Free trade with Mexico: how to avoid being taken.

• Author: Neff, Richard E.

There is a market of 80,000,000 consumers and a tremendous demand for American products, but U.S. companies must be alert to perils ahead.

More than two years after endorsing the concept, and following over a year of negotiations, the Presidents of the U.S. and Mexico and the Prime Minister of Canada approved the text of the North American Free Trade Agreement (NAFTA) on Aug. 12, 1992. The concept of a free trade agreement with Mexico was unimaginable just five years ago, when that nation's economy was beginning to stir from decades of protectionism and staggering debt. Tariffs of 100% were fairly common then, but the maximum today is 20%, and the average is 10%. The rate of inflation, which soared to 160% in 1987, was approximately 12% in 1992.

Since 1987, more than 75% of Mexico's state-owned enterprises have been privatized. During nearly five years of the Carlos Salinas Administration, 362 companies have been privatized, generating more than $21,000,000,000 for the Mexican economy, much of it dedicated to retiring that nation's debt. Telefonos de Mexico was privatized in 1990 and has launched an ambitious and much needed modernization program. Moreover, virtually all of the country's 18 banks, which were nationalized in one disastrous stroke by outgoing Pres. Lopez Portillo in 1982, have been re-privatized, and the remaining few are up for sale.

To complete the impressive structural reform that made free trade possible, Mexico enacted a series of laws that have spurred foreign investment and growth. The Salinas Administration completely abrogated the law that imposed many costly restrictions on technology transfers, and the Technology Transfer Bureau also was eliminated. New industrial property (patent, trademark) and copyright laws that approach international standards were enacted in 1991. Further improvements are contained in the NAFTA accord.

While the Foreign Investment Law still stands, the government, by regulation, now permits 100% foreign ownership of businesses in most sectors when certain minimal requirements are met. The key restrictions for small businesses, apart from certain geographical limitations for manufacturing companies, are that foreign investment projects must be financed with foreign capital and, for the first three years of operation, must maintain net positive dollar balances in their Mexican accounts. About three-quarters of the Mexican economy is open to such investments, but most mining, fishing, and telecommunications activities are restricted to 49% foreign ownership, and railway transportation and petroleum are closed to foreign investment.

Upcoming free trade with Mexico offers great opportunities for US. business owners if they avoid making costly mistakes. Mexico is the third largest trading partner of the US., after Canada and Japan, representing nearly $70,000,000,000 in two-way trade (exports plus imports) and more than $40,000,000,000 in U.S. exports alone in 1992. The combination of its burgeoning economy - one of the fastest growing in the Western Hemisphere, with nearly 12% growth over the past three years - and free market reforms soon should make Mexico the U.S.'s second largest consumer market.

Even though NAFTA faces a rough ride to approval in Congress, the impetus in Mexico toward free trade is irreversible. This presents enormous opportunities to American companies. U.S. businesses, large and small, face certain advantages in expanding south of the border, as Mexicans regard American products as having great cachet.

While many industries will benefit from free trade with Mexico, a U.S. government study has identified the following sectors in Mexico as the most promising for American exporters: auto parts and service equipment; apparel; oil and gas machinery and services; chemicals and chemical production machinery; plastics and resins; cosmetics and toiletries; computers, software, peripherals, and services; machine tools and metalworking equipment; telecommunications equipment and services; and medical equipment.

To this can be added virtually all services, from banking and financial to brokerage to insurance, as U.S. service companies are even further ahead of their Mexican counterparts than American manufacturers.

American executives'

potential mistakes

There are nine common and costly mistakes made by American executives who seek to do business in Mexico without proper guidance, as well as fallacies that prevent optimal reults:

"I'll wait until NAFTA is enacted by Congress." Under the best scenario, the effective date of the free trade agreement will be Jan. 1, 1994. While competitors are waiting for the agreement to take effect, now is the time to get a toehold in Mexico and begin to build market share.

Most of the onerous restrictions on exporting to Mexico and doing business there have been eliminated. Second, because the Mexican economy was protected from competition for so long, American...