Mexico's Wagon Is Hitched to a Falling Star

A U.S. recession would hurt even worse south of the border

Every day, thousands of trucks rumble through border checkpoints, bearing cars and computers and other cargo to the great markets of El Norte. For the better part of a decade, Mexico has worked mightily to hitch its economy to that of its northern neighbor. Now the U.S. could be sliding into a deep recession after a wave of terrorist attacks, and Mexico, too, will pay the price. From border boomtowns such as Ciudad Juarez to the seaside resort of Cancun, all will feel the effects of a U.S. retrenchment.

Coming just five days after President Vicente Fox's state visit to Washington, the bombings extinguished hopes that the U.S. economy was on the verge of recovery. Economists now say Mexico will be lucky to post 0.6% growth this year. That's way down from the 4.5% the government had initially projected. Mexico had already been faltering before the events of September. Exports to the U.S. fell by more than 4% year over year in June and July and are headed further south. More than 500,000 workers have lost their jobs this year, as companies scale back production. "If the U.S. doesn't recover quickly, it is going to be hard," says Finance Secretary Francisco Gil.

The damage to the Mexican economy could be widespread: 90% of its exports are manufactured goods, most of them bound for the U.S. Demand for big-ticket items such as automobiles will probably be the worst hit. But Gil says he expects that shipments of televisions, computers, and household appliances such as stoves and refrigerators will also suffer. Another likely victim: tourism. "The U.S. economic crisis and fear of flying will make tourism one of the most affected sectors," says Francisco Madrid, undersecretary of planning at the Tourism Secretariat. Officials predict that revenues will fall by 5% next year, to $7.6 billion. Yet analysts warn that revenues could be as low as $5 billion if many Americans decide to stay home.

Washington's efforts to beef up airline security could also take a toll on Mexican businesses. Passenger flights will no longer be able to accept cargo shipments. That will boost transport costs for electronics manufacturers in Guadalajara and Monterrey that supply components to factories in the U.S. on a just-in-time basis. "Timing [of deliveries] is going to be more unpredictable, so it's going to cost more in terms of production costs," Gil says. And businesses that use highway transport are facing long delays at customs crossings along the U.S.-Mexico border. Crossings that normally take half an hour were taking as long as two hours one week after the bombings, according to Delphi Automotive Systems Corp.

Some Mexican companies have bigger worries than whether their shipments get to their destination on time. Wages in many sectors are rising faster than inflation, which is expected to end the year at 5.5%. In early September, 12,300 workers at Volkswagen's New Beetle plant in Puebla secured a 14% increase in wages and benefits after a 15-day strike. Workers at the state-run oil company, Petroleos Mexicanos, recently won an 8.5% hike, as did flight attendants at Mexicana Airlines. "If companies and the government continue to reach settlements quickly to avoid strikes, we'll quickly price ourselves out of the markets," says Gil.

PLUNGE. The trend towards high-wage settlements could also dim Mexico's attractiveness in the eyes of foreign investors. Volkswagen spokesman Thomas Karig says the company has shelved plans for new projects for the time being. "Mexico definitely is no longer a low-wage country," he says. Plunging sales at home and in major export markets may force other multinationals to follow suit. "Large international companies are heading toward a much more pessimistic outlook, and investment in a country like Mexico will be a lower priority," says Rogelio Ramírez de la O, president of Economic Analysis for Company Planning (ECANAL), a Mexico City consultancy.

One of the areas where Mexico stands to benefit from the current crisis, is if oil prices skyrocket in response to war in the Middle East. The price of Mexico's crude mix has risen 28% in the last month. And the U.S. and Mexican economies are so closely wedded that when demand picks up in the U.S., orders should flow to Mexico immediately. For now, that recovery is nowhere in sight.

By Geri Smith in Mexico City

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