Trade Knits U.S. and Mexico Ever More Tightly

The last time an American leader visited this capital, Mexico was the United States’ No. 4 trading partner. The year was 1979, Mexico’s main export was oil, and President Jimmy Carter’s most famous comment regarded his case of “Montezuma’s revenge.”

President Clinton may still want to skip the drinking water. But when he arrives today, he will find that other aspects of Mexico have been transformed. Mexico is now poised to overtake Japan as the United States’ No. 2 export market--trailing only Canada.

Behind that move is a remarkable story of how the two neighbors’ economies have become increasingly knit together. Even as many Americans’ impressions of Mexico focus on problems such as drug smuggling and illegal immigration, this country has quietly become a kind of Sun Belt for the United States.

“The North American market is becoming more and more important for us,” said Raul Hinojosa, an expert at UCLA on the North American Free Trade Agreement, which was created to open up exchange between the United States, Mexico and Canada. “How Mexico evolves will be incredibly important for the U.S. economy.”

While also spotlighting issues such as fighting drugs and controlling illegal immigration, Clinton hopes to use his trip, which includes two days here and stops in Costa Rica and Barbados, to generate momentum for extending NAFTA to the rest of Latin America.

The president also plans to emphasize NAFTA’s benefits in advance of a potentially hostile U.S. congressional review of the accord scheduled for this summer.

Since NAFTA took effect in 1994, trade between Mexico and the United States has mushroomed to record levels. U.S. exports to and imports from Mexico combined were worth about $130 billion last year.

But though U.S. exports to Mexico have surged 36%, NAFTA opponents note that imports from Mexico have grown by twice that percentage--leaving the U.S. with a $16-billion deficit.

Success or failure? Many analysts say it is still too early to judge NAFTA. That is especially true since Mexico is emerging from its worst recession in 60 years, a disaster that far outweighed any NAFTA effect.

But analysts say the economic relationship between the two countries has been radically transformed. Just consider: Bilateral trade as measured in dollars is up more than 500% since Carter’s visit in 1979.

The most important change actually came before NAFTA. Mexico started slashing its sky-high tariffs in the mid-1980s as part of a drastic shift toward freer markets. That encouraged many U.S. companies to move labor-intensive elements of their production to Mexico, where wages were lower.

Today, most of Mexico’s exports to the United States are manufactured products such as cars, televisions and clothing. But many are chock full of American content. In fact, about 80% of U.S. exports to Mexico are “intermediate goods,” which are installed in Mexican computers, spun into Mexican T-shirts and riveted into Mexican cars--many headed back north of the border.

They are products like the U.S. gabardine that goes to Corporativa Libra in the northern Mexican state of Coahuila, which borders Texas. The company cuts the fabric and sews it into insulated overalls, which go back to a U.S. distributor.

“The company’s strategy of looking toward the U.S. market is 10 years old. But with NAFTA, the whole process has been accelerated” because of lower tariffs in both directions, said Isidro Garcia, a senior company official.

In a striking sign of how companies are increasingly viewing North America as a single market, about half of U.S.-Mexican trade is now between subsidiaries of the same companies or between firms with strategic alliances, estimates Sidney Weintraub, a Washington-based trade expert and author of “NAFTA at Three: a Progress Report.”

Ford, for example, imports Escort models from its plant in the northern Mexican city of Hermosillo. But the company and its suppliers export to Mexico the engines, from Dearborn, Mich.; the brakes, from Cincinnati; and the power steering pumps, from Indianapolis.

Such integration means that Mexico and the United States now depend on each other economically far more than ever before.

But the division of labor has serious consequences, especially in manufacturing centers such as Southern California.

A new, comprehensive study by Hinojosa ranks Los Angeles County as the No. 1 area in the United States that is likely to lose jobs because of imports under NAFTA. But the county, ironically, is also expected to be one of the biggest job gainers, thanks to rising exports of its more sophisticated products.

“What people don’t understand in Southern California is that we’re highly integrated with Mexico compared to other parts of the country,” Hinojosa said.

Take the electronics industry. Southern California’s biggest export to Mexico is electronics, Hinojosa notes. Electronics are also the state’s biggest import from Mexico, but mainly products assembled in Mexico using U.S.-made parts. Exporters of sophisticated electronics from Southern California, therefore, may be enjoying a boom--even as workers in the region’s assembly plants are facing layoffs.

According to Hinojosa’s study, job losses among low-skilled U.S. workers due to the accord have largely been matched by job gains, many of them among higher-skilled workers.

Despite sharp gains in trade between the United States and Mexico, two-way commerce remains small in relative terms. Most products that Americans buy are produced at home. Even with its growing appetite for American products, Mexico receives only about 9% of U.S. exports.

But for workers whose factories move south, that is small comfort.

“People who lose their jobs in the U.S. because of trade imports don’t go up the ladder, they go down or off. Their new jobs pay much less, or they don’t get new jobs,” said Jeff Faux, president of the Washington-based Economic Policy Institute.

* WASHINGTON OUTLOOK: Tough talk may be needed for Clinton’s visit to Mexico. A5

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U.S.-Mexico Trade

Bilateral commerce has risen more than 500% since 1979.

‘96 (In billions)

U.S. imports from Mexico: $73 billion in 1996

U.S. exports to Mexico: $57 billion in 1996

Source: Census Bureau, Foreign Trade Division

Researched by JENNIFER OLDHAM / L.A. Times