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Sunday, December 19

Three reports on Mexico and questions about NAFTA (Revised)

Update 7:15 PM
The response from a blogger friend to the original version of this post caused me to consider that I'd worked so many concepts into it that I'd diluted my arguments. So I've deleted the discussion about I call the 'Wal-Mart Syndrome' and its connection to the cheapening of the concept of value in America and placed the discussion in a separate post. And I added an introduction to the new post in the forlorn hope this will keep it away from politics.

Three reports, below, from the Associated Press, Los Angeles Times and Wall Street Journal provide a snapshot of Mexican immigration to the United States, the current state of Mexico's drug war, and the cost of drug cartel-related violence to Mexico's economy. Beyond these issues looms questions about NAFTA.

The Wall Street Journal report points out that "Mexico continues to lure foreign investment with its low wages, location next to the U.S. and the advantages of the North American Free Trade Agreement."

What I find most striking in the WSJ report is the discussion about three U.S. firms that want to build factories in Mexico but are held back because of the violence there. Surely those American firms are but a few that absent the violence would choose Mexico over the United States for factory sites.

Given that the USA is the world's largest recipient of FDI (foreign direct investment) I might sound miserly by complaining that our southern neighbor could draw a small amount of FDI away from the USA but that's not my point. The foreign firms that set up branches in the USA pay higher salaries to U.S. workers than U.S. firms. That means the United States is a very attractive place to do business -- for foreign conglomerates; so attractive that the companies are willing to pay very good salaries to American workers.

So what it is about the USA that makes it attractive to foreign business but unattractive to many American businesses?

This is an issue Americans need to resolve as Mexico heads toward greater economic success, particularly given that the American taxpayer has gone a long way toward subsidizing Mexico's notoriously tax-averse ruling class. Mexico's government shunts its poorest onto Americans, who have been picking up the tab for education, and health and welfare for Mexican immigrants to this country including illegal immigrants.

In better times Americans could afford to provide such subsidies for Mexico's rich, and the subsidies were seen as a tradeoff to lure cheap Mexican labor to the USA. But that view does not hold up against the current jobless rate in the USA and the fact that many American jobs are in service industries that are the first to tank during an economic downturn.

Another issue that Americans need to wrestle with is NAFTA. The rationale for NAFTA -- the way the U.S.-Mexico portion was promoted to Americans -- is based on the trickle-down theory: as more Mexicans find employment in Mexico they have more disposable income, which they could use to purchase American products. The same theory was applied to Mainland China but that didn't work out as U.S. economists visualized. The question is whether the economists are also in La-La Land when it comes to Mexico.

The bottom line is that 1 Mexican Peso (MXN) exchanges for 12.40 U.S. dollars (USD). That might not sound like a huge difference -- until the pesos pile up:

100,000 USD = 1,239,746 MXN

The MXN is now among the 15 most traded currency units in the world and is the most traded currency in Latin America.

Someday the MXN will surely come into approximate parity with the USD. The question is how many years into the future that day is -- and how many U.S. factories will go south during the interim.
December 15, 2010, Associated Press via The Washington Post:
(MEXICO CITY) A joint U.S.-Mexico committee met for the first time Wednesday to address border management issues and border violence. The committee was created By Presidents Barack Obama and Felipe Calderón in May.

Mexico has expressed concern about the deaths of migrants during recent incidents involving U.S. Border Patrol officers, and the two countries agreed on the need to "minimize the need for United States and Mexican federal law enforcement officers to resort to lethal force."
The committee endorsed expanding coordinated patrols and "expanding existing exchanges of passenger information to detect and detain possible drug and weapons smugglers, and other criminals that travel between the U.S. and Mexico."

The statement also pledged support for various projects aimed at improving ports-of-entry and border crossings in several states, and "expand trusted traveler and shipment programs by facilitating enrollment and making them more advantageous and easy to use." It also supported the establishment of pilot projects for cargo pre-clearance in both countries.

The issue of migrants and how they are treated remains a sensitive subject in Mexico, even as their overall number of migrants moving across the border drops.

The number of Mexicans deported or repatriated by the United States dropped 23.2 percent in the first 10 months of 2010 as compared to the same period of the previous year, Mexico's Interior department reported Wednesday.

A total of 410,442 people were returned to Mexico.

Of those, 23,359 agreed to be flown to Mexico City and transported to their hometowns, rather than simply being expelled over the border. That annual program was in effect from June 1 to Sept. 28.

The mayors and governors in some Mexican border states have complained in the past about crime and unemployment problems created by the deportation of large numbers of migrants to border communities.
December 16, 2010, Los Angeles Times (Ken Ellingwood report filed in Mexico City):
More than 12,000 people have died this year in Mexico's drug war, officials said Thursday, making it the deadliest year since President Felipe Calderón launched a government crackdown against traffickers in 2006. The federal attorney general's office said 12,456 people were killed through Nov. 30.

The overall death toll since the launch of the drug war stands at 30,196, according to figures given to reporters during a year-end breakfast session with Atty. Gen. Arturo Chavez Chavez. But that figure appeared to underestimate the toll. Federal officials announced in August that 28,228 had been killed in the war, meaning the death rate would have to have slowed considerably since then.

But there has been no sign of easing violence as cartels have remained locked in fierce turf battles that have most contributed to the rising toll.

Estimates by Mexican intelligence put the death count at about 32,000. The rising toll represents a political drag on Calderón, who has sought to assure a jittery public that the crackdown is depleting the cartels' power as they lose bosses to death and arrest.

Although the administration has contended that the vast majority of those killed are drug gang henchmen, the bloodletting has left many Mexicans convinced that the government has lost control of entire regions, such as the crime-ridden northern border state of Tamaulipas.

In a recent survey by the Mitofsky polling firm, 59% of respondents said organized-crime groups were winning the war against federal forces. In a separate poll, 4 in 5 respondents said the country was more violent than a year before.

On Thursday, more than 30 business and civic groups took out full-page advertisements in newspapers pleading with the country's leaders to bring the mayhem under control.

Chavez told reporters that arrests and killings by Mexican forces of top underworld figures, including the reported slaying last week of a reputed drug lord in the western state of Michoacan, were taking a toll on the groups. Chavez said "a lot of evidence" suggested that Nazario Moreno Gonzalez, alleged leader of the cult-like La Familia group, was killed in skirmishing with federal forces, though no body was recovered.

In November, marines killed Ezequiel Cardenas Guillen, an alleged leader of the Gulf cartel, during a battle in Tamaulipas.

"What is clear is that there is a significant weakening of these criminal structures," Chavez said.
December 17, 2010, Wall Street Journal:
Companies Shun Violent Mexico

Unrest Deters Electrolux, Whirlpool, Others Who Have Considered New South-of-the-Border Plants.

[...] Drug-related violence in Mexico probably cost the country some $4 billion in foreign direct investment this year, estimated Gabriel Casillas, J.P. Morgan's chief economist for Mexico.

Crime has also spooked foreign executives. Jim Davis, a managing director at Russell Reynolds Associates, an executive-recruitment firm, said he recently conducted a search for a pharmaceutical company seeking a top manager in Mexico City.

"A lot of the folks would say, 'My wife would not be in favor of us moving down there at this time,'" Mr. Davis said. "I think the fears are a little bit overblown but the reality is that's what people are reading in the newspapers and seeing on TV."

While foreign direct investment is expected to be slightly up in Mexico this year, the figures were boosted by the $5 billion takeover of the beer business of Fomento Economico Mexicano SAB by Dutch brewer Heineken NV. That deal won't include typical investment benefits like construction of factories and creation of jobs in Mexico.

Stripping out the Heineken-Femsa deal, Mexico's foreign investment numbers begin to look less healthy, said Mr. Casillas. Moreover, companies usually plan investments far enough ahead that this year's dramatic increase in violence will probably only show up in next year's numbers.

In Mexico's violent border regions and troubled interior states of Durango, Sinaloa and Michoacan, foreign investment has dropped to roughly $1.9 billion in 2010 from an average of about $5 billion a year from 2005 through 2008, excluding the Heineken-Femsa deal.

Concern about violence is leading to "a lot of caution around future growth plans," said David Speer, chief executive officer of Illinois Tool Works Inc., a big industrial conglomerate based in Glenview, Ill.

Mr. Speer said some companies that buy products from ITW units have delayed projects in Mexico due to security concerns, though he declined to name any projects.

Violence has spread to parts of the country formerly seen as "immune" from such problems, he said.

Some global companies are making investments deeper in Mexico's interior to avoid the violence. Japanese car maker Toyota Motor Corp., for instance, is building a plant in the state of San Luis Potosí.[...]
Readers following the economic situation in Mexico should read the entire WSJ report.

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