`Free Trade Isn't Painless'

This was the moment Mexico had been waiting for: its debut in the First World. After 18 months of up-and-down negotiations, a beaming President Carlos Salinas de Gortari appeared on nationwide television on Aug. 12 and triumphantly raised a weighty tome, the completed North American Free Trade Agreement. Was there a carnival of mariachis in the streets? Hardly. Within two days, the limp Mexican stock market slumped an additional 2%.

The Mexicans, it seems, enjoyed their free-trade fiesta last year. As foreign investors poured dollars into the booming Mexican market, south-of-the-border companies strutted confidently down Wall Street, raising billions in debt and equity. They exulted in the long-term potential of free trade: job creation, foreign investment, bigger markets, better infrastructure, and a higher standard of living at home. But the party fizzled out last spring, when the overheated Mexican market started falling.

Now, Mexican companies realize just how much short-term pain there will be before the long-term gain. Once the trade agreement goes into effect, they will have to compete head-to-head with U.S. and Canadian powerhouses, from American Airlines Inc. to Anheuser-Busch Cos. "Free trade isn't painless," says Lorenzo Zambrano, general director of the Monterrey cement giant, Cementos Mexicanos.

It won't be all roses for Salinas, either. Massive imports of everything from Oreos to Alpo are building up a record trade deficit (chart). Attracting foreign cash to finance the buying binge could be tough if the stock market falls further. What's more, emboldened by free trade, Mexico's low-wage workers are striking for higher salaries, most recently at Volkswagen and General Motors Corp.

Although NAFTA has not yet been signed, corporate Mexico is already getting a strong dose of the short-term discomforts that come with free trade. Take the airlines. With the skies opening over Mexico, the country's two airlines are feeling the pressure as American Airlines and United Airlines Inc. bull their way southward. To survive in this new world, the Mexicans are scurrying for alliances with U.S. carriers--Aeromexico with U.S. West and Mexicana de Aviacion with Continental Airlines.

THE VULNERABLES. Many of Mexico's other big companies are also linking with partners north of the border, from Wal-Mart Stores Inc. to General Electric Co. But thousands of small Mexican companies are vulnerable. Technologically backward, they hold scant appeal for U.S. partners. Worse, they're locked out of foreign money markets and must pay 20%-plus interest on peso loans. Even more daunting, when free trade kicks in, foreigners will be able to snatch a growing share of the government contracts that keep many smaller companies afloat. "I tell these companies: 'You are going to have to move fast to modernize,' " says Finance Secretary Pedro Aspe. "They can't afford to wait."

The pain from Mexico's import splurge throbs throughout the country. Each month, more petrochemical plants on Mexico's Gulf Coast shut down, unable to compete with cheap imports. Along the crowded sidewalks in Mexico City's colonial downtown, eager customers sift through piles of cheap Asian garments dumped into Mexico through the U.S. But in nearby Puebla, textile plants are shuttered. State companies, too, are cutting back. Thousands of workers laid off from state oil monopoly Pemex recently marched to protest but to no avail.

`SUSPICION.' While companies scrounge for capital, they also confront an increasingly restive work force. This is especially so in Mexico's booming auto industry. There, strikes recently shut down two export operations, GM's prize-winning plant in Ramos Arizpe and Volkswagen's complex in Puebla. Mexican officials suspect that U.S. unions are quietly helping Mexican unions. Their motive, the officials say, is to raise the cost of building cars in Mexico, where companies save an average $700 per vehicle, and thus to slow the industry's march southward. "We don't have direct evidence of this," says President Salinas. "But there are grounds for suspicion." A spokesman for the United Auto Workers in Detroit says his union has provided financial aid to unions in Mexico but has not organized any strikes there.

Still, Mexicans have plenty of reasons to feel confident. The federal budget, a disaster just a few years ago, now boasts a surplus, thanks to debt restructuring and sharp cuts in subsidies. The President's political footing, which seemed shaky when he took power in 1988, is now rock-solid. Massive infrastructure projects, including an ambitious network of private toll roads, link Mexico to the U.S. market--and spell big contracts for local cement and steel companies.

Salinas thinks NAFTA will become law, no matter who wins the U.S. Presidential election in November. "It is inevitable," he says. And most Mexicans agree that NAFTA gives the country a once-in-a-lifetime chance to join the industrialized world. But, for now, they're grumbling. After last year's party, all they can see for the year ahead is a long, hard climb.

Stephen Baker in Mexico City

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