodyear -- to build factories.
In the mid-1960s, a limited exception was made for U.S. carmakers and other companies that wanted to take advantage of cheaper Mexican labor. Plants in designated "maquiladora" districts in northern Mexico were allowed to assemble products -- mainly using parts made in the United States -- for immediate export back across the border. Goodyear opened a plant to serve the maquiladora industry. The plant in Hermosillo mounts and balances U.S.-made tires for a nearby Ford factory assembling Escorts and Mercury Tracers. Another plant in San Luis Potosi makes automotive hoses and belts, mainly for export to the United States.
By the mid-1980s, the policy of import substitution was judged a failure. Critics charged that instead of spurring industrial development, the tariffs were protecting inefficient companies, resulting in poor goods and high prices for Mexicans.
The last remnants of the policy were swept away when President Carlos Salinas de Gortari took office in 1988 and began dropping tariffs and other trade bars. Under a banner of "neoliberalism," Salinas pushed for a common market with the United States -- a move that climaxed in NAFTA.
"In the '80s, before Mexico opened up, there were basically six brands of tires present in the Mexican market. And those were the six local manufacturers," Pace said. "Today, first of all with the opening of the Mexican market and in particular the opening caused by NAFTA, we now find over 35 brands of tires present in Mexico."
With the barriers coming down, the Goodyear plant exported its first tires in 1993 -- 7 percent of its production. The following year, the figure jumped to 20 percent.
Pace said the opening of the Mexican market couldn't have come at a better time because it coincided with a growing "global mentality" at Goodyear that enabled the company to react quickly to the collapse of the Mexican economy.
"Because of the global mentality, any time we see a problem -- an economic crisis in any country which reduces the demand for product -- we immediately try to replace that demand through exports to another market," he said.
"When the bottom fell out, local and corporate management in Akron immediately got together. We've displaced 18,000 tires a day to other markets around the world. In the past we would have had to cut our ticket 8,000 tires a day. We would have had to lay off people."
More freedom coming
As NAFTA eliminates all trade barriers over the next 10 years, permitting tires to be sold anywhere in North America without tariffs, Goodyear will have even more freedom to fine-tune supply and demand by allowing his plant to specialize, Pace said.
Many U.S. Goodyear plants already specialize in one or two lines of tires. But as long as Mexico was a closed economy, Pace's plant had to produce all types of tires, from bias-ply tires for mobile homes and tractors to high-tech radial Eagles. The plant even makes tires for the Volkswagen Beetle, which is still manufactured in Puebla.
"As the economies of Mexico and the United States and Canada become more and more integrated, this plant will become more and more specialized in the lines that it makes, and that will enhance our efficiency and productivity," Pace said. "I could see a scenario where this company would continue exporting 50 percent of its product if it becomes a more and more specialized plant."
Types of tires no longer made at the plant would be imported from the United States and Canada.
Pace said that despite the burden of constantly shifting product lines and being an older facility, his plant is nearly as cost-effective as Goodyear's U.S. factories because of lower labor costs. Pace said his employees make about $12 an hour, including Social Security, pension and other benefits.
While that is less than half the $27.55 an hour that the average U.S. rubber worker makes in wages and benefits, it's more than 30 times the Mexican minimum wage of about $3 a day and enough to support a solidly middle-class lifestyle.
"Our people own their own houses," Pace said. "They own their own apartments. They have one or two cars, and they can afford to send their children to university. Their standard of living -- by Mexican standards -- is extremely high."
If NAFTA is helping some Mexican companies survive this crisis, what is it doing for the U.S. economy?
The short answer is not much -- at least right now.
The problem is that few Mexicans can afford to buy U.S. products, which cost more because of the peso devaluation. The economic crisis has derailed predictions by NAFTA supporters that lowering the trade bars with a nation of 91 million people would create a vast market for U.S. goods, generating hundreds of thousands of jobs here.
Started on right foot
For a while, it had looked like those predictions quickly would come true. In November -- a month before the peso collapse -- the U.S. Department of Commerce credited increased trade with Mexico with creating 100,000 jobs in the United States in the first six months after the treaty took effect. By the end of the year, the United States boasted a $1.3 billion trade surplus with Mexico.
The number of new jobs overshadowed the 9,200 U.S. employees who lost work because of NAFTA and qualified for federal assistance under a Labor Department program.
But the situation changed dramatically after the devaluation. Within weeks, the flow of goods and services into Mexico dried up. Through July, the United States recorded an $8.9 billion trade deficit.
Meanwhile, the Labor Department found the number of U.S. employees who lost work because of NAFTA has gone up nearly fivefold, to 42,221 as of Sept. 30. Union leaders claim the damage is worse because many workers don't claim unemployment benefits.
The Commerce Department has not updated its figures on new jobs, but its chief economist, Lew Alexander, acknowledged that "trade with Mexico has not created the number of jobs people anticipated. That's a function of the financial crisis."
Mexico's economic crisis also has slowed direct U.S. investment there -- especially in stores.
Plummeting retail sales -- down 39 percent by May -- forced several major U.S. chains that had moved into Mexico in anticipation of a flood of NAFTA-spurred spending to scale back plans for expansion.
Wal-Mart, which had 44 stores in Mexico, had planned to open 12 supercenters and 13 Sam's Clubs in 1995. Now there will be only three.
Kmart opened two stores last year and two more this spring, but no more are on the drawing boards.
J.C. Penney entered Mexico with two stores in May, but plans for five more by 1997 are on hold.
Also hurting are many U.S. companies that opened plants south of the border to make products for sale in Mexico.
The J.M. Smucker Co. came to the Mexican market three years ago, importing its jams and jellies produced in Orrville, said Ken Miller, general manager of J.M. Smucker de Mexico.
To take advantage of cheaper manufacturing costs, the company began production in Michoacan, a fruit-growing state west of Mexico City. Plans called for gradually replacing the Ohio-made stock on supermarket shelves with locally made products.
But depressed sales this year have meant "we've had to come down from those plans," Miller said.
Running behind last year
Miller declined to reveal sales figures, but he admitted, "We're running slightly behind last year at this point."
While "many U.S. companies have withdrawn from the market" because of the economy, Miller said Smucker is in Mexico to stay. "We plan on toughing it out."
Miller said NAFTA alone won't cure Mexico's ills.
Miller said the devalued peso and price increases caused by inflation that's predicted to hit nearly 50 percent for the year more than offset the treaty's gradual tariff reductions, which amount to only 2 percent annually for Smucker products.
"The impact of duty reduction is very modest at this point," he said. "On balance, NAFTA has been negated by the economic crisis."
NAFTA supporters say that despite the setbacks, it's too soon to call the treaty a flop. Once the Mexican economy gets going again, the demand for U.S. products will return. "That's the real benefit to Americans. It's not cheap labor; it's the consumers here," said Jaime Anderson, 26, who has worked as a commercial real-estate agent in Mexico for 1 1/2 years.
Works for state
Anderson, a graduate of Denison and Ohio universities, was hired by the Ohio Department of Development to help open a trade office in Mexico City.
Mexico is Ohio's fifth-largest trading partner. About 18,700 Ohio workers -- a 175 percent increase in the work force since 1987, according to the U.S. Department of Commerce -- make about $1 billion worth of products exported annually to Mexico.
Anderson said there "are immense opportunities for Ohio companies to sell in Mexico," pointing to the success of Procter & Gamble of Cincinnati, which has produced bathroom and household products in Mexico for decades.
Anderson argued that the United States has an interest in a prosperous Mexico because of the potential size of the market.
"You don't get rich selling to the rich," he said. "Wouldn't you rather sell one jelly bean worth 1 cent to 50 million Mexicans every year rather than one jelly bean worth 10 cents to 10,000 rich Mexicans?
"I'd rather sell to 50 million."
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