Gloom Descends on Mexico’s Nafta Capital

President Trump’s threat to renegotiate the free-trade agreement and build a wall has created anxiety in Monterrey, where foreign investment lifted thousands of workers into the middle class and further enriched the city’s mighty industrialists

By Robbie Whelan

       A view of Monterrey, Mexico. Photo: Daniel Becerril /REUTERS


MONTERREY, Mexico—The road from the airport to the center of this city, Mexico’s bustling industrial hub, is lined with factories and warehouses bearing familiar American corporate names that churn out some of the world’s most recognizable products: Whirlpool Corp. washing machines, Mondelez International Inc. cookies and Mary Kay Inc. makeup.

At an industrial park in the city’s outskirts that includes General Electric Co. and DuPont Co. facilities, one street is named Nafta Avenue, while another is called TLC Boulevard, the Spanish-language acronym for the North American Free Trade Agreement that binds the economies of the U.S., Canada and Mexico.

A flood of Nafta-inspired foreign investment has helped turn Monterrey into Mexico’s Free Trade capital, lifting tens of thousands of workers into the middle class and making this city’s mighty industrialist families even richer. These days, people at both ends of the economy are scrambling to figure out what to do now that the new U.S. president, Donald Trump, appears to be following through on vows to renegotiate Nafta and build a wall between the two countries.

Just Thursday morning, President Trump threatened to cancel a scheduled meeting next week with Mexican President Enrique Peña Nieto, during which both sides were expected to agree on a framework to renegotiate the pact, if Mexico refuses to pay for the wall. Mr. Peña Nieto responded by calling off the trip.

“Free trade is crucial to Mexico’s growth,” said Alberto de Armas, president of the Monterrey chapter of the American Chamber of Commerce of Mexico, a pro-trade business association. “When I first came to Monterrey in the 1980s, it was a sleepy town. It was all glass factories and cement and beer. Now you can go to the opera.”

While American political leaders ranging from Mr. Trump to Democratic Sen. Bernie Sanders have blamed Nafta and free trade more broadly for job losses in the U.S., it has turned exports into the engine of Mexico’s economy. Nafta helped a wide swath of the country develop, helped end the country’s chronic boom and busts, and ushered in a fivefold rise in annual foreign direct investment—mostly by U.S. companies. Mexico’s largest private employer is Bentonville, Ark.-based Wal-Mart Stores Inc.
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      A worker assembles a vehicle at the Kia Motor Corp. assembly plant in Pesqueria, Mexico. Photo: Susana Gonzalez/Bloomberg News


For Mexico, the rise of Mr. Trump is seen as the country’s biggest threat from its northern neighbor since World War I, when U.S. Marines briefly occupied the city of Veracruz. It also upends six decades of U.S. policy that placed stability in Mexico as a key priority.

The national currency, the peso, has already weakened by about 13% since the election and foreign direct investment, which had already tumbled 23% in the first nine months of 2016, appears to have dried up altogether since the U.S. election. Last Friday, economists surveyed by Mexican bank Citibanamex cut their growth forecast for 2017 to 1.5% from 1.7%. They also raised expectations of steeper inflation and a fresh round of interest rate increases by Mexico’s central bank.

Mexican business leaders are trying to come up with ways to soften the blow. On a recent Thursday, around 50 executives from Mexico’s largest companies met privately in Mexico City with Luis Videgaray, who was appointed foreign minister by President Peña Nieto earlier this month.

The purpose was to brainstorm ways to approach the Trump administration, a task that has been delegated to Mr. Videgaray, who previously served as finance minister before resigning from the cabinet in September over fallout from Mr. Trump’s campaign visit to Mexico.

Business leaders suggested that Mr. Videgaray propose that Nafta add tighter rules-of-origin, which would require that products assembled in Mexico have increased levels of North American components in order to be exported duty free to the U.S. In the car industry, for example, some auto makers such as Mazda Motor Corp. import motors directly from Japan to assemble a car in Mexico for export to the U.S. Under revised rules, those cars might be subject to a tariff unless the motors were made in the region.

Tighter rules of origin would likely prompt a shift toward greater U.S. content, but it would also likely raise costs and reduce the region’s competitiveness versus the rest of the world, trade advocates say.

Mr. Videgaray approved of the strategy and said it sounded like the “most logical” negotiating tactic, according to several executives who attended the meeting. The office of Mr. Videgaray, who is meeting with representatives of the Trump administration in Washington this week, didn’t respond to calls seeking comment.

While much of Mexico remains poor, parts of the country have leveraged trade to begin to develop. The economy in Nuevo León, where Monterrey is located, grew by 67% between 2004 and the middle of 2016, according to Mexican government data—a yearly average of more than 4%.

Likewise, the 12 Mexican states that rely most on export industries governed by Nafta—clustered mostly along Mexico’s northern border and in the central auto-manufacturing region known as the Bajio—saw an average annual rate of economic growth of 3.7% since 2004, according to a Wall Street Journal analysis of government data. The 20 Mexican states that don’t rely heavily on Nafta had an average annual GDP growth of 2.8% since 2003.


Nafta Boost

The 12 Mexican states whose economies depend heavily on export industries have seen an average annual GDP growth of 3.6% since Nafta was implemented, compared to 2.7% for the 20 that don’t.

 


Average annual GDP growth since Nafta was implemented*
3.61% to 4.5%
2.7% or less
2.71% to 3.6%
More than 4.5%
States depending heavily on export industries
Baja
California
Sonora
Chihuahua
Coahuila
Baja
California
Sur
Nuevo
León
Durango
Tamaulipas
Aguascalientes
Nayarit
Querétaro
Yucatán
Jalisco
Hidalgo
Quintana
Roo
Tlaxcala
Colima
Campeche
Puebla
Tabasco
Guerrero
Oaxaca
Chiapas
Morelos
Distrito Federal
*As of the end of the second quarter of 2016
Sources: WSJ analysis of INEGI data (map); Labor Department (manufacturing employment)
     

Even if Nafta can be successfully renegotiated, Mexico appears in for a rough ride given how Mr. Trump has called out U.S. firms that try to open a new factory south of the border.

Concern grew to near panic in recent weeks after Ford Motor Co. canceled a planned $1.6 billion assembly plant in the industrial city of San Luis Potosí after Mr. Trump criticized the move. That followed a similar cancellation by Indiana-based Carrier Corp. A big U.S. home improvement chain has suspended its plans to expand in Mexico, worried about the negative publicity, according to people familiar with the matter.

Some in Mexico say it’s difficult to imagine when a big U.S. company will announce a new factory in Mexico anytime soon. “We have no new information about new investments in plants since the U.S. election,” said Ricardo Cantú, president of Index Nuevo Leon, an exporters’ trade group.

The CEO of Fiat Chrysler Automobiles said his firm could pull out of Mexico entirely if the Trump administration follows through on a pledge to impose tariffs on imported cars, and Mr. Trump has in recent weeks put General Motors Co., Toyota Motor Corp. and BMW AG in the crosshairs over their investments in Mexico.

Mexicans are dismayed and, increasingly, angry. One state government, a municipal government and several Mexican firms responded to Ford’s announcement by launching a boycott of the auto maker’s products.




If Nafta were scrapped entirely, the U.S.-Mexico trade relationship would revert to World Trade Organization rules, experts say, which would likely result in average tariffs of only about 5% for Mexican goods going north. The impact would be slightly worse for American goods going south, since the old WTO arrangement allowed for some protectionism by Mexico.

But the impact on the investment climate would be hard to predict. Nafta enshrined legal protections for U.S. firms investing in Mexico, protecting them from punitive Mexican regulation or confiscation. The pact also established a mechanism to adjudicate complaints.

Even more worrisome for the Monterrey elite are other possible import tariffs under discussion in the U.S. Republicans in the U.S. House of Representatives have floated the idea of “border adjustment tax” that would bar American firms from taking a tax exemption on imported goods.

“The idea of a border tax is a huge problem,” said Enrique Zambrano Benítez, chief executive of Grupo Proeza, a holding company that owns steel producer Metalsa, a large auto supplier based in Monterrey.

If a border tax happens, Mr. Zambrano said his firm would likely shift some of its Mexican production to its five U.S. plants and buy more raw materials from U.S. producers, which would result in job losses in Mexico. He also said it would likely force his firm to charge higher prices in the U.S.

    A man walks near the Whirlpool Mexico SAB facility in Monterrey. Photo: Susana Gonzalez/Bloomberg News


Stabilit SA, a construction materials company, said such a tax might force it to lay off hundreds of Mexican workers, while trying to focus more on selling to customers in Mexico, Europe and Asia, according to company chairman Fernando Canales Clariond, a third-generation industrialist who served as Mexico’s secretary of economy and of energy.

Mr. Canales said the company spends about $350 million per year on raw materials, including running up large tabs buying plastic resins and fiberglass from U.S. companies including PPG Industries Inc. Imposing a border tax would mean a lot of lost jobs in U.S. factories, too, Mr. Canales said.

With six major manufacturers of industrial vehicles, trucks and cars and more than 200 first-tier suppliers, Nuevo León, and especially Monterrey, is a major economic center for the Mexican auto industry. Roughly 84,000 people work in the local auto industry, accounting for a third of every sales dollar gleaned from exports, according to Manuel Montoya Ortega, the head of a local auto industry group.

“These are the most formal, most stable jobs in the region, from factory positions to designers and engineers,” Mr. Montoya said. “Everyone is very worried.”

For Monterrey, the embrace of free trade and Nafta didn’t come naturally. For decades, Mexico had a closed economy, and many of the country’s national champion firms were based in Monterrey. When Nafta was being negotiated in 1993, many firms in Monterrey thought they would simply disappear under the onslaught of U.S. firms.



Not everyone in Mexico thinks that free trade has been an unequivocal success. Mexico’s annual GDP growth since 1994, the year the treaty took effect, has averaged 2.57%, according to the World Bank, compared with 4.18% per year during the previous two decades—a time when Mexico made major oil discoveries.

Wage growth has also fallen short of what Nafta’s early champions had hoped, partly due to a bulge in young Mexicans entering the workforce during the 1990s and early 2000s. Average daily wages in dollar terms have risen by just 18% since 2000, to $16.70 per day, according to Mexican government statistics. Tens of thousands of Mexican small-plot farmers were forced to find work after Nafta exposed them to competition with more technologically adept U.S. factory farms.

Nafta “has not been a silver bullet,” said Fernando Turner, Nuevo León’s secretary of economic development and owner of Katcon Global, a manufacturer of automotive exhaust systems.

Despite those reservations, few in Mexico think the country would have been better off without the trade pact. Nafta and open trade in general introduced competition to an economy that had been closed off for decades, with coddled public and private monopolies making low-quality goods at uncompetitive prices.

Mr. Canales, whose family used to run the conglomerate Industrias de Monterrey SA, says that before Nafta, galvanized steel produced in Mexico was so flimsy that it broke under the pressure of stamping presses. Only after the markets opened up to American competition did the quality of his family business’s products improve.

“I lived through Mexico’s period of closed borders, and the products we had were lousy,” he said. “I remember being worried when Nafta started, thinking, ‘How can we compete with American steel producers?’ My uncle used to tell me, ‘When you go to bed, pray for your company, but pray more for your competitors, because good competition is the best pressure a company can ask for.’”

Workers watch as a large stamping press, used to shape steel pieces in chassis for Dodge and Toyota pickup trucks, is moved inside the Metalsa factory in Monterrey. Photo: Robbie Whelan/The Wall Street Journal


Metalsa’s factory in the Monterrey suburb of Apodaca offers a glimpse into how free trade has helped support the creation of a blue collar labor force here. The plant employs some 3,600 people and produces about 680,000 steel frames for Dodge Ram, Toyota Tundra and Toyota Tacoma pickup trucks each year. The company buys 56% of the steel and other components to produce the truck chassis from Mexican suppliers, 21% from U.S. suppliers, and 22% from Asian companies.

Alexander Calderón, 46, grew up the son of a farmer in a rural part of the Mexican state of Veracruz. He started working at Metalsa welding frames for Chrysler trucks in 1993, initially earning 600 pesos, or about $194 at the time, per month. He now earns 40,000 pesos, $1,860, per month as a supervisor in the plant’s steel hydroforming division, owns a house in the Monterrey suburb of Guadalupe, and sent his oldest son to study accounting at the state of Nuevo Leon’s public university.

“For me, I really started to notice the development of industries here in the last 15 years as companies from other countries came here. That’s when my salary started to go up,” Mr. Calderón said. “It’s gotten very competitive.”

Most workers at the Metalsa plant earn much less, but their lives have improved. Alfredo Treviño, 30, has been with the company 11 years, and has seen his salary grow from 50 pesos, or $13.76, per day to 360 pesos, or $16.74. He spends about a quarter of his paycheck to pay the mortgage on the two-bedroom house he shares with his wife and two children. The Volkswagen Lupo hatchback he bought in 2005 is paid off.

“In my circle, everyone has a house and a car,” Mr. Treviño said.

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