INTERNATIONAL ISSUESROBERT E. MARKLAND, Feature Editor, College of Business Administration, University of South Carolina NAFTA IS HERE, WHAT IS IT? AND WHAT DO WE DO NOW?by Benito Flores, Texas A&M University What Is NAFTA? The North American Free Trade Agreement (NAFTA) is a reality. It is here and there are some changes taking place that we should be aware of. NAFTA is a trade-off. Mexico is going through the creation and adaptation of a new culture. This new environment envisions a market-driven reinvention of old institutions for Mexico, like the agricultural and energy sectors. It is the development of new economic essentials that we normally take for granted. As a trade-off, in exchange for the transformation, Mexico will receive Canadian and U.S. investments needed to aid the evolution of the country. The free trade agreement is a series of time schedules for the elimination of trade barriers. The rules that are created have to do with the way investment schedules are to be carried out. In most cases, the target is almost exclusively Mexico. NAFTA assures that all American and Canadian investments in Mexico are treated in the same manner as Mexican companies. It creates the rules for the pharmaceutical companies and the software firms. It adds to the security of stocks and other financial instruments. It means that American manufacturers do not have to maintain a positive balance of cross-border payments in the automobile industry, which in the past forced them to export cars and limited the import of components. NAFTA has created many changes mainly in the Mexican way of doing business. In the U.S. an open economy is already essentially in place. In Mexico, until recently, there was an outright ban on foreign equity control in many key industries. The treaty has a schedule for the opening of ownership for most business areas. In the financial services, liberalization of trade means a partial liberalization of direct investment rules. In manufactur- ing, rules of origin are an implicit investment code. Since duty-free goods must be made in North America, then direct in- vestment must be made. NAFTA's tariff reduction time schedules can be used as a road map for investors. Textile producers in the Carolinas know when to begin adding new high tech looms to supply fabric to Mexican garment manufacturers. Mexican agriculture is motivated to move away from sorghum and into winter vegetables. U.S. farmers are told to stay in wheat and corn but to move away from sugar cane. What Are the Opportunities for the U.S. and Canada? Consider an example of where growth could come to the U.S. from the impact of NAFTA. The Mexican housing market can be a bonanza. World Bank estimates show an unsatisfied six-million unit house demand. Families are large (averaging four children) and young (80% of the people are under 40). The purchasing power of middle-class professionals has nearly doubled in the last five years. This would imply, in most countries, a booming housing market. But in Mexico this is not the case. The construction market is nearly stagnant. According to some estimates, the supply of the present demand would take an investment of 100 billion dollars. Providing the housing for the new incoming families would require a yearly 15 billion dollar investment. Why has this situation arisen? The presence of high interest rates (15% in real terms) and a banking system that was encumbered by heavy reserve requirements put home mortgages out of the reach of most families. Commercial banks only finance 100,000 units per year. It was not unusual to have a down payment of up to a third with full amortization of no more than ten years. The stagnant construction market can mean two things: the needed presence of a competitive mortgage market and the development of massive housing. Construc- tion companies from Canada and the U.S. could join the boom that will be created as U.S. and Canadian banks begin to finance this untapped market. Is this market the same as in the U.S.? The answer is no. For instance, construction methods are different. Houses in the U.S. are wood-frame built, whereas houses in Mexico are built mostly from cinderblock. Internally, the walls are also built from block and covered with gypsum. In the U.S. sheet rock is the mode. Culture adaptation should be taken into consideration before joining the competition. U.S. and Canadian business persons must be educated in the Mexican ways and vice versa. Professors in all three countries need to learn (so they can become transfer agents) about the many differences in the countries so they can educate the future business generations. What Has Happened Since the Adoption of NAFTA? What has been the reaction of the business world to the changes that are taking place? A survey of over 1,000 executives reported in June 1994 by KPMG reveals some interesting answers. The executives think that the expansion into Mexico will facilitate the expansion into the rest of Latin America (66%), and, at the same time, provide more economic stability to Mexico (61%). Also, that the growth will also improve both the U.S. (57%) and the global economy (54%). Executives are not as clear as to whether it will help solve the infrastructure problems of Mexico (38%) or whether it will provide more high-skilled jobs to Americans (37%). In the same survey, executives (33%) stated that NAFTA has already begun to have an impact in the way they do business in their industry; 26% say that the way they are doing business has been impacted. Nearly 40% of the survey respondents said that their industry has already benefited in some way by the passage of NAFTA while 25% have seen an increase in their demand. Overall, the survey found that 42% of the respondents saw both Mexico and the U.S. benefiting equally. Some special problems have come up in this relationship. A common complaint has been the amount of paperwork needed to do business in Mexico. About 40% of the companies surveyed reported that they have hired or plan to hire personnel who are fluent in Spanish. Still, there are no immediate plans to move to Mexico in the near future (86%). About half of the executives surveyed commented that NAFTA has motivated them to change their market strategy in response to the treaty (45%), analyze information on customers, competitors and suppliers (45%), plus evaluate commercial and regulatory issues (43%). Thus a conservative approach to Mexico is being taken by the companies that answered the survey. What Is the Decision Sciences Institute Doing? The Institute is providing an opportunity to get in touch with educators of schools of business in Mexico. The third annual international meeting will be held June 12-14, 1995, in Puebla, Mexico. The meeting will be attended by professors from business schools throughout Mexico. This will be a unique opportunity to meet and exchange information about the kinds of problems that are unique to Mexico and the ones that have been created by NAFTA. There was concern in the U.S. about the passage of the treaty, especially the impact on the U.S. On the other hand, in Mexico there was fear. It is sometimes said in Mexico that when the U.S. economy catches a cold, the Mexican economy gets pneumonia. The sizes of the economies are so different that there was truly grave concern about the impact. The educational system in Mexico is going through a dramatic change. The privatization of the Mexican economy has had a counterpart in the educational sector of Mexico. The research component of the Mexican universities is growing by leaps and bounds. Once teaching was the major task of most universities. Service was small and research was almost non-existent. The rules of the game are changing. Lately, the Decision Sciences Institute has been going through an internationalization process. A Pacific-Rim region has been officially added. In no small part this was done because of the second annual international meeting held in Korea in the summer of 1993. It is only logical that the process should continue. The Institute's third international meeting will give attendees a chance to see Mexico away from the border. It will allow members to view first-hand what the Mexican province looks like, plus see the largest city in the world (Mexico City) on your way to Puebla, a city of two million. Surrounded by two of Mexico's tallest volcanoes, Puebla's weather is warm during the day but cool at night. The University of the Americas (small by U.S. standardsþ5000 students) is a first-rate university that will welcome the academic world of the U.S. in friendship. Let us make this meeting as successful as the Korean one and provide the Mexican academic world and ours an opportunity to meet, get to know each other and join in friendship. Come join us in June 1995. Vamos a Puebla!
BENITO E. FLORES is a Professor of Operations Management in the College of Business Administration and Graduate School of Business, Texas A&M University. He received a Ph.D in managerial economics at the University of Houston and a B.S. and M.S. in industrial engineering at Texas A&M and the University of Houston, respectively. He has worked in industry for such companies as B.F. Goodrich (Mexico City) and HYLSA, SA (steel manufacturing plant in Mexico) as an industrial engineer and in several management areas such as strategic planning for HYL (an international concern that sells steel technology all over the world). He taught in Mexico at the Monterrey Institute of Technology and the University of Monterrey. He has also taught in Central America for the Central American Bank of Economic Development in several countries and for INCAE in Costa Rica. His research interests are in business forecasting, inventory management, international facilities location, and manufacturing strategy. He has published in many journals and has consulted in industry both in the U.S. and abroad.
Dr. Robert E. Markland
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