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1 NAFTA AND FOREIGN INVESTMENT IN MEXICO: THE CASE OF MONTERREY By ALISON MARIE BOELTER A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MAS TER OF ARTS UNIVERSITY OF FLORIDA 2009
2 2009 Alison Marie Boelter
3 This thesis is dedicated my mom my supporter my confidante, my best friend. Y our greatest desire in life was to see your childre n succeed, and you sacrificed so much to help me achieve my hopes and dreams. Nick and I were you world ; you put us before anything else in your life and f or that I am ever -grateful. I would not be where I am today if it had not been for your unending supp ort and faith your pride in me, and your undying love. I love you, I miss you, and you will forever remain at the center of my heart.
4 ACKNOWLEDGMENTS I thank my chair, Dr. Terry McCoy for his guidance and support throughout the research and writing process, my committee members for dedicating their time and input, Samuel Pea for his valuable contributions and continued support throughout my study, to all of those who were willing to openly share their experiences with me and to the Tinker Foundation for granting me the funding that made my research possible. I tha nk my dad and brother for giving me the motivation and encouragement to continue working despite the sudden loss of my mother.
5 TABLE OF CONTENTS page ACKNO WLEDGMENTS .................................................................................................................... 4 LIST OF FIGURES .............................................................................................................................. 7 ABSTRACT .......................................................................................................................................... 8 CHAPTER 1 INTRODUCTION ......................................................................................................................... 9 Problem Statement ........................................................................................................................ 9 Literature Review .......................................................................................................................... 9 Significance ................................................................................................................................. 14 Research Strategy ........................................................................................................................ 15 Organization of the Thesis .......................................................................................................... 16 2 NAFTA AND INVESTMENT .................................................................................................. 17 Introduction ................................................................................................................................. 17 Free Trade .................................................................................................................................... 17 The Evolution of Trade Liberalization: Post WWII .......................................................... 18 Bretton Woods agreement ........................................................................................... 20 The General Agreement on Tariff and Trade (GATT) .............................................. 20 Economic Liberalization in Mexico ........................................................................................... 23 Maquiladoras ........................................................................................................................ 24 Debt Crisis and the Economic Opening ............................................................................. 25 NAFTA ........................................................................................................................................ 28 NAFTA as an Investment Agreement ........................................................................................ 30 Investment Provisions of NAFTA ...................................................................................... 32 Section A: Rules of investment ................................................................................... 33 Section B: Settlement of investment disputes ............................................................ 39 Foreign Investment Flows into Mexico ..................................................................................... 40 Investment Flows Before NAFTA ...................................................................................... 41 Investment Flows under NAFTA ....................................................................................... 42 Conclusion ................................................................................................................................... 45 3 U.S. INVESTMENT IN MEXICO: THE CASE OF MONTERREY, NUEVO LEON ........ 46 Nuevo Leon: An Industria l Powerhouse .................................................................................... 47 Industrial Clusters ................................................................................................................ 48 Education .............................................................................................................................. 49 Quality of Life ...................................................................................................................... 51 Research Findings ....................................................................................................................... 52 Insights of the Director of Foreign Investment for Nuevo Leon ...................................... 53 Company Case Studies ........................................................................................................ 57
6 Interview 1: ITW Safety .............................................................................................. 57 Interview 2: Danhil de Mexico .................................................................................... 58 Interview 3: Panduit Corporation ................................................................................ 58 Interview 4: Pregis ....................................................................................................... 58 Interview 5: Whirlpool, Mexico .................................................................................. 58 The Decision to Locate in Monterrey ................................................................................. 59 ITW Safety .................................................................................................................... 59 Danhil ............................................................................................................................ 60 Panduit Corporation ..................................................................................................... 61 Pregis ............................................................................................................................. 61 Conclusions .................................................................................................................. 6 1 Results of the Decision ........................................................................................................ 62 ITW Safety .................................................................................................................... 62 Danhil ............................................................................................................................ 63 Panduit Corporation ..................................................................................................... 63 Pregis ............................................................................................................................. 64 Conclusions .................................................................................................................. 64 Business in Mexi co .............................................................................................................. 65 ITW Safety .................................................................................................................... 65 Danhil ............................................................................................................................ 65 Panduit Corporation ..................................................................................................... 66 Pregis ............................................................................................................................. 67 Conclusions .................................................................................................................. 67 Whirlpool Mexico ................................................................................................................ 68 Eduardo Solis Sanchez ........................................................................................................ 70 Conclusion ................................................................................................................................... 73 4 FINAL CONCLU.S.IONS AND RECOMMENDATIONS .................................................... 74 Research Findings ....................................................................................................................... 74 Significance ................................................................................................................................. 76 Limitations ................................................................................................................................... 78 Suggestions for Future Research ................................................................................................ 78 APPENDIX : INTERVIEW QUESTIONS ....................................................................................... 79 LIST OF REFERENCES ................................................................................................................... 81 BIOGRAPHICAL SKETCH ............................................................................................................. 84
7 LIST OF FIGURES Figure page 2 1 Foreign Direct Investment in Mex ico, 19711992 (U.S.$ mi llions) .................................. 41 2 2 FDI into Mexico by country of ori gin, millions of U.S. Dollars ........................................ 43 3 1 Strategic location .................................................................................................................. 46
8 Abstract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Master of Arts NAFTA AND FOREIGN INVESTMENT IN MEXICO: THE CASE OF MONTERREY By Al ison Marie Boelter May 2009 Chair: Terry L. McCoy Major: Latin American Studies This study examines NAFTAs role in attracting and maintaining foreign investment in Monterrey. In light of the difficulty in separating the effects of NAFTA from other inf luences, m any argue that influxes in foreign investment are not a direct result of the free trade agreement, but rather, a combination of factors such as globalization and economic reforms designed to aid Mexico recover from its national debt crises A cas e study approach of five U S based companies in Monterrey was employed to determine if NAFTA was the main, or one of the main reasons, for expansion to Mexico. Additional key informants within governmental organizations were utilized to assess the investm ent environment in Monterrey and the likelihood that NAFTA was a strong influence. Economic data were collected to compare total levels of investment in Mexico both before and after the implementation of NAFTA, as well as levels of U S -based investment. The study revealed that NAFTA has, in fact, been successful at drawing foreign investment to Monterrey, both directly and indirectly. Although Chapter 11 was not cited by interviewees, my research findings demonstrate that it underpinned the willingness o f investors to come to Mexico because its trade protections made investment secure and profitable.
9 CHAPTER 1 INTRODUCTION T his study analyze s the impact of the North American Free Trade Agreement (NAFTA) on the decision of U.S. companies to relocate, expand or stay in Mexico using cases from field research in Monterrey, Nuevo Leon. As an intern with the U.S. Commercial Service, I was able to establish contacts with representatives of U.S. companies hosting operations in Monterrey. Using information from i nterviews and from recent publications regarding the issue, I was able to assess whether NAFTA, had an impact and continues to have an impact on U.S. investment in Mexico. Problem Statement There are differing assessments over whether NAFTA has affected foreign investment flows especially from the U.S., into Mexico According to the HSBC Chief Economist for Mexico, When the negotiating process took placethere were two main goals: first, to increase the export capacity of the country; and second, to i ncrease the capacity for attracting foreign investment (Emmond 2008) However, many argue that foreign investment flows are not a direct result of the free trade agreement, but rather, a combination of factors such as globalization and economic reforms designed to aid the nation in recovery of national debt crises. Thus, I intend to use case studies of U.S. companies in Monterrey to determine if NAFTA was the main, or one of the main reasons, for locating in Mexico. I hypothesize that NAFTA has in fact attracted and maintained U.S. investment in Mexico Literature Review NAFTA was the fir st free trade a greement to be enacted between Latin America and the United States. Its pr imary goal was to eliminate all trade barriers between the two nations within fifteen years, or by January 1, 2008. O n this date, the final few duties remaining on
10 [agricultural] goods between the two nations were removed (Foreign Agricultural Service [FAS] February 2008) Under Presidents de la Madrid, Salinas, Zedillo, Fox and Caldern, brought d ow n barriers to trade and reduced governmental control over the economy (Fol som et al 2004). F ull implementation of the agreement however, has not quieted the controversy over the impact of NAFTA on both Mexico and the United States. According to Gustavo Vega, Mexico enter ed into a free trade agreement with the United States not only to enhance access to t he worlds largest economy, but also to stimulate foreign direct investment and encourage technology transfers (Ve ga and De la Mora 2003). A s Emmond points out in his report on NAFTAs first fifteen years, NAFTA had two main goals: first, to increase the export capacity of the country [Mexico] and, second, to increase the capacity for attracting foreign investment. However, t he HSBC chief economist for Mexico challenges this view claiming that increased trade and investment result from technological change and globalization, or externalities (Emmond, 2008). In other words, many of the expect ed benefits of NAFTA are not the result of provisions in the a greement itself but, rather, a consequence of globalization. Blank and Hottenrot (1998) counter that NAFTA has significant implications for investment. They feel that investor confidence increased as a result of the agreemen ts ongoing influence over the behavior of policymakers. Some of its most important investment provisions include protection of direct investment, intellectual property, trade in services, and governmental procurement According to a 2004 article in The Economist magazine reviewing the first ten years NAFTA, the agreement succeeded in stimulating trade and investment among the three member nations. Evidence of this is Mexicos upgrade to an investment -grade credit rating during a decade when other Latin American nations were marked by financial instability. As a
11 result the nation is now allowed to issue longterm local currency bonds and mortgage backed securities, which is a feat many other Latin American nations have yet to accomplish. Investors now think of Mexico more as a North American than a Latin A merican country. In response to critics of the agreements success, T he Economist (2004) blames the inability of subsequent governments to attack issues such as corruption, poor education, bureaucra cy, poor infrastructure, lack of credit availability, and an undersized tax base for the inability of both Mexicans and foreign investors to take advantage of the opportunities presente d by freer trade. It cannot be denied that FDI has increased in Mexico since the implementation of the agreement. According to a 2002 Foreign Policy article, the average foreign investment in Mexico had increased by more than 250 percent from $ 3.47 billion to more than $ 13 billion since the agreements inception (Espinosa 2002) Similarly The Economi st (2004) reports that in 2004 foreign direct investment shot up, reflecting its success in making investors feel more prote cted by the legal environment. A report by the International Monetary Fund (IMF) also documents that U.S. foreign di rect investment in Mexico has increased under NAFTA because it improves the foreign investment environment within Mexicos economy and extends sectors in which investors can operate. As a res ult, FDI flows into Mexico increased from $12 billion (19911993) to $54 billion (20002002). Furthermore, domestic gross fixed capital formation as a share of FDI flows increased by 5 percent (6 11%) from 1993 to 2002. The bulk of this investment came from its fellow NAFTA members ( Kose et al ., 2004). However, as R obert Blecker (2004) points out, it remains controversial to what extent these trends are accounted for by the forces of globalization and regional integration through NAFTA is only a part of those forces Steven Blank and Victoria Hottenrot (1998) su pport this skepticism with the claim that estimating NAFTAs impact on FDI flows is a very difficult
12 task. They believe that NAFTA was more of a response to changes already in progress within the regions economic infras tructure. For example, in 1987 the U.S. and Mexico began employment of several trade and investment agreements, which ignited a new wave of foreign investment in Mexico and the return of capital that fled the nation as a result of th e debt crisis in the early 1980s. Moreover, the scholars point out that investment decisions are influenced by a number of factors in the macro economy which function independently from free trade agreements. For example, corporate managers determ ine investment strategies using assessments of growth statistics, currency values and trends, trends in savings, interest rates, inflation and wage rates. Furthermore, investment decisions are made far in advance, which means many companies chose to enter the Mexican market well before the beginning of capital flow in to the country (Blank and Hottenrot 1998). Thus, it can be difficult to determine whether or not increases in investment flows after 1994 were direct results of NAFTA. Nonetheless, Chapters 11 and 17 of the NAFTA agreement include several clauses desig ned to encourage foreign capital flows by allowing for greater security of investors wishing to enter the Mexican m arket, and forcing Mexico to discard its past foreign investment policies. According to Guillen (2002) NAFTAapproved FDI regulations cons titute a model for transnational corporations and financial trade on a world scale Chapter 11 of NAFTA was designed specifically to create a mor e secure investment environment and has been copied and modeled in several Free Trade Agreements since. In fa ct, it has been used as the underlying foundation for a model for the World Investment Agreement, presented by the Organization of Economic Cooperation and Development (OECD) in 1995, and also for the proposed Free Trade Area of the Americas (Guillen 2002).
13 In spite of NAFTAs investment provisions, many scholars continue to dispute their direct effects on increases in Mexicos flow of foreign investment. For example, Andreas Waldrich (2008) though conceding that NAFTAs effects on investment can at least in part be traced bac k to the agreement doesnt reject the lack of evidence on the effect of dramatically increased foreign participation in the Mexican market as a result of NAFTA In comparison, a 2007 study by Waldrich and colleague Ayca Tekin -Ko ru had found a statistically significant and economically large positive effect, suggesting that NAFTA has led to an increase in FDI in Mexico from the U.S. In addition, the researchers calculated the predicted amount of foreign investment by the year 2000 both with and without the agreement. They foun d that stock of FDI is about 24 percent more elevated than it would have been in the a bsence of NAFTA. Penelope Pacheco Lpez (2004) details the Foreign Investment Law (FIL) of 1993, which reformed previ ous investment laws in Mexico, explaining how the law reduced barriers to foreign participation in the market. The FIL also includes p rovisions necessary to make it compatible with NAFTA investment provisions. In 1999, an amendment became a law, thus libe ralizing most financial services, and allowing for 100 percent foreign participation of within the financial sector. In addition, the amendment deregulated all railroad services and gas distribution. Although it might seem like the FIL is largely respons ible for drawing in foreign investment during much of the initial NAFTA years, PachecoLpez also points out the change in the definition of FDI data made in 1994, under NAFTA Previously, FDI referred to only that which was authorized by the National For eign Investment Registry Office, meaning that firms could have received authorization of foreign investment without actually investing. Since 1994, however, FDI refers to realized new investment, w hich Pacheco Lpez refers to as )
14 a mounts reported to the National Foreign Investment Registry Office 2) p rovision of capital for new companies 3) f oreign investor trust -funds 4) Transfers of stock from nationals to foreigners 5) Imports of capital assets (fixed assets) by maquila firms 6) p loughing back of profits by FDI firms ; and 7) t he amounts involved in accounts between companies (debts and loa ns between parent companies) Those final four categories were not included as FDI data prior to the year NAFTA was implemented. In addition to the FIL and investment provisions of the NAFTA, Mex ico has become a world leader of membership in bilateral foreign investment agreements. It has investment agreements with Spain, Switzerland, Ar gentina, the Netherlands, Denma rk France, Finland, Portugal, and is in the process of negotiating several more. However, the U.S. remains on top as the leader of FDI inflows into the nation (PachecoLpez 2004). Granted, given the proximity between Mexico and the U.S. it makes sense that the northern neighbor would be res ponsible for much of the foreign investment in the nation. Significance The effects of NAFTA on Mexico s economy are disputed. Increased forei gn direct investment in Mexico wa s considered one of the main objectives and expected benefit s of the agreement Investment by U.S. companies has increased substantially over the past fifteen years; however, there is controversy over whether or not this influx is due directly to NAFTA or if it is the result of a combination of several factors. My research will p r oduce further insight into the impact investment flows into Mexico In light of the difficulty in isolating NAFTAs achievements from other factors, my research examines t he decision-making process of U.S. investors in their choice of Mexico as a multinat ional location. In using company cases from the Mexican city of Monterrey to demonstrate NAFTAs effect on such investment decisions, I will contribute to the debate over whether or not the agreement itself is a major influencing factor. In discussions with local representatives of U.S. companies and with contacts inside the
15 Commercial service and other trade organizations, I have gained several perspectives on NAFTAs ability to draw U.S. multinational organizations into Mexico. Research Strategy As an intern with the U.S. Commercial Service of the American Consulate General in one of the most robust business environments in Mexico, I was able to take advantage of my position in establishing contacts for interviews.1 My goal was to talk with represen tatives from U.S. based companies and government officials who would be able to explain the background on the company decision to operate in Monterrey. Government officers working with foreign investors would likely be aware of the reasons many investors chose Monterrey as a location. The first contact I established was an important key informant. My colleague at the Commercial Service, Ernesto de Keratry put me in contact with his friend and colleague, Samuel Pea Director of Foreign Investment at the Secretariat of Economic Development ( SEDECO ) for the state of Nuevo Leon (NL), based in Monterrey. He was able to give me pertinent information about the citys investment environment and could potentially lead me to future interviews. Additionally, my supervisor introduced me to his colleague Luciano Escobedo, with the American Chamber of Commerce. Escobedo arranged four interviews with American Companies operating in Monterrey: ITW Safety, Danhil de Mexico, Panduit, and Pregis. All companies are man ufacturing and/o r production facilities that expanded operations into Northern Mexico. Each had a variety of reasons for choos ing to enter the Mexican market and they agree d that NAFTA had some form of influence on their decision, though more of an indire ct benefit 1 Having spent a semester of my undergraduate career studying at ITESM, I felt at home in Monterrey and was familiar with the hurdles one nee ded to jump in order to obtain information. If the saying its not what you know, its who you know reigns true in the United States, then its even more applicable in Mexico. I was aware that I couldnt simply go through the phone book and expect that businesses would be willing to meet with me.
16 than direct These interviews also lead me to further questions and points of interest, such as why many companies have chosen Mexico over other low cost countries such as China, and why many are returning to Mexi co after relocating to China. In addition to these four interviews, Pea arranged an interview with Adrian Estrada of Whirlpool Mexico, who subsequently put me into contact with a colleague of his one of the original drafters of the NAFTA docume nt, Eduardo Solis Snchez. These intervi ew s provided me with useful first -hand perspective s Organization of the Thesis My thesis is divided into four chapters, including this introduction. In the second chapter, I present background information Free Trade Agreements in general and on NAFTA. Next, I provide a basic explanation of the provisions regarding investment as well as other pertinent components and provisions of the agreement. It also describe s the goals and objectives that were determined by the creators of NAFTA and the subsequent r esults for the Mexican economy. Finally it focus es on trends in U.S. Foreign Direct Investment in Mexico from before and after the implementation of NAFTA. T his section of the chapter draw s l argely from the agreement itself as well as from economic data from both before and after the implementation of the agreement. Chapter Three introduce s Monterrey and explain s why it was chos en for field research. It set s up and explains my personal research and provide s a case analysis detailing the results and sig nificance of my study. Finally, I will conclude as to whether or not my hypothesis, that NAFTA has reached its goal of drawing U.S. investment into Northern Mexico, can be ac cepted based on my research findings.
17 CHAPTER 2 NAFTA AND INVESTMENT Introduc tion This c hapter provide s a brief history of free trade and the evolution of the General Agreements on Tariffs and Trade (GATT) An understanding of these organizations and Mexicos initial rejection of them is crucial to understanding modern Free Trade Agreements (FTAs). Next, I will focus on the two main phases of economic liberalization in Mexico: the early period from approximately 19651980, and the renewal phase from 1990 to present day (of which NAFTA is a part). Within this phase, I will outlin e Mexicos specific process of economic liberalization under presidents de la Madrid and Salinas. This era of economic liberalization led to the opening of Mexicos investment environment and set the stage for the NAFTA agreement. Next I provide an overv iew of NAFTA, with particular focus on how and why investment provisions got folded into the agreement. This section address es the most important provisions of NAFTAs Chapter 11 and their importanc e to investors. Finally, I conclude with an overview of investme nt flows throughout Mexico before and after NA FTA, in order to set the stage for Monterrey company case studies regarding its ability to attract and maintain foreign investment. Free Trade In order to understand the evoluti on of free t rade leading up to NAFTA, we must begin with a brief description of the history of economic liberalization. Free trade was championed by 18th Century economists Adam Smith and Da vid Ricardo in Britain. Adam Smith, in 1776, introduced the idea of absolute advantage i n The Wealth of Nations which is based on the assumption that because all individuals are best equipped to make production decisions concerning their own skills and circumstances, they will naturally specialize in the production of
18 the goods in which th ey have a competitive advantage Applying the same principle to international trade, Smith thus contended that trade barriers limit not just the private benefits but the public benefits that would accrue to the nation as a whole. Adam Smith was the first to provide clear, theoretical argumen ts in favor of free trade (Moon 1996). Approximately 40 years later, David Ricardo went further into the argument for economic liberalism, by building on Adam Smiths theory. In The Principles of Political Economy and Taxation Ricardo introduced the idea of comparative advantage, which presumed that a country should specialize in producing that good which it can produce most efficiently and trade for that which is does not The ideas developed by these scholars cha llenge d the theory of economic mercantilism, which argued that governments must regulate trade in order to further the national interest. Smith and Ricardo proposed that the government was not to interfere in the market; rather, the people should make decisions on the basis of trade, investment, and exportation (Moon 1996). The Evolution of Trade Liberalization: Post WWII Based upon these theories, Europe opened up to free trade and their economies were restructured based u pon comparative advantage Up until t he Great Depression in the 1930s, Great Britain had led the way in free trade and most countries had followed its example, but t he collapse of the world economy brought about a drastic change in international trade policy. After WWI, Britain rev erted to protectionism as a matter of protecting competition and national security. Nation after nation rejected liberalism in favor of protectionist duties in retaliation to one anothers policies. In just three years global trade plummeted by 70 perc ent. The Great Depression and the global trade war fed on one another to produce the most devastating econom ic chaos of modern times (Moon 1996). According to Bulmer Thomas (1993), a s the
19 Great Depression deepened from these trade wars and unemployment rose drastically throughout the world. During the post -World W ar I era, relations between the United States and Mexico (Latin America) had begun to re strengthen. Europe, particularly Great Britain, receded from its leading position in international tra de and investment in order to rebuild its internal economy. In an attempt to protect Latin American nations from falling to fascism, the United States stepped in to absorb those commodities previously purchased by Europe. The newly dominant world player was mainly concerned with securing access to raw materials and strategic commodities as protection against an interruption in its traditional supply chain. Latin American exports became crucial for the United States throughout World War II. This was a ma jor factor in ma intaining the traditional Latin American model of export led growth. U.S. FDI to Latin America soared throughout the war as a result of influxes of wartime commodity agreements with the larger Latin American republics such as Me xico. Howe ver, wartime conditions provided artificial protection to infant industries that had grown through expansion in industrial growth. After WWII, t he U.S. turned its focus to the recovery of Western Europe and Latin Americas share of U.S. trade declined an d the proportion of the regions exports going to the United States also sunk. As a result of external shocks to Latin America, policymakers began to favor import restrictions over export -led growth (Bulmer Thomas, 2003) But while Latin America was turn ing towards a protectionist, inward looking model, Europe and the rest of the world were embarking on what Bulmer Thomas (2 003) calls a ne w international economic order. There was widespread recognition of the need for international supervision of the balance -of -payments corrections, for mechanisms to promote exchange rate flexibility, for new instruments to promote international capital flows,
20 and for a global organization to oversee the elimination of barriers to international trade (Bulmer Thomas 2 003). T he solution to the crumbling system of international trade was to be found at Bretton Woods., New Hampshire in 1947. Bretton W oods a greement World trade leaders met in Bretton Woods, New Hampshire in 1947 to create a global system of economic rules. The outcome was a system that created two economic institutions to manage the world economy: The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank). The IMF was to govern exchange rate polic y and the World Bank to function as the central source for reconstruction and development fun ds (Hernandez Truyol and Powell 2 009). Two years later, the General Agreement on Tariffs and Trade (GATT) was created as a framework for global trade liberali zation. The Bretton Woods system, particularly the GATT, provides the legal context for current trade debates and the mechanisms through which trade controversies betw een nations are resolved (Moon 1996). The G eneral A greement on Tariff and T rade (GA TT) On October 30, 1947, in Geneva, Switzerland, under the leadership of the United States, 23 countries signed the General Agreements on Tariffs and Trade (Mexico was not one of them). The GATT was designed to promote a multilateral, nondiscriminatory s ystem of trade (IDB and ECLAC, 1995). According to Moon ( 1996), the ultimate goals of GATT are classically liberal the expansion of trade and the maintenance of a trading system free of political conflict but the means used to accomplish them reveals an underlying philosophy that contains both liberal and mercantilist assumptions. The two basic principles of the GATT are nondiscrimination and reciprocity, while allowing for ce rtain national safeguards (Moon 1996).
21 These basic principles are operational ized by the 4 pillars: (1) the Most Favored Nation Clause (MFN), (2) the National Treatment Clause, (3) Bound Tariffs, and (4) No Quotas. Under Article I, MFN, if aMember gives a benefit or privilege to any country, it must automatically and uncondi tionally grant that same benefit to every other GATT Member. The reference to most -favored, then, means that the importing Member must provide equal treatment for imports of a product from, and exports of that product to, all Members based on the treatmen t that it gives its most -favored trading partner with respect to that product (Hernandez Truy ol and Powell 2009). T he National Treatment Clause, under Article III, specifies that once foreign goods have entered the stream of commerce, Members must trea t them in the same manner as Members treat like domestic products. Like products are goods similar in physical characteristics and uses to the imported go ods (HernandezTruyol and Powell 2009). To clarify what is meant by like products, National Tr eatment means, for example, that neither national nor local governments can rightfully mandate that a Spanish wine, once it has properly satisfied tariff obligations at the frontier, be sold exclusively in liquor stores, if a like wine from Napa, Californi a is allowed to be sold in grocery stores as well. Rules for vending and taxing the foreign wine must be equivalent to those for the California win e. The Third Pillar of the GATT, under Article II, requires that each WTO Member makes a commitment to char ge no more than a certain tariff on a particular import. A schedule of concessions lists the highest tariffs that can be charged for particular goods above which would make the tariff non -bound. Thus, the schedule of concessions binds tariffs at a cer tain maximum (H ernandez Truyol and Powell 2009).
22 The Fourth Pillar, in Article XI, prohibitsquotas or other restrictions on the volume of a product that can be imported or exported, as well as licensing systems that act as barriers to the exportation o r importation of produ cts (Hernandez Truyol and Powell 2009). Since its inception, members of the GATT have undergone eight rounds of negotiations the last of which created the World Trade Organization (WTO) The last and largest GATT round, was the Uruguay Round which lasted from 1986 to 1994 and led to the WTOs creation. Whereas GATT had mainly dealt with trade in goods, the WTO and its agreements now cover trade in services, and in traded inventions, creations and designs (intellectual property) (World Trade Organization [WTO] 2009). The WTO replaced the GATT, but it still acts as the WTOs umbrella treaty for trade in goods. Six agreements res ulted from the Uruguay round First, they list the GATT principles for trade in goods and the GATS principles regarding services. The third area includes the Trade Related Aspects of In tellectual Property Rights (TRIM S). Extra agreements and annexes are then added by the negotiating parties to deal with special issues or requirements. Lastly, are the schedules of commitments agreed upon by the individual countries, granting market access to cert ain foreign products or service -providers. Under the GATT, these schedules are binding commitments on tariffs and quotas for goods. For the GATS, foreign ser vice providers are grante d access to specific sectors, including lists of certain services to which member nations chose not to apply the most -favored nation principle (WTO, 2009) Although the Four Pillars of the GATT ( implemented and supervised by the WT O) would seem to guarantee unrestricted trade, they are not left without exceptions. The most common exception to GATT rules are tariffs, when put in place for reasons such as reasonable protection of domestic industry (that is, so as not to impose unnece ssary duties to prevent competition), or for the purpose of earning government revenue (border taxes, tariffs, customs
23 duties, etc). Additional exceptions are often made protect a member nations safety or measurement standards. Moreover, members of the WTO are allowed to raise barriers in defense of certain public health and welfare standards under Article XX of the GATT. However, the most significant exception is that allowing regional free t rade a greements Parties to a regional FTA such as NAFTA, ar e permitted by the WTO to violate the Pillars by discriminating against WTO Members who are not parties to the agreement, for example, by not granting other WTO Members the benefit of the reduced tariffs that characterize all FTAs (Hernandez Truyol and P owell 2009). Approximately 300 such agreements currently govern almost half of all world trade. Economic Liberalization in Mexico Latin American nations rejected the Bretton Woods system as serving U.S. preferences and priorities. The GATT failed incorp orate international trade in primary commodities. As a result, Latin American nations who that turned to inward looking development based policies favoring import -subs titution industrialization (ISI). The shift to ISI ended the first phase of economic de velopment in Mexico, export -led growth. ISI was based on protection of the manufacturing sector so that industry could flourish without the threat of competition. At the same time that the GATT was rapidly lowering tariffs in the developing world, Latin American nations were erecting barriers to trade. Mexico introduced strict import quotas and raised tariffs significantly (Bulmer Thomas 2003). According to Ros (1993), Mexicos evolution of industrial and trade policies from the 1960s until the early phases of NAFTA (early 1990s) can be divided into three broad phases. During the 1960s, Mexico had largely completed the process of ISI for non-durable consumer goods and light intermediaries. As a result of this completion, industrial policies focused on domestic development of durable consumer goods and capital goods industries. These
24 protectionist policies under ISI were dependent on import licenses which were granted on the basis of avai lability of domestic supplies. During this phase, import lice nses and tariff protection were used to promote local industrial integration. This included the establishment of domestic content requirements (DCRs) in the automobile industry (1962), the yearly publication of lists of industrial products with potential for import substitution, and fabrication programs in the heavy intermediates and capital goods sectors, designed to promote local industrial integration through sector or firm -specific fiscal incentives and import licenses (Ros 1993). Maquiladoras T he maquiladora industry became a policy adopted during Mexicos pursuit of inwardlooking development (Ros 1993). Maquiladoras, according to Kagan (2005) are foreign -owned assembly plants clustered along the Mexico -U.S. border, which first appeared in 1965. They were designed to increase foreign investment and employment in the border towns that grew up with the Bracero program, permitting Mexican citizens to take temporary agricultural work in the U.S. That program ended in 1964, but the border towns remained crowded with citizens that needed work. The National Border Development Program (PRONAF) was developed in 1965 by the Mexican government to create jobs for the newly unemployed braceros by attracting foreign investment. Under PRONAF, the governm ent gave grants to foreign companies to import duty free machinery, raw materials, parts, and components to Mexico to produce in the maquiladoras for re -export to the U.S. Foreign investors were enticed by the prospect of the programs favorable tariff and chea p labor options. The U.S. aided with this by interpreting its tariffs to apply only to the value added in Mexico, rath er than the full product value. Initially, these plants were bound to the U.S. -Mexico frontier to limit the influx of foreign goods and competition into Mexico so employment in the border region would grow. Maquiladoras turned out to be one of
25 the first steps towards breaking the countrys longstanding tradition of restricting foreign investment and ownership (Kagan 2005). Ros (1993) purports that i n the early 1970s, industrial policy diversified its objectives to include export promotion and the strengthening of international competitiveness, the development of capital goods industries, regional decentralization of industrial act ivities, and foreign investment regulation The 1973 tariff reforms increased the protection of the domestic capital goods industry. In addition, preferential treatment was awarded for the production and purchase of domestic capital goods. The 1973 Law on Foreign Investment placed a nearly 50 percent restriction on foreign ownership. The macroeconomic environment became very unstable and by the early 1980s Mexico experienced an exchange rate crisis, devaluation, and balance of payments issues (Ros 1993). Debt Crisis and the Economic Opening In 1976, petroleum deposits were discovered in t he Gulf of Mexico. Subsequently, GDP grew and profit and investment soared. Meanwhile, the government (under President Jos Lpez Portillo) was spending freely and u nchecked. Anticipating future revenues, the government and private sector both borrowed heavily. When world oil prices collapsed in 1981, Mexico was in dire straits. Mexican investors began pouring capital into the U.S. market, anticipating peso devalua tion. Within less than a year, the government wasnt even capable of paying back the interest it owed on its more than $60 billion in foreign debt (Kandell, 2004). In August of 1982, Mexico declared that it could no longer pay back its debt. During the f irst phase of recovery efforts, Mexico was forced to follow IMF policies. Mexico devaluated its currency, made efforts to eliminate its budget deficit, and borrowed additional funds from the same banks it was in debt to in order to keep up interest on its foreign debt. In the short term, the IMF policies worked. In the long run, however, they drove down
26 wages and increased debt to the point of exhaustion. Currency devaluation caused inflation to skyrocket and encouraged more capital flight. Most crucia lly, the IMF formula weakened public faith in the local currency. In 1985, the U.S. Treasury Secretary, James A. Baker, introduced the Baker Plan as an alternative to failed IMF policies for Latin American countries. The Baker Plan continued to offer new loans but on the basis that they would meet certain market conditionality requirements. The indebted countries were promised $29 billion U.S. D in loans from commercial banks and multilateral organizations in exchange for reforms such as privatization, the reduction of trade barriers, and investment liberalization. However, the Baker Plan also proved inefficient (Vsquez 2009). Then, in an effort to control inflation, President De la Madrid and his planning and budget minister, Carlos Salinas de Gortari, c ame up with a new plan. For decades, Mexico had promised the United States it would join the GATT. In 1986, it did so. As a member of the GATT, Mexico was forced to follow the trade liberalization policies a greed upon by all members. (Orme, 1996). As a result, the ailing nation agreed to continue reducing its tariff levels. In addition, the De La Madrid administration viewed GATT membership as a way to strengthen the private sectors confidence in the governments unyielding commitment to free trade. T he following year, the Mexican government adopted a stabilization program, with cooperation from trade unions and business organizations. Under this program and through subsequent reforms over the next three years, the tariff system was greatly liberalize d. When the Salinas administration took office in 1988, he adjusted tariff rates upward in an attempt to better protect the consumer goods market from competitive imports. Up until 1989 trade reforms in the 1980s had mostly been centered on the import regime and, to an extent, export promotion (Ros
27 1993). That year, the Bush administration and new treasury secretary, Nicholas Brady, introduced a plan of voluntary debt reduction. Mexico served as the example for the new Brady Plan. The Mexican government, along with an advisory committee and numerous bank representatives created a menu of conditions from which banks could select one of three refin ancing options. Mexico chose to exchange 49 percent of their loans for discount bonds, 41 percent for par bonds, and 10 percent to provide new money (Vsquez, 2009). The option cove red their nearly $50 million in both medium and long term commercial debt. Part of Mexicos debt was forgiven under the premise that the principal and interest of these new bonds would be backed by U.S. Treasury bonds and financed by international financial organizations. Although the Brady Plan was controversial it is largely viewed as a success. Since 1989, Latin American nations (the main targets of the plan) have moved ag gressively toward the free market, introducing far ranging reforms, and have begun attracting impressive levels of finance again from the international capital markets. Many analysts believe that in a number of important countries the debt problems of the 1980s have been overcome (Vsquez, 2009). However, Salinas still faced on e great challenge: attracting foreign and offshore money into the economy. The stabilization program introduced by his administration had a long -term goal of sustainable growth o f 5 to 6 percent per year, single -digit inflation, a declining debt service ratio, and a current account deficit of only 2 to 3 percent of GDP. In order to attain that goal, Mexico would have to steadily increase productivity and real wages, while attract ing technologically advanced for eign investment. At the same time, he would have to convince local manufacturers to export and inv est abroad (Orme 1996). Orme explains it as:
28 a plan to escape the maquiladora trap of the 1980s, which condemned Mexico to investments based on low wages and lax environmental standards. But to work, it needed a steady influx of billions of dollars a year to finance imports and investment. And as the government discovered, only the promise of permanent domestic economic reform and access to the crucial American market could guarantee the capital flows on which it relied. NAFTA On February 4, 1990, President Carlos Salinas de Gortari, along with U.S. Treasury Secretary Nicholas Brady, and the chairmen of Citicorp, Bank of America, and the Bank of Tokyo signed what they coined the concluding chapter of the collaborative, bilateral debt negotiations. This agreement softened the impact of low oil prices and high interest rates, and allowed Mexico to maintain the stabilizat ion of the peso. Tariff barriers had been reduced and the nation was looking to expand export manufacturing. However, Mexico was in desperate need of foreign capital inflows in order to achieve its goals of economic growth. Not only was this a time of gl obal slowdown, but investors continued to worry about Mexicos troubling history of errat ic swi ngs and property seizures (Orme, 1996). Salinas had promised free market reform s b ut there was no guarantee that future government s would adhere to this poli cy Stepping towards that goal, Salinas made two additional commitments when he signed the 30 year debt pact in 1990. First, he would re -privatize Mexicos banking system. Secondly, and mos t crucially, he would pursue a free trade a greement with the Unit ed States government, signaling to inv estors that Mexico was committed to an open -market economy The privatization of Mexicos commercial banks marked a reversal of Mexicos historical policies under the PRI (Institutional Revolutionary Party), which was responsible for massive expropriation in 1982 under President Jos Lpez Portillo. Salinas hoped that the re privatization of the banking sector would begin to mend relations with private investors. Orme (1996) exclaims that e ventually, the Salinas Adm inistration would sell 18 banks for more than three times book value, double the market rate for an American bank. Without the simultaneous
29 commitment to a Free Trade Agreement, and its promise of economic expansion and an increasingly open investment regime, the bidding w ould never have raised that high At the same time, Salinas quickly privatized Telmex, the national telephone company. In anticipation of the growth and security that NAFTA promised, American investors were quick to purchase shares of Telmex, as well as other newly privatized sectors, such as airlines, steel mills, and fertilizer factories. Without the prospect of NAFTA, privatization sales would have been less robust (Orme 1996). The Foreign Agricultural Service (2008) states that, u nder the NAFTA, all nontariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to 15 years. This allowed for an or derly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008. In order to understand how investment got folded into NAFTA and other F ree T rade A greements, we must first understand the goals and ideals behind it. Accordi ng to Orme (1996), with or without NAFTA, the continents economic integrat ion was fast becoming a reality. The North American Free Trade Agreement clarifies how this integration will proceed, at w hat pace, and for whose benefit The main goal behind N AFTA, to the benefit of both United States and its Southern neighbor, was to help Mexico become fully industrialized. In short, NAFTA provides the set of laws governing the liberalization of cross -border trade. All restrictions on trade in manufacturing were to be removed within 10 years. By its 15th year (2009), any remaining tariffs and quotas on agricultural goods were to be removed (Orme 1996). However, NAFTA goes beyond eliminating barriers to trade. To begin with it ties Mexicos hands to its commitment to free -market policies. The policies instigated by the De la
30 Madrid and Salinas administrations signaled Mexicos desire to compete in the world economy. A relationship with its North Ame rican counterparts would help reach this goal. As a fi nal step in Salinas economic liberalization program, Mexico opened its market to American companies. Granted, the market reforms would have continued under the Salinas administration even without the agreement, but what NAFTA adds to this process, Orm e (1996) argues is the predictability of a negotiated tariff reduction schedule, a guaranteed edge for American companies in the Mexican market, and the fire -breathing vigilanc e of Washingtons trade lawyers (Orme, 1996). NAFTA as an Investment Agreemen t E ach round of GATT negotiations reduced barriers to trade. Over time, policymakers began to broaden the issues of focus beyond trade barriers into other areas such as intellectual property rights, trade in services and, ev entually, investment The Tokyo Round in 1978, first introduced the inclusion of investment provisions in the GATT. In 1982, the GATT council established a dispute settlement panel to handle investment disputes between the U.S. and Canada regarding the Canadian Foreign Investment Revi ew Act. Successive rounds of the GATT continued to discuss ways to further include investment measures By the conclusion of the Uruguay round in April of 1994, negotiators had included the Trade Related Investment Measures (TRIMS), which extend the artic les regarding National Treatment and Quantitative Restrictions to include trade related investment measures (von Moltke, 2003). Additionally, the Uruguay Round included investment measures in the GATS (General Agreement on Trade in Services). NAFTA nego tiators also incorporated investment NAFTA is based on the assumption that Mexico can and should get much more foreign capital than it has in the past if its business rules are clear and fair, and if its industries have secure access to th e American mar ket (Orme
31 1996). Free Trade Agreements are based on comparative advantage; Mexico, however, strives to also reinvent its economy into one in which investors feel is a worth -while investment. In building investor confidence, Mexico aimed to continually attract new sources of foreign capital in order to fund the industrialization of its economy. Thus, much of the NAFTA text is made up of investment provisions, which are mostly aimed at opening Mexico to Foreign Direct Investm ent NAFTA forces Mexico to o pen foreign investment to certain industries, such as petrochemicals and mining, previously closed to foreign ownership. It also strengthens the patent protections in areas such as pharmaceuticals and computer software. It makes investment in Mexicos fi nancial system more secure, as U.S. and Canadian investors cannot be discriminated against by barriers to the repatriation of profits, red tape, or retaliatory exchange rates. The national treatment principle introduced under the GATT ensures that U.S. an d Canadian companies are treated as if they were Mexican. The liberalization of the financial sector allows for American and Canadian banks to acquire fu ll ownership of Mexican banks. Even the rules of origin principles largely directed at tariff matters complement investment provisions. These rules mandate that a specific percent of duty -free goods must be produced in North America. This prevents manufacturers from using imported component parts in their products. Thus, the rules of origin encourage direct investment in primary manufacturing Furthermore, expansion of the North American market is also attractive to third party investors in Mexico. For example, Japan, a crucial trading partner for the U.S. and Canada, is also a growing source of fore ign investment in Mexico. Japanese investors see Mexico as a
32 gateway to the U.S. and Canadian markets (Orme, 1996) NAFTA was the first Free Trade Agreement to dedicate a chapter of the text to investment agreements. Investment Provisions of NAFTA Chapt er 11 reversed the provisions of Mexicos protectionist 1917 Constitution. Its drafters were more concerned with carrying out the revolutionary ideals of agrarian reform, destruction of concentrated landholding, and expropriation of property than with individual liberties. Chapter 11 also overturned the Mexican foreign investment laws of the 1930s that severely restricted foreign participation in the Mexican economy. These laws authorized expropriation of for eign companies. Strict foreign investment reg ulations acted as a barrier to investment for several decades, particularly in the 1970s. Such stringent policies were in place until the 1980s when first president De la Madrid and then Salinas de Gortari began to relax the nations investment laws. Con sequently, investment began to return to Mexico, particularly after it joined the GATT in 1984. The 1993 Investment Act largely reversed the harsh 1970s policies, and allowed Mexico to comply with NAFTAs foreign investment provisio ns (Folsom, Gordon and Lopez 2000). Chapt er 11 provides the framework that serves as a model for subsequent agreements. T he more important ones as indicated by Mann and Von Moltke ( 2003), include : Rights to establish an investment; Rights to national and most -favoured nation treatment; Guaranteed minimum international standards of treatment for foreign investors; Protection from direct and indirect expropriation; Special protections against performance and personnel requirements; and Rights to repatriate all monies Prior to NAFTA, disputes between investors were settled in domestic administrative tribunal s and judicial courts (Jimnez 2 001). As a result of NAFTA, Mexico has broadened its international investment policy to permit investors of member states to submit a cla im against it
33 before an international tribunal for breach of its obligations under NAFTA Chapter 11 (Jimnez 2001). Moreover, it expanded enforcement of the rights to member nations with the inclusion of investor -state arbitration proceedings. Previous ly, enforcement was somewhat lacking and, in the rare case that it took place, it only occurred between states and not between individual investors. Moreover, choice of forum clauses permit investors to select international remedies rather than settling for the national remedies that are applied in the host country. As such, investors are no longer as hesitant to use the remedies provided to them because they are easier to use and much more enforceable (Mann and von Molke 2003). According to Hart and Dymond (2002), the purpose of NAFTAs Chapter 11 is to facilitate the flow of investment among the parties by imposing limitations upon the capacity of a host government to impose discriminatory or market distorting measures upon such investments or inves tors. That being said, much controversy remains as to the extent which certain provisions are properly interpreted, particularly national treatment, most favored nation treatment, minimum standards of treatment, prohibitions on performance requirements, and expropriation (Mann and von Moltke 2003). Section A: R ules of i nvestment The Rules of Investment include 14 explicit articles to protect foreign investment in the member nations. For the purposes of this paper, I will discuss some of the more import ant articles that address the most commo n concerns of foreign investors .1 Consistent with the GATT, the first two provisions of the investment chapter of NAFTA include National Treatment and Most Favored Nation (MFN). Article 1102, National Treatment, st ates that each Party shall accord to investors of another Party treatment no less favorable than 1 Unless otherwise indicated, all quotations for this section come from the final text of the NAFTA as dictated by the NAFTA Secretariat website at http://www.nafta sec alena.org/DefaultSite/index_e.aspx?Det ailID=160
34 that it accords, in like circumstances to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sa le or other disposition of investments This requires that the U.S. Mexico, and Canada must treat member investment s as they would treat their own. This article also protects investors from being required to reserve a minimum level of equity ownership in their enterprise for foreign nationals. Several concerns have arisen regarding the wording of Article 1102. One unresolved question pointed out by Mann and von Moltke, 2003) is its lack of defining a standard of comparison for treatment to the foreig n investor. Moreover, the language in like circumstances can be interpreted many ways. What constitutes like circumstances, and if an investor is not found to be in like circumstances, can they be treated less favorably than another investor ? Secondly, they claim that Article 1102 fails to define the phrase no less favorable. The problem with this interpretation is that it is unclear as to how much of a difference in treatment is acceptable. Again, no relevant standard of comparison seems to exi s t to define the necessary favorable treatment t hat is to be accorded investors. The scholars also argue that the terms investor and investment are too broadly defined. It is clear that no actual productive process or facility is now required for prote ctions and rights to be vested in a foreign investor. Article 1103, dealing with the Most Favored Nation Treatment, holds that Each Party shall accord to investors of another Party [and investments of investors] treatment no less favorable than that it accords, in like circumstances, to investors [and investments of investors] of any other Party or of a non -Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. Mos t Favored Nation Treatment (MFN) has become one of the backbone a rticles in drafting subsequent
35 bilateral and regional Free Trade Agreements. In other words, all investors of member nations must treat and be treated at least as favorably as non -members. Article 1105 (1) holds that Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. This is also known as minimum stand ard of treatment. This article was designed to guarantee due process of law and to ensure proper justice affordable under international law. This article also generates criticism The terms fair and equitable treat ment, according to Jimnez ( 2001), are drawn from minimum standards set by customary international law. However, he argues that the minimum standards of treatment accorded under NAFTAs Chapter 11 only pertain to the investments by the company or enterprise as a whole, rather than to the in dividual investor. That being said, the investor herself has no right to claim damages agai nst the member country. Mann and von Moltke agree that the language of the article is not clearly defined. They use the example of the Metalclad case regarding damages claimed under Chapter 11, in which Mexico was found to violate the customary international standards of treatment by not following the appropriate transparency requisites express ed in other sections of NAFTA. The Tribunal in this case interpreted the international minimum standard of treatment in a very broad manner. As further cases have been charged with interpretation of this standard, it has become clear that the language needs to be more clearly defined so it is not left open to such broad inte rpretation (Mann and von Moltke, 2003).
36 Article 1106 addresses the issue of performance requirements. It requires tha t : No Party may impose or enforce any of the fol lowing requirements, or enforce any commitment or undertaking, in connection with the esta blishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a nonParty in its territory: (a) to export a given level or percentage of goods or services; (b) to achieve a given level or percentage of domestic content; (c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory; (d) to relate in any way the volume or value of imports to the volum e or value of exports or to the amount of foreign exchange inflows associated with such investment; (e) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or va lue of its exports or foreign exchange earnings; (f) to transfer technology, a production process or other proprietary knowledge to a person in its territory, except when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal or competition authority to remedy an alleged violation of competition laws or to act in a manner not inconsistent with other provisions of this Agreement; or (g) to act as the exclusive supplier of the goods it produces or service s it provides to a specific region or world market. The performance requirements in this article apply to all investments, not just those involving member parties. They liberate the actions of investors much like the elimination of tariff barriers does f or importers and exporters (Graham 1994). Article 1107(1) prohibits the requirement that foreign investors hire a certain number of foreign nationals as senior managers (Folsom, Gordon and Lopez 2000). No Party may require that an enterprise of that Par ty that is an investment of an investor of another Party appoint to senior management positions individuals of any particular nationality. However, an exception may exist necessitating that the majority of board directors or members be nationals or resid ents in the case that the investor is not hindered in his or her control over the inves tment (Folsom,
37 Gordon and Lopez 2 000). This allows a company to transfer its own trained personnel from the home nation. Moreover, it ensures that the company will ma i ntain the standards set forth by the parent company. If expected to hire a certain percent of national personnel, investors may be worried that they would be forced to run the operation according to the foreign culture. Article 1109 obliges that each Pa rty shall permit all transfers relating to an investment of an investor of another Party in the territory of the Party to be made freely and without delay. In other words, this article was designed to allow for the free transferability of profits, royalt y payments, etc., both during the operation and upon liquidation of the invest ment (Folsom, Gordon and Lopez 2 000). Generally, exceptions are limited to bankruptcy, securities trading, criminal offenses and other extraordinary issues (Folsom, Gordon and Lopez 2 000). This article is one of the clearer and less controversial provisions of Chapter 11. Another major concern by foreign investors is protection them from expropriation. As such, the NAFTA includes an article specifically designed to govern expr opriation and compensati on (Folsom, Gordon and Lopez 2 000). Article 1110 maintains that: No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (expropriation). However, exceptions exist under four circumstances if the expropriation is (a) for a public purpose; (b) on a non discriminatory basis; (c) in accordance with due process of law and Art icle 1105(1)2; and (d) on payment of compensation in accordance with paragraphs 2 through 63. 2 Article 1105(1): Standard of treatment Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. 3 Paragraghs 2 through 6 of article 1110 govern the rules of compensation in the case of expropriation under the four exceptions noted.
38 This article has been interpreted quite broadly. The first problem encountered is the difficulty in determining what constitutes an indirect expropriation because it does not involve the actual taking of property, but a mere interference with the property that is considered comparable to a taking (Jimnez 2 001). How far does the interference have to go in order to constitute equivalence to literal expropriation of property? Again, this phrasing can be interpreted in many ways and thus could potentially be exploited by inve stors and their legal experts. One of the biggest concerns regarding Article 1110, as Jimnez (2001) points out, is the phrase tantamount to expropriation. What is the definition of tantamount? The Oxford English Dictionary defi nes it as equivalent. However, we again encounter a problem in determining what constitutes equivalence. In one case regarding this exact issue, SD Meyers v. Canad a the tribunal decided that the inclusion of the word tantamount in the article was to protect against creeping expropriation, which is when a governmental regime changes regulations or taxation with the goal of making it more difficult for a foreign enti ty to survive in the host country. If this was in fact the goal of the original drafters of the agreement, then tantamount to expropriation is an indirect expropriation rather than a third form of expropriation (Jimnez 2001). In the case of Metalcla d Corporation v. Mexico, the tribunal determined : expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property  but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to -be expected economic benefit of property even if not necessarily to the obvious benefit of the host s tate (Man n and von Moltke 2003). Although this decision helps clarify the definitio n of
39 expropriation, we are still left to determine phrases such as deliberate and acknowledged, and reasonably -to -be expected economic benefit. Thus, further clarification of unclear phrasing often leads to the need for even more interpretation. It i s obviously true that several of the articles under Chapter 11 are somewhat unclear, but it may be nearly impossible to revise them to the point of comprehensive clarity. Section B: Settlement of investment d isputes Section B lays out the claims procedure for investment disputes between a party and an investor of another party. Its 23 articles address the procedure of claims submission and explain the rules and conditions of the arbitration process under the agreement. One of the most important aspects of Section B is the right of the individual investor to seek arbitration in a dispute against a government that is party to NAFTA. In other dispute settlement mechanisms, such as those of the GATT, an investor must be represented by its government in order to pursue claims against another government. According to Graham (1994): an investor can pursue claims on its own behalf or on behalf of its investment if the claim involves breach by a signing party (where a signing party includes obviously any of the governments of Canada Mexico, and the United States, but apparently can also include a state or provincial government of any of these nations as well) of obligations under section A of chapter 11 or certain other articles of NAFTA This condition is ver y desirable and empowering for investors. In the event of an investment dispute, Section B requires that parties must first attempt to find a solution through consultation and negotiation. In the case that negotiations fail, the dispute may be submitted to binding arbitration under the rules of the World Bank or the United Nations. The arbitration panel reserves the right to order short term measures to protect the rights of the disputing investor. However, it cannot apply measures for an alleged breac h of NAFTA. The tribunal can also award monetary, not punitive, damages and/or compensation of property, possibly including interest. In the case that an investor submits a claim on behalf of an
40 investment, the arbitration panel cannot award damages that interfere with any right the investment might have to relief under domestic law (Graham 1994). The dispute settlement mechanisms also resolve a long -standing dispute between the U.S. and Mexico over the Calvo Doctrine. Under the Doctrine, Mexico and o ther Latin American nations have held that the sole means for resolving a dispute between a sovereign state and an investment within the territory of that state is judicial proceedings in local courts (Graham 1 994). U.S. investors and the U.S. governmen t find these proceedings to be unfair and prejudiced. Section B reforms the terms that caused this dispute. In sum, Chapter 11 facilitates and protects foreign investment so that companies are confident their investment is safe. Foreign governments cannot place inequitable conditions or requirements on member parties. Moreover it protects investors from fear of government expropriation, a common issue in Mexico before it joined NAFTA. The dispute settlement provisions give investors a sense of security If they feel a member nation has violated their rights under NAFTA, a claim can be handled by the innovative dispute mechanisms under Section B. One of Mexicos main goals when it joined NAFTA was to attract foreign investment, particularly from the U. S. With the provisions of Chapter 11, Mexico is forced to maintain an open policy towards foreign investment and to treat them in the same manner in which it treats domestic investors. Foreign Investment Flows into Mexico Increased FDI, particularly from the United States, was one of Mexicos main aspirations in joining NAFTA. Several studies point out the success of the agreement in attaining that goal. In her study on regionalism and Foreign Direct Investment, Waldrich (2002) discovered a positive corr elation be tween NAFTA and FDI in Mexico. She feels that in the absence of the regional agreement, such flows would have been significantly lower (as much as 45%) from
41 1994 until the beginning of 1999. Indeed the United States has historically been the biggest contributor of foreign investment flows into Mexico and, since the initiation of NAFTA, has poured even more investment into its less developed neighbor (Waldrich 2002). Investment Flows B efore NAFTA Despite strict regulations on foreign investment during the 1970s, Mexico was still a major developing country recipient of U.S. foreign direct investment during the 1970s and 1980s. In 1971, foreign investment in Mexico was equa l to $3.8 billion U.S. D (Ortiz, 1994). Figure 2 1. Foreign Direct Inves tment in Mexico, 19711992 ( U.S. $ millions) (Source: Ortiz, E. (1994) NAFTA and Foreign Inves tment in Mexico, in A.M. Rugman ( ed .) Foreign Investment and NAFTA University of South Carolina Press: Columbia ). Throughout this decade, investment grew moder ately by about 3 billion dollars, to $6.8billion (Figure 2 1). The rapid increase from 1979 to 1981 can be attributed to the oil boom in Mexico, when oil was discovered in the G ulf. In just three years, foreign investment jumped over $4 billion, reaching a level of just over $10 billion. Growth was quite modest over the next two years because of Mexicos debt default in 1982. However, investment recovered over the rest of the decade under De la Madrid and reached a total of $24.1 billion by the end of h is term
42 in 1988. This was a 146 percent increase in total investment over the former Portillo administration, though $3 billion was attributable to debt -equity swaps from 19861987. Growth during the first few years under the Salinas administration was e ven more impressive. During his first four years in office (19891992), investment increased by about $23 billi on to a total of $50.2 billion. From 1975 to 1980, the U.S. made up about 70 percent of the total foreign investment in Mexico. The UK, Germany Japan and Switzerland followed, but a t a great distance from the U.S. Throughout the 1980s, the its share of investment began to decrease, averaging about 64 percent of the total in Mexico, as countries like Germany, Japan, Switzerland and the UK increa sed market share in the nation. By 1992, the U.S. share had decreased to 60.7 percent when NAFTA was signed. At the same time, Canada was slowly increasing its investment in Mexico The decrease in U.S. investment is likely attributable to liberalizati on policies in Europe and Asia. As nations shifted towards less protective policies, domestic demand decreased. Firms subsequently invested in Mexico to take advantage of cheap labor costs and as a means to reach the U.S. market. It would be expected t hat U.S. and Canadian investment increased over the next several years to take advantage of NAFTAs favorable trade and investment conditions (Ortiz, 1994). Investment Flows u nder NAFTA After NAFTA was signed on December 17th, 1992 by U.S. President Bush, Mexican President Salinas, and Canadian Prime Minister Mulroney, U.S. investment began to increase, likely in anticipation of NAFTA and because of the liberalization policies under Salinas and De La Madrid. Then, in December of 1994, the peso was devalue d to 1/3 of its value when the stock market dropped dramatically (British Broadcasting Corporation [BBC], 2009). As a result, investment dropped slightly from $10.3 billion to about $7.1 billion by the end of 1996.
43 However, because of a $40 billion bailo ut package by the IMF together with the Clinton administration (Fischer, 2001) the peso was able to recover fairly quickly and by 1997 investment had risen steadily to record levels of nearly $13 billion. Figure 2 2. FDI into Mexico by country of origin, m illions of U.S. Dollars (Source: http://www.inegi.gob.mx/inegi/default.aspx?s=est Last accessed 3 Feb 2009). After Mexicos complete recovery investment increased by over $20 billion from 1998 to 2001, reaching a record high $29.5 bil lion (Figure 2 2). The decline from 2001 to 2004 was a demonstration of the effects of the U.S. recession in an economy that is closely linked. In 2007, investment in Mexico was equal to $25 billion and potenti ally rising. T he U.S. has maintained its dominant position in Mexicos economy since NAFTA went into effect The United States in 2001 accounted for 72 percent of total foreign direct investment. In 1994, it only held about 50% of the total. Most recent ly, the United States is responsible for approximately 42%. Still, no other country comes close to reaching a level comparable to that of the U.S., except for Germany in 2004, at the bottom of a rapid decline in U.S. and world investment in Mexico. As wit h total investment U.S. FDI peaked in 2001, at
44 approximately $21 billion. During the expansive period from 1999 to 2001, Mexico had fully recovered from its 1994 financial crisis and NAFTA had been in place for 5 years. As no other major event occurred d uring that time, we can presume that NAFTA was likely one of the main reasons for the impressive growth in FDI, particularly because the majority of this investme nt came from the United States. What these numbers tell us is that although the FDI levels di d not increase steadily from when NAFTA was implemented in 1994 until the present day, we can still see how significant U.S. investment is to the Mexican economy. As a single nation, it accounts for nearly half of the foreign investment in Mexico. The ot her 50 -some percent comes from the rest of the worlds nations combined. Fur thermore, the extreme increase over the period from 1994 to 2001 demonstrates that NAFTA likely had a great effect on U.S. investment in Mexico. A number of factors can account f or an increase in this economic indicator, but such a dramatic change is most likely associated with the NAFTA agreement because the levels began to jump to record levels both in anticipation of the agreement and after it went into effect. As Eduardo Soli s Sanchez, one of the initial creators of the agreement, mentioned in a n interview, several U.S. companies were anticipating the agreement and thus helped to push it through the governments of both nations in order to take advantage of an improved and more secure investment environment that they hoped w ould be a result of the NAFTA. From this data, we have determined that NAFTA is probably responsible for much of the increase in foreign investment in Mexico from 1992 to present day. But was this increase t he result of the protections and advantages offered under Chapter 11? Or were companies encouraged by the elimination of tariff barriers, facilitating cross border shipments of inputs and
45 products? The answer to this answer to this question is debatable and will be the subject of my next chapter. Conclusion In conclusion, this chapter has demonstrated how present day trade liberalization emerged from early 18th Century theories arguing against mercantilist protectionism. In the post World War era, Mexi co erected high tariff barriers and reverted to protectionist policies in defense of its developing industry. When Import -Substitution Industrialization proved to be an unhealthy national policy, Mexico turned to the United States and international organi zations for financial help. Mexicos economic reforms toward liberalization culminated when it became a member of the GATT in 1984. Its concentration on earning capital wealth by reforming its investment environment led to the inclusion of a chapter spec ifically designed to meet the needs of individual investors. NAFTAs Chapter 11 has become the cornerstone of several subsequent tr ade and investment agreements. Designed to enhance the investment environment and, in turn, draw foreign capital into the m ember nations, the true effects of Chapter 11 are highly debated. Because the agreement was targeted at developing the Mexican investment climate for NAFTA members, the dispute is centered on whether or not Mexicos influx of foreign investment, particula rly that of the U.S. is largely the result of NAFTAs Chapter 11 investment provisions or is a culmination of many factors. The next chapter will address this debate, using case studies of U.S. companies with operations in Monterrey, Nuevo Leon, Mexico.
46 CHAPTER 3 U.S. INVESTMENT IN MEXICO : THE CASE OF MONTER REY, NUEVO LEON I chose to conduct my research in Monterrey, the capital of the state of Nuevo Leon. The city of Monterrey is the third most populous city in Mexico, behind Mexico City and Guadalajara. Known as the industrial capital of Mexico, i t is strategically located within close proximity to several major U.S. and Mexican Cities (Figure 3 1). With 4.3 million inhabitants, Nuevo Leon is home to four percent of the nations population. It is r esponsible for 11 percent of the manufactured goods in Mexico, at $16.4 billion U.S.D. 1 This northern state produces 7.6 percent of the n ational GDP, at $69.2 billion. Figure 3 1. Strategic l ocation. (Source: Secretariat of Economic Development (SEDECO ). (2008) Nuevo Leon: The Platform for the NAFTA Region, SEDEC O : Monterrey, Nuevo Leon, Mexico. Retri e ved 15 January 2009 from http://www.nl.gob.mx/pics/pages/econ omia_razones_invertir_base/ventajas_ing.pdf ) 1 Unless otherwise indicated, all currencies are in US Dollars ($).
47 Nuevo Leon is the second highest FDI recipient of the Mexican states, averagi ng $1.5 billion per year. With 2,000 foreign-owned companies in the states metro area, 145,000 jobs were created in the period fro m 2006 to 2007 ( Secretariat of Economic Development [SEDECO], 2008). Nuevo Leon: An Industrial Powerhouse The state of Nuevo Leons industrial legacy began with the first steel concession in 1890, one of the first in all of Latin America. As a result of the success of the steel industry in the 1980s and subsequent influxes of foreign direct investment, the states beer industry was developed as a large -scale joint venture in 1989. Ten years later, the glass industry rose to meet the demands of the ever -g rowing beer industry. In the past few decades, industry in Nuevo Leon, particularly in Monterrey, has become a key component of the states development. In addition to local entrepreneurialism, i nternational exchanges with industrialized nations have pl ayed a fundamental role in the economic development of the region and specifically Monterrey (Secretariat of Economic Development [SEDECO] 2006). According to U.S. Commercial Service (2008) the state of Nuevo Leon is responsible for 75 percent of the n ational production of glass containers, 60 percent of cement, 60 percent of artificial and synthetic fiber, 50 percent of beer, 50 percent of ceramics, 25 percent of basic steel, and 70 percent of household appliances. Moreover, Monterrey is ranked the best city in Latin America in which to do business by Fortune magazine Some of the more well known United States based companies currently operating in Monterrey are: American Express, Amway, Baker and McKenzie, Bank of America, Carrier, Caterpillar, Ch rysler, Donnelly, GE, GM, Honeywell, IBM, John Deere, JC Penney, Kohler, Korn/Ferry International, KPMG, Kimberly Clark, Lucent, Mary Kay Cosmetics, Pinkerton, Price Waterhouse Coopers, Trane, Toyota, Visteon, Wayerhaeuser, York
48 Industrial C lusters Nue vo Leon has several consolidated clusters as identified by the states Secretary for Economic Development. These clusters reflect the success of the state and add to the attractiveness of the business climate, making them important assets. Although these assets were established before NAFTA, the agreement helped to make Monterrey even more appealing to foreign investors. Among these clusters are auto parts and components, home appliances and components, electric and electronic equipment, IT and software, steel, glass and cement, and health services. The auto parts and components cluster is the most important of the nine clusters. It alone contributes 8.4 percent to the $1.3 billion of Mexicos industrial production. Twenty percent of Mexicos auto part industries are located in Nuevo Leon. The automotive cluster has generated many jobs in Nuevo Leon and has been a big part o f the states economic growth. The household electric industry in Mexico is one of the largest in the world. Nuevo Leons cluste r has become a very prominent one. As it continues to grow, it is becoming an attractive location for foreign companies, such as Whirlpool and Carrier, looking to expand and/or relocate their world production. Nuevo Leon is also becoming known for its qu ality health service providers both local and international. There are an increasing number of research laboratories to improve and develop new specialized medical services. The state particularly encourages research and development in the areas of biote chnology and nanotechnology. ( SEDECO 2006). Research and development is a key part to the development of Nuevo Leon and Monterrey. As an example, PIIT Monterrey is a new Research and Innovation Technology Park located in the Apodaca industrial area, a collection of nearly 40 Industrial Parks which developed as Monterreys industry continued to expand beyond the capacity of Monterrey. The
49 parks were originally created by the municipal government to foster growth and developm ent in the city. It is one result of efforts by the government to create an International City of Knowledge that emphasizes growth in biotechnology, nanotechnology, mechatronics, information and communication technologies, and health ( SEDECO 2006). According to the Ap odaca Munic ipal Government (2008) g rowth, development and competitiveness are the elements that distinguish the transformation of the Apodaca in recent years. Its geographical loca tion and service infrastructure position it as a privileged city for investors and the creation of business. 2 Education To complement and support its economic and industrial achievements, Nuevo Leon, particularly Monterrey, boasts an educated population. With over 150,000 students enrolled in the states 93 colleges and universities, N uevo Leon has the highest level of education in all of Mexico. Moreover, it is home to 60 bilingual schools and 213 technical programs. Monterrey alone has 30 universities and 213 technical programs. The most prestigio us private University in Mexico, an d one of the best in Latin America, the Instituto Tecnologico de Estudiantes Superiores de Monterrey (ITESM), which has campuses throughout Mexico, but its home is in Monterrey. Together with the Universidad de Monterrey (UDEM) and Universidad Regiomontana (UR), these three institutions of higher education are considered the best private colleges in all of the Northeastern Mexican region. In addition, the Universidad Autonoma de Nuevo Leon (UANL) is considered the best public state university in all of N orthern Mexico (SEDEC O 2006). Finally, Nuevo Leon is also the residence of the nations three best graduate schools, which all specialize in Business Management and Public Administration. IPADE, 2. All translations done by author.
50 EGADE, and EGAP are known world -wide. Nuevo Leons key to success throughout the years has been its investment in education. From youngest to eldest, continuous education has been the standard for generations, boasts Nuevo Leons governor, Jos Natividad Gonzlez Pars (SEDECO 2006). The average level of education in Nuevo Leon is 10.1 years, while the national average is 8.7 years. In the year 2005, 44 percent of University students in the state were specializing in Business Administration or Social Science programs, while another 40 percent were studying E ngineering and Technology -related specialties (SEDECO, 2008).3 Particularly important to American investors and international businesspeople is the fact that English is widely spoken in this northern Mexican state. Most classes at ITESM are offered in b oth English and Spanish, and nearly all students took their major courses in English in order to improve their international business abilities, by becoming completely bilingual in their specialization. The majority of stu dents and professors speak both En glish and Spanish. Students receive a culturally diverse education, as the international exchange program at ITESM is very well known and popular among students of many countries, particularly from the United States, France, Germany, and Latin Ame rica. E xchange students are allowed to take most any classes at the University, including those offered through the international programs department. Therefore, students interact on a daily basis with students of all different countries, cultures, and 3 As an undergraduate student, I was enrolled in an exchange program for a semester at the home campus of ITESM. As an outsider, I was quickly able to recognize the high level of academia presented at the university. The large majority of Mexican students I got to know were enginee ring students, or in business or social science specialties. The students were very dedicated to their studies, seemed to be extremely driven, and appeared to have a greater appreciation for the opportunities that lay before them than many American stude nts enrolled at my undergraduate university. Students took great pride in their degrees and generally had little trouble finding career placement after graduation. This was especially true for students in engineering or other trades, because of the outst anding relationships between industry, government, and the university. Many of my acquaintances were from Mexico City or other more southern states; they came to Tec de Monterrey because they realized that Monterrey has Mexicos top system of higher educa tion and has endless career opportunities in areas such as industry, internati onal business, and government.
51 languages which instills in students a sense of cultural sensitivity and understanding, and the ability to work with people of many different backgrounds. NL has an educated workforce of 1.9 million. Nuevo Leon takes pride in its competitive wages, which range f rom $200 U.S. D per day for a plant manager to $10 U.S. D per day for a blue collar worker.4 Furthermore, close working relations between unions and companies result in efficient product ivity and a satisfied workforce Union pressure is much less in Nuevo Leon than states in the U.S. I t has gone nearly 10 years strike -free. Overall, the states main competitive advantages can be summed up as a quality oriented culture and global business environment as well as a combination of high tech manufacturing a nd engineering in a low cost region ( SEDECO 2006). Quality of Life Another attraction for investors when choosing a place to locate their facilities is the quality of life of the city in which they will be established. Many investors are familiar with the large income gaps between the rich and poor in Mexico, and are well aware that the quality of life in many Mexican states and cities is not comparable to that of the United States. However, the Northern state of Nuevo Leon and, specifically the city of Monterrey, is more developed with a better standard of li ving than elsewhere in Mexico. Nuevo Leon has 20 museums, more than 100 hotels, and two convention centers, including Cintermex, which is one of the largest and highest quality convention and exposition centers in Mexico. Addi tionally, the state is home to seven golf courses, one sports and concert hall, two stadiums, and 20 shopping centers (SEDECO, 2008). 4 Rates are based on workers with 5 years of experience.
52 Perhaps even more relevant to investors, Monterrey was ranked number six as the easiest c ities in which to start a business in Latin America in 2008 according to Amrica Economa magazine, based on factors such as the political interference, freedom of doing business and security Nuevo Leon and its capital city of Monterrey are situated in the prime NAFTA location, along the border with the United States in a location that can be used as a gateway for 3rd party investors (outside the NAFTA region) to reach the United States. Modern infrastructure, including a technology park and more than 6 8 industrial parks are proof of the booming industry in this Northern Mexican state. A g lobal business culture is widespread throughout Nuevo Leon Human capital is strong and the labor force has been very stable over the past decade. The education leve l is the highest in all of Mexico. Links between academics, industry, and government create a well trained and highly motivated workforce in a state which boasts a high quality of life. (SEDECO, 2008). The Secretariat of Economic Development in Nuevo Le on sums it up nicely in his message to potential investors: Nuevo Leon, a state of progress, is the ideal location for foreign investment. In Nuveo Leon, we welcome companies from across the globe and look forward to helping new firms establish their busi ness operations in our state. We have the presence of more than 1800 foreign companies operating in Nuevo Leon and their success is a model for others seeking opportunities in the growing Mexican market. Economic development plays a strategic r ole in the growth of the state. Research Findings In light of Monterrey, Nuevo Leons investment climate, it was the ideal location in which to study NAFTAs effects on attracting foreign investment in Mexico. Monterrey has several governmental organizations wh ich work with foreign investors In addition, U.S. investment is present because of its location close to the border. I felt as though companies in Monterrey would be knowledgeable of NAFTA and the extent to which their investment depends
53 on it. My first i nterview was with the Samuel Pea, Director of Foreign Investment with the Secretariat of Economic Development ( SEDECO ) for the state of Nuevo Leon (NL ), which is based in Monterrey. As a government officer who works with foreign investors on a daily basi s, I knew he would be able to inform me about pertinent information about the citys investment environment and could lead me to future interviews. Insights of the Director of Foreign Investment for Nuevo Leon I met with Pea at his office in downtown Monterrey to discuss his perspective on the investment climate of the state of Nuevo Leon and to get his insight about what attracts investors to the state. He also gave me suggestions for shaping my study. He invited the foreign investment coordinator to j oin us as she had done research similar to mine for her masters thesis. Initially, they explained what the office of the Secretariat of Economic Development (SEDECO ) does to promote foreign investment in Nuevo Leon. Pea explained to me that basically, the job of the foreign investment director/coordinator at SEDECO is to create certainty in the minds of foreign investors by providing them with information about Monterreys investment climate that is trustworthy and reliable. Most large companies have b argaining power when deciding whether or not to invest in Monterrey; if not provided with the accurate and pertinent information regarding their investment, they may chose to take their funds else where. The foreign SMEs (Small and Medium -sized Enterprises) are predisposed to invest in Monterrey; however, they need someone to reinforce why the city is a good place to invest The investment coordinators job is to facilitate the actual transition into Mexico once the decision has been made to relocate or open another facility in Monterrey. According to Pea, about 44 percent of FDI in the state of NL is of U.S. origin. This reflects the strong ties between Northern Mexico and the United States. Mexico has a historic relationship with the U.S. However, afte r 15 years of NAFTA, certain sectors such as the
54 agricultural sector still cannot compete with U.S. industries, largely due to subsidiaries from the U.S. Others, such as the automotive and home appliance industries have become competitive with U.S. indust ry under NA FTA. One reason for this was the economic crisis in Mexico during 1994, which resulted in skyrocketing inflation and interest rates until 1998, when the economy became more stable. Interest rates and inflation remained high (double digit perce nts) from 19982000, but were not as volatile as during the economic crisis In 2000, Mexicos inflation finally came back down to one -digit percentages, which lowered credit costs and allowed many sectors within the Mexican economy, such as the automotiv e and home appliances sectors, to compete with their American counterparts. Mexican companies continue to have difficulty gaining access to government credit. In contrast with the U.S., few companies in Mexico today (including those in Monterrey) have co rporate governance. Thus, they do not often comply with SEC mandates for publicly traded companies, which have easier access to lower cost financing especially if they are listed on the New York Stock Exchange. It becomes difficult for companies to grow without access to public credit. Thus, it is beneficial to the Mexican economy when markets become saturated in the U.S. as many U.S. investors are turning abroad to realize higher rates of return. Competition from the U.S. has forced the Mexican econom y to focus more on research and development for the growth of technology. Consequently, the Mexican economy is slowly beginning to shift from a manufacturing economy to a more knowledge -based economy. This is especially evident in Monterrey, which hosts 6 out of the 15 most important holding groups in Mexico. Mostly because of its close proximity to the U.S. border, Monterrey has higher productivity and competition than does Mexico City.
55 In line with the idea that the Mexican economy is shifting into a more knowledge -based economy, industries such as automotive, medical, aero, appliances, and software have seen an influx of investment, particularly with NAFTA. The elim ination of tariffs under NAFTA wa s one of the most significant influences on company decisions to move operations to Mexico. But he added that there are many other factors that result in new FDI. Next I asked what other major factors he has found to be influential on an investors decision to invest in Mexico over other nations, such as C hina or other Asian countries, and how much of an influence NAFTA has. He was quick to remark that the union pressures of the U.S. were not a problem in Nuevo Leon, which has gone nearly 10 years strike free. He also recognized other factors such as Mexi cos strategic location next to the U.S. as well as larger market and economic factors such as globalization itself, and saturation of the U.S. market. Lower costs are still an important deciding factor, as well as the strong business culture in Monterr ey. He strongly believes that Americans are drawn to this area of Northern Mexico because of its assimilation to the American way of doing business. As far as China goes, the labor might be cheaper but issues such as logistics, a very contrasting and c omplex culture compared with that of the U.S. and an often unstable political environment can prove to be deterrents. Are American companies starting to see more potential in investing in China over Mexico? I queried. China is a threat, but he also f eels that it provides a good scare tactic to get Mexico moving more quickly in working towards a more knowledge -based economy as a sort of defense mechanism. Moreover, in comparing Monterrey with the more -centrally located Mexico City (Distrito Federal, D .F.), he believes that companies are becoming more likely to invest in Monterrey because of NAFTA provisions. However, logistics and the profound business culture in Monterrey are aspects that he feels cannot be overlooked. He went on to describe what he
56 called the triple helix which describes the working relationship between the government, education, and private sector that truly helps foster the business env ironment present in Monterrey. In your professional opinion, do you feel that through the t rend in movement of manufacturing operations from the U.S. to Mexico, there has been a significant loss of U.S. jobs in certain sectors? If so, do you feel that creation of new jobs in other sectors largely offsets that loss? Although this question has little to do with NAFTAs actually ability to draw foreign investment into Mexico, it is one of the most widely debated aspects of NAFTAs effects. If NAFTAs investment chapter has been successful in its efforts, then has it also succeeded in destroying American jobs? So, from a M exican governmental opinion, Pea didnt deny that there has been a loss of U.S. jobs, particularly with the expansion of the U.S. automotive sector into Monterrey. From his point of view, this may be detrimental in the short run but over time other industries will grow to accommodate those losses. Its a cyclical process. In reality, he doesnt see NAFTA as being the main cause of job losses in the U.S. As a result of union pressure, they are shooting themselves in the foot by forcing companies to look for less costly and more hassle -fre e assembly plants, such as in N L, which hasnt experienced a workers strike in nearly 10 years. From his perspective, NAFTA was indeed a key reason why the American investors he works wi th come to Monterrey. But more than that, Pea feels that Monterreys flourishing and culturally similar business environment are what truly draw them to Monterrey instead of other locations in Mexico. Without NAFTA, investment would not be as straightforward. Investors choose Monterrey for its cultural similarities, proximity to the U.S. ease of logistics, low -cost production, and its shift toward a knowledge -based economy. Would all of this be possible
57 without NAFTA? Its not likely at least not to the extent that it is. NAFTA made the investment environment more secure to foreign investors, particularly those from the U.S. and Canada. It made logistics easier because of the elimination of most tariff barriers, lessening the complexity of cross -bor der shipment. Moreover, technology transfer from its more developed neighbors has helped to develop its infrastructure and technological know -how. Pea pointed out that the industries that had experienced higher levels of investment since NAFTA include a ero, engineering, computer software, automotive, appliances, etc. (Personal Interview with Samuel Pea, 17 June 2007, Monterrey). Company Case S tudies After obtaining background information on Monterreys investment climate from a government official, I began interviewing company representatives. Along with the American Chamber of Commerce intern, I met with plant managers from ITW Safety, Danhil de Mexico, Panduit, and Pregis. A fifth company interview was arranged with a colleague of Mr. Peas at Whi rlpool Mexico. For these interviews, I made up a standard list of questions pertaining to my specific goals for the interviews. I laid my questions out in three sections, including A. The Decision to Relocate, B. Results of the Decision, and C. Business in Mexico. The meeting with Adrian Estrada of Whirlpool was more open-ended and touched on a broad array of topics Therefore, this one is addressed separately. All interviews were conducted in English so that I would not miss any particular points or ha ve to ask the interviewees to repeat themselves for our better understanding. Interview 1: ITW S afety Alberto Cordero is plant manager of ITW (Illinois Tool Works) Safety, a division of the Illinois -based American Safety Technologies, which has operatio ns in 52 countries around the
58 world. His Controller, Fabricio Galindo, was also present. ITW manufactures anti -slip floor and desk systems for marine and industrial applications. The company opened its first Mexican operation in 2006 and the second in 2007. Interview 2: Danhil de M exico Rafael Silva is General Director of Danhil de Mexico. Danhil m akes containers and packaging products used for moving and storage. The company is Texas based and currently has four locations in Temple and Brownwood, T X, and in Monterrey and Reynosa, Mexico. Interview 3: Panduit Corporation Carlos Cano is the Plant Manager of Panduit Monterrey. An Illinois based company, Panduit m anufactures wiring and communication products, network cabling systems and cable and wiri ng accessories In addition to its Mexican manufacturing facility, the corporation has international locations in Costa Rica, China, the Netherlands and Singapore Panduit Corp. opened operations to Mexico in July of 2007. Interview 4: Pregis T he fou rth interview is with Jos Peralta, plant manager of Pregis Monterrey. Illinois based Pregis makes protective, flexible and food service packaging with facilities throughout North America and in Europe. The Monterrey facility is part of the corporations Hexacomb honeycomb business unit5. Pregis Monterrey facilities began construction in November of 2006 and operations began in March 2007. Interview 5: Whirlpool, M exico Adrian Estrada is General Counsel and Head of Government Relations for Whirlpo ol, Mexico. Whirlpool Corporation is the global leader in major home appliance manufacturing. It 5 For more information about Pregis different business units, visit http://www.pregis.com/AboutPregis/Businesses/tabid/227/language/enUS/default.aspx
59 is headquartered in Benton Harbor, Michigan and has manufacturing facilities in 13 countries and markets 11 major brand name products in more than 170 countr ies. Whirlpool came to Monterrey in 1987 under a joint venture with Vitro. In 2002, it acquired Vitros stake in Vitromatic, the second largest appliance manufacturer in Mexico (Whirlpool Corporation, 2002). The Decision to L ocate in Monterrey ITW Safety Their first manufacturing line in Monterrey was relocated from Germany in 2006 to reduce transportation costs to the U.S. Then, in 2007, they closed their Detroit, Michigan plant and initiated the second line in order to take advantage of lower labor co sts. When asked the main reason ITW chose to locate operations to Monterrey, Cordero explained that they had existing clientele in the area. Monterrey is a strategic location for ITW because it is two hours from Reynosa, Texas, which is where the majori ty of our customers are located. He also mentioned Mexicos status as a Low Cost Country, or LCC. When asked if NAFTA was a major influence on the companys de cision to move to Mexico, I found out was that it was more of an indirect cause of their choi ce to relocate. They moved here to be closer to existing customers/suppliers in Mexico so as to lower transportation costs. If NAFTA had never gone into effect, Cordero said they still would have relocated for the reasons he had previously listed. Had his clients and suppliers not moved to Reynosa or Mexico, ITW may never have relocated. However, NAFTA may have been an important reason for the latters decision to come to Mexico (Personal Interview with Alberto Cordero, 7 July 2008, Monter r ey Mexico ).
60 Danhil The company e stablished operations in Mexico in 1995, the year after NAFTA was implemented. Silva noted that no operations were closed in order to make this transition. Instead, the Mexican plant was an expansion of the Texas operations. Simila rly to ITW Safety, Danhil chose to move to Mexico because its most vital client in Texas, Kohler, moved here, and asked them to move here if Danhil wanted to continue being a supplier. Eventually, Kohler merg ed with International Paper and left Mexico but Danhil stayed in Mexico as they built up a client base in Monterrey. Kohlers influence on them was the largest factor in their decision to come to Mexico. However, NAFTA definitely made the transition easier because cross border shipping became a much simpler operation. Like with ITW Safety, it was a facilitating factor in the transition. The principle reason why Kohler moved to Mexico, he speculated, was probably to take advantage of labor costs. Even if NAFTA had not gone into effect, Danhil defini tely would still have relocated in order to maintain their top customer. However, Kohler may not have moved here to take advantage of lower cost labor had it not been for NAFTA and the enhanced investment provisions. On the question regarding what had allowed Danhil to maintain operations in Mexico, rather than moving to another low -cost location such as China, he responded that the main reason and the same reason for staying in Mexico is because our customers are here. Our growth has been determined by our customers needs. As long as Mexico is attractive to our customers it will be attractive to us. As time goes, Mexico has made it easier to do business here particularly after NAFTA. (Personal Interview with Rafael Silva, 8 July 2008, Monterrey, Mexico ).
61 Panduit Corporation Panduit expanded operations to Mexico in July of 2007. The corporation chose Mexico, specifically Monterrey, for several reasons including infrastructure, the low cost of labor, the citys universities, the use of the English language in business, and low transportation costs. However, unlike the previous interviewees, Cano claimed that NAFTA was definitely one of the main influences on t he decision to move to Mexico. In fact, if NAFTA had never gone into effect, Cano reason ed that Panduit likely would not have expanded to Mexico. Before NAFTA was enacted, Panduit chose Costa Rica over Mexico and they continue to operate there (Personal Interview with Carlos Cano, 8 July 2008, Monterrey Mexico ). Pregis Construction for the companys Monterrey facilities began in November of 2006. Operations began in March 2007. As for why Pregis chose to open operations in Monterrey, Peralta responded that Hexacom, the parent company, wanted to expand into the Mexican domestic market. N AFTA had a big part in making the decision. In addition, a large amount of Pregis U.S. customer base is in Mexico, and in particular the Monterrey area. Peralta claimed it was hard to say if the company still would have come to Monterrey without NAFTA. On the other hand, he feels that in the scheme of things, Pregis is ultimately here because the companies we work with are here, most likely because of NAFTA (Personal Interview with Jos Peralta, 9 July 2008, Monterrey Mexico ). Conclusions The role of NAFTA in the decision s to locate in Monterrey varied, but it was a factor in all four cases. For ITW and Danhil, NAFTA was not cited as one of the main reasons they are there, let alone the specific investment provisions. ITW chose Monterrey because of transportation and labor c osts, as well as proximity to its customers in Texas. Danhil also
62 followed customers to Mexico. Although neither of them suggested that NAFTA investment provisions were a reason for their companys decision to expand, the cli ents they followed may have been here for that reason. Remember from figure 2 2, that investment climbed drastically from the mid 1980s until 1994 and again from the late 1990s until 2001. During the first phase, Mexico was enhancing its investment envi ronment, joined the GATT, and later joined NAFTA. Chapter 2 suggested that these increases in investment could largely be attributable to Mexicos membership in NAFTA. ITW and Danhils customers may have been a part of this influx. If so, ITW and Danhil were indirectly attracted by NAFTA. In contrast, the representative from Panduit and Pregis both named NAFTA as one of their main reasons for expanding to Monterrey. Panduit referred to many factors that influenced their decision related to those considered by ITW and Danhil, but before NAFTA went into effect, the company chose Costa Rica over Mexico. Pregis also followed its client -base but many of them are here because of NAFTA. None of my interviewees referred specifically to Chapter 11 or the inv estment provisions of the agreement, but most of them moved to Monterrey after the first s tages of NAFTA were over. B ecause they are not there as a direct result of Chapter 11 does not imply that the clients they followed are not. In order to determine w hat aspects of NAFTA attracted their companies to Mexico, I next inquire d about the Results of the Decision and their experiences using the agreement. Results of the Decision ITW Safety T he second section of this interview, regarding the results of the de cision, inquired if the companys location/expansion to Mexico had been as successful as expected. The answer, for ITW Safety was a definite yes. As for the effect of the rules of origin, I asked him what
63 percentage of ITWs products are shipped back to t he U.S. vs. those that remain in Mexico. Only about 2 3 percent of their products go directly back to the U.S.; the other 97 98 percent is sold to distributors in Mexico. Ultimately, though, almost all of those products go back to the U.S. through these s econdhand Mexican distributors. Another major impact of NAFTA has been liberalized imports of U.S. parts. The majority of the companys raw materials come from the U.S. (Personal Interview with Alberto Co rdero, 7 July 2008, Monter r ey Mexico ). Danhil S ilva agreed that his companys expansion into Mexico has been as profitable as expected. They are growing within Mexico and hope to continue to expand throughout the country. They currently have offices in Reynosa, and are in the process of opening a new one in Juarez. Danhil de Mexico imports raw materials daily from the U.S. They need only have 2 main on -site employees for Danhil to deal with the customs procedures and NAFTA regulations for importing their materials. U.S. imports total around 40 perc ent, the rest are Mexican. Only about one to three percent of their products are directly exported back to the U.S. the rest are distributed throughout Mexico to their customers (similar to ITW Safety), of which about 80 to 90 percent are U.S. companies. Most of their clients in Mexico are existing customers, who were previously supplied from the Texas plant (Personal Interview with Rafael S ilva, 8 July 2008, Monterrey Mexico ). Panduit Corporation E xpansion has been very profitable for Panduit and the Monterrey location has produced few problems conducting duty -free import and export operations under NAFTA. Problems encountered have been more the result of issues with customs brokers, rather than with the customs process itself. It has proven more dif ficult for Panduit to import supplies into Mexico from the U.S. than to expor t products/supplies to the U.S. Fortunately, about 70 percent of their
64 products are exported to the U.S. and Canada, the other two NAFTA members. This is in contrast to ITW and D anhil, whose products mostly remain in Mexico (Personal Interview with Carlos Cano, 8 July 2008, Monterrey, Mexico ). Pregis Although the operation is still fairly new, it seems to have been profitable is going well. In relation to the conduct of import an d export operations under NAFTA, Peralta responded that importation has proven mostly hassle -free. They do have some issues regarding tools coming in due to restrictions on this type of product, but that had been the only real concern as of this past summ er. About 40 percent of the products made at the facility are shipped back to the U.S. while the remaining 60 percent are sold within Mexico. Therefore, in nearly half of sales, the company deals with NAFTA regulations, including rules of origin. However, the business imports the majority of their supplies from the U.S. (cardboard and glue). The only supplies it uses Mexican suppliers for are office supplies. So NAFTA has greatly facilitated their operation (Personal Interview with Jos Peralta, 9 July 2008, Monterrey Mexico ). Conclusions Each of the companies is satisfied with their decision to operate in Mexico. Most of the companies take advantage of NAFTAs tariff eliminations through massive cross -border shipping of both final products and input s. Under the rules of origin, NAFTA members are allowed to ship goods and supplies freely across the border as long as a certain percent of the product is composed entirely of supplies/inputs from Canada, the U.S. and Mexico. This rule is particularly useful for Panduit and Pregis, which ship a large amount of their final products back to the U.S. Without NAFTA, tariffs may apply to goods entering the U.S. that are not entirely composed of U.S. inputs.
65 While companies take advantage of NAFTAs tarif f eliminations and rules of origin, none of the interviewees alluded to the Chapter 11 protections. I conclude that NAFTA has affected their operations, but not necessarily the specific chapter geared towards the investment environment. Business in Mexi co ITW Safety T his section seeks to explain their experiences conducting business in Mexico and specifically with NAFTA. Cordero reported that the only real problem was the occasional product getting stuck on the border, which he believes this is the r esult of miscommunications in customs paperwork. Normally, the importation process is very easy. Cordero explained that the major challenge of a U.S. -based company dealing with the Mexican government is its bureaucracy: there is considerably more paper work for opening a plant and maintaining daily operations than in the U.S. Often, their U.S. counterparts dont understand why they have to have so much detailed information on something that, to them, should se emingly be simpler. As for job losses in the U.S. as a result of relocation, when both the German and Detroit plants were closed, current employees were given an opportunity to relocate to another branch. Therefore Cordero doesnt feel that the closing of the plants resulted in a significant loss o f U.S. jobs within the ITW Safety Corporation (Personal Interview with Alberto Cor dero, 7 July 2008, Monterrey Mexico ). Danhil The companys experience i s similar to ITW Safety in dealing with the Mexican government and with customs procedures. The compa nys main issue is also with bureaucracy. He expressed the difficulty in starting a business in Mexico, complicated with lots of papelero, or red tape. Once the business gets going, dealings are more one -on-one tha n they are in the U.S.
66 Silva seemed ho peful that the business would continue to expand in the country, as it has been very fruitful in Monterrey and Reynosa and their customer base continues to expand. Regarding the threats of cheaper labor sources in China and potentially in Central America under DR -CAFTA, he doesnt see it affecting Danhil specifically; however, he feels that many companies are coming back to Mexico from China as a result of the difficulties they have encountered with logistics (increasing transportation costs), and extreme cultural differences. Also, many companies already have a cust omer base established in Mexico which makes it a more attractive location and an easier transition. As for Central America, the underdeveloped infrastructure is still a problem, aside from Costa Rica and Panama where he foresees the majority of business growing from the overflow of Southern Mexico. About U.S. job losses as a result of the movement of manufacturing operations to Mexico, no Danhil operations were closed down in the U.S. in orde r to open operations in Mexico. It was an expansion of current operations to better serve Kohler and the Mexican market (Personal Interview with Rafael Silva, 8 July 2008, Monterrey Mexico ). Panduit Corporation The major challenges Panduit Monterrey has experienced were with finding and hiring reliable contractors, especially those for energy and gas. The biggest obstacle the facility has encountered has been in obtaining necessary permits for some of their products, as it takes a significant amount of t ime. Subsequently, when asked if they used Mexican suppliers and what their experience had been with them, Cano responded that although they have many suppliers in the U.S. their biggest supplier is actually a local Monterrey supplier. About 78 percent of their input s come from within Mexico Local sourcing has grown over time, and they eventually hope to obtain all of their supplies from Mexico. This indicated that advanced communication
67 technology must be a growing industry in Monterrey and is furthe r evidence of the technology transfer made possible by NAFTA. Concerning the business culture in Monterrey, Sano explained the similarity in business cultures between the U.S. and Mexico. As a result, there is much easier cultural understanding whereas cultural differences stand out more in other parts of Mexico. Panduit has not caused a loss of U.S. jobs in their sector because the Mexico operation was an expansion rather than the transfer of operations (Personal Interview with Carlos Cano, 8 July 2008, Monterrey, Mexico ). Pregis Overall, adjusting to business culture in Mexico for Pregis has been a bit slower to evolve than expected but Peralta believes that things are beginning to pick up. Regarding a shift of labor from the U.S. to Mexico, Pregis st ory is parallel to the other three companies interviewed, as the move was only an expansion with no loss of jobs. The only effect of the expansion was that a plant in Arlington, VA that was previously supplying the Mexican market lost that market. On the other hand, it was a positive result because they now have more ability to sell to the domestic market, so no loss of jobs or harm to the plant resulted (Personal Interview with Jos Peralta, 9 July 2008, Monterrey Mexico ). Conclusions Regarding the proc ess of doing business in Mexico, these American-based companies did not express any major difficulties in handling NAFTA customs procedures or problems with investment disputes. Bureaucracy appears to be the biggest complication, but a company intending t o enter the Mexican market is aware of this challenge. Again, none of the plant managers cited as advantages or problems, any of the Chapter 11 provisions. However, I would take this as a sign that safeguards offered under Chapter 11 had protected the companies from
68 problems with expropriation, repatriation, standards of treatment, personnel and performance requirements, and other complications. Overall, business in Mexico appears to be going relatively smoothly and they reported no loss of U.S. jobs in their expansions or relocations. What these plant managers may not realize is that the reason for their ability to maintain smooth operation is in part due to NAFTA Chapter 11. Whirlpool Mexico Adrian Estrada is the General Counsel and Head of Government Relations for Whirlpool, Mexico. 6 Whirlpool chose to enter the Mexican market for several reasons; the main ones being proximity to the North American market and the cost of labor in comparison with that available in the U.S As for NAFTAs effects on drawing Whirlpool, and FDI in general, into Mexico, NAFTA has given Whirlpool the advantage of preferential treatment in the importation of pa rts and components from the North American market. Still, NAFTA is again an indirect reason why Whirlpool has ope rations in Mexico. They first entered the Mexican market in the early 1980s, as part of a joint venture with a Mexican company. Although it was there before NAFTA, the agreement has been of an advantage for the corporation since its installment in 1994. When discussing the Mexico vs. China manufacturing debate, Estrada argued that Mexico is a better location for companies like Whirlpool, which use large and expe nsive inputs. Close proximity to the U.S. allows for lower shipping costs on the expensive ap pliance s produced by Whirlpool and also takes advantage of the knowledge -base and technological advances in the U.S On the other hand, for companies that make inexpensive and/or small mass produced products, China, and Asia in general is better because labor in China is extremely 6 Shortly after my interviews with the American Chamber of Commerce, Sam Pea, my contact at SED ECO organiz ed another interview for me structured at Whirlpool Mexico. I felt it necessary to address this interview separately, as it was less formal and did not follow the general organization of the previous interviews. I asked Mr. Estrada my same sta ndard questions, but our conversation went deeper into my interests as Mr. Pea had informed him what I was hoping to accomplish in my research.
69 competitive for this sort of industry. China is able to mass -produce more efficiently than Mexico or the U.S. and labor costs are much lower. Even though shipping costs a re higher from Asia to North America the savings in production and labor costs offset them As to why companies that relocated operations to Asia are beginning to return to Mexico, these companies were probably originally attract ed by the availability of land and very inexpensive labor. C ompanies with which E strada is in contact have begun to face reality of the instable government in China, the increased risks associated with Chinese investment, cultural differences, a lack of technological capacity as well as lower availability of engineers and other knowl edge -based professionals. They are discovering that, a lthough labor costs may be muc h lower in China than in Mexico and mass production is more efficient Mexico has a much more stable government, similar cultural environment and a safer investment enviro nment. However, he did acknowledge that the U.S. is definitely losing competition to Asia and also to Eastern Europe because of their ability to mass pr oduce products that are of increasing quality. What they lack is the knowledge -base that exists in the North American ( U.S. ) market. Estrada feels that NAFTA is benef icial for both Mexico and the U.S. contrary to the sentiment of many Mexican officials and citizens. For Mexico, he sees benefits in the agreements ability to increase investment in Mexico and generate employment for the Mexican people. Also, it has strengthened the Mexican economy by creating a more stable investment environment. In the U.S. consumers can purchase goods at lower prices because of cheaper labor in a neighboring country th at reduces costs. It is often much less expensive to purchase a product at its cost plus a margin (Mexican labor) than it would be to produce that product in the U.S T he loss of jobs in the U.S. is more the result of a growing global market than it is t he direct result of NAFTA. Cheaper labor equals lower costs. Estrada believes that U.S. jobs
70 would have been sacrificed even without the existence of NAFTA, as globalization continues to grow. Would Whirlpool still be in Mexico if it were not for NAFTA ? According to Estrada, the answer is y es because, o ver time, NAFTA has allowed the corporation to increase productivity and capacity. However; NAFTA is not the reason Whirlpool entered the Me xican market originally. It is an indirect advantage allowing them to maintain and grow their operations in Mexico. Although China could be a threat for certain mass -production corporations, companies that are more focused on engineering and technology will likely first turn to Mexico. This bodes well for Mexicos continued development possibilities. If Mexicos knowledge -base is increasing (particularly in the Northern areas) then NAFTA is achieving its goals. He also concurred that extreme cultural differences and a lack of the technology and knowledge -base tha t Mexico is developing are detrimental to U.S. companies in China7 (Personal Interview with Adrian Estrada, 23 July 2008, Monterrey Mexico ). Eduardo Solis Sanchez As an original negotiator of the agreement, Solis provided me with insider information behind the development of NAFTA and its goals for investment. He explained that before NAFTA, Mexico was oriented toward Latin America, incl uding South and Central America, but with NAFTA Mexico is now a part of the marriage that is North America. That bei ng said, at the strategic decision -making level, the case for Mexico is really including things such as protection of investment and market access. China has no agreement that guarantees protection 7 After our interview, Mr. Estrada contacted his colleague, Eduardo Solis, executive president of the Mexican A ssociation of the Automotive Industry (AAIW), and one of the original negotiators of the NAFTA agreement. In light of my research goals, he arranged for me to meet with Mr. Solis. This final and most important interview helped clarify the incomplete corr elation of findings and shape my final conclusions.
71 of intellectual property. Thus, it is no random chance that the U.S. Department of Defense chooses to have engineers in Mexico work for the department of defense to program their weapons, rather than having it done somewhere in China. NAFTA was most likely a selling point for company decisions to expand to M exico, but this also depends on what NAFTA period they were in. Not even the CEO of a company really knows why they are located here in Mexico. Why? Because they werent there when the decision was made; they werent part o f the decision -making process The NAFTA partnership goes way beyond the content of the NAFTA agreement. It is a strategic partnership of North America, more like the European Union (EU) than any other FTAs. He told me that before NAFTA, the big OEMs (Original Equipment Manufacture rs) were pushing for a U.S. -Mexico FTA. They were extremely eager to take advantage of the investment clauses of NAFTA that would make the investment environment more secure and less bureaucratic than before the agreement. These potential investors often became involved in the negotiation process of the investment sections. From the early 1990s up through about 1999, he claimed that Mexico was the place to be. Mexico was hot. So, to explain why a company such as Whirlpool is here in Mexico, the plant managers might tell me it is because they had important clients who moved here. But really, why are their clients here? Most likely, they came to take advantage of NAFTA. According to Solis, NAFTA offers not only market access but it also brings certain ty to the investment/trade relationship. It creates the rules of the game. Under NAFTAs investment chapter, companies have the ability to retaliate against what they see as wrongdoings against another company or against the foreign government who they feel is causing them harm or violating the agreement, by using NAFTAs dispute settlement terms. The FTA brought
72 governance to the relationship. In addition, it encourages the supply chain to move. Thus, companies that are moving now, in a period where NAFTA advantages are not as pertinent, and countries like China are hot, the ones moving to Mexico are following clients that had already moved here (most likely in the first or second wave of FDI under NAFTA). Solis explained that the agreement also c reated a fresh location for investment, because Mexico was not such a desirable location for foreign investment before the agreement was enacted. Protection is what he foresees as the number one benefit of NAFTA, along with intellectual property, dispute settlement, rules of origin, and the other prov isions mentioned in Chapter 2. From here, he elucidated the backbone of the decision to operate in Mexico, even before NAFTA, to understand why a company sees benefit in relocating or expanding to Mexico. The question at hand has been posed three times and each per iod has a different rationale. Before NAFTA OMEs were hoping for an agreement and they lobbied hard in favor of the agreement. Companies were beginning to make plans to move operations to Mexico in order to take advantage of the anticipated agreement. This is when Mexico was hot. From signing NAFTA until China Joined the WTO Before China joined the WTO in December of 2001, China was a nonissue. Reasoning of Tier 1 and 2 companies was: My comp etition is already in Mexico; my clients are moving to Mexico; Mexico is the place to be low -cost and is still in North America. Mexico is a member of countless FTAs, so it provides access not only to North America but also to Europe and much of the rest of the world. At this point, companies were lined up to enter; promotion was not necessary. 2001 and Beyond China is now the place to be for inexpensive labor, efficient and quick production, and increasing quality. On the other hand, labor is starting to become scarce. This is
73 especially true in the knowledge -based areas. Furthermore, freight costs are increasing dramatically, making shipping and logistics very expensive (Personal Interview with Eduardo Solis Snc hez, 27 July 2008, Monterrey, Mexico ). Conclusion This chapter presented the findings derived from my field research, conducted through interviews with representatives of U.S. -based companies operating in Monterrey and with officials of two governmental institutions. The first interview helpe d me understand Monterreys investment climate and the various reasons why it is an attractive loca tion for foreign investment. From the five interviews with U.S. -based companies, I learned that NAFTA has been a secondary but crucial cause of their compan y s de cision to locate in Mexico b y securing cross border trade and transport between Mexico and the U.S. Most of the companies were client followers and did not see NAFTA as a direct cause of their decision to expand to Monterrey. However, I suggest tha t their clients moved there because of the advantages and protections offered under NAFTAs Chapter 11. The final interview introduced me to the concept of investment phases covering the years leading up to NAFTA and the fifteen years since its implementa tion. This helped explain why some of the plant managers I interviewed did not consider NAFTA as a crucial aspect resulting in their expansion to Mexico.
74 CHAPTER 4 FINAL CONCL U S IONS AND RECOMMENDAT IONS This study was designed to analyze the impact of the North American Free Trade Agreement on the decision of U.S. companies to relocate, expand, or stay in Mexico based on cases of field research conducted in Monterrey, Nuevo Leon. I took advantage of my position as an intern with the U.S. Commercial Service to develop contacts through my colleagues and affiliates of the organization. I interviewed two government officials familiar with the foreign investment environment in Mexico and five representatives of U.S. -based companies with operations in Mo nterrey to get an inside view of NAFTAs effects on t heir decision to invest there. As is shown in the section on investment flows in Chapter 2, foreign investment in Mexico has clearly been enhanced under NAFTA. However, that influx could be attributab le to a number of factors, including the forces of globalization as a whole. Thus, it is difficult to determine how much of an effect NAFTA had over other influences. However, my interviews with U.S. companies and government officials involved in Mexico s investment environment shed some new light on the debate and created suggestions for further research on the matter. Research Findings From the review of the literature, I determined that the present literature on NAFTAs ability to attract foreign inve stment in Mexico has several holes. My research was designed to help fill those holes. Recall the two main goals of NAFTA from Chapter 1: to increase the expo rt capacity of the country and to increase the capacity for attracting foreign investment (Emmon d, 2008). Many argue that NAFTA was successful in achieving these objectives but others claim that influxes in foreign investment are the result of the inevitable process of globalizati on and other external factors. The objective of my study was to addres s the debate
75 from a perspective that had not previously been looked into. I interviewed government officials and company representatives to get a first -hand perspective of the rationale behind the decision making process of investing in Mexico over other locations. Throughout my interviews, I learned that NAFTA could not be the only reason a company chooses to operate in Monterrey. Although it could have been a big part of the decision, maybe even the bulk of the decision, a number of factors were considered in choosing Monterrey. Investors are attracted to the Northern City for many reasons, of which NAFTA is a part. Monterrey boasts a strong business culture that has many similarities to that of the U.S. Additionally, the state of Nuevo Leon is growi ng out of its manufacturing era and into a new knowledge -based one. Other factors include the ease of logistics between Mexico and the U.S. ( as compared with other low -cost areas like China ), high-class infrastructure, world renowned systems of higher edu cation. Although Mexico is known as a Low Cost Country, it offers much more. Three out of the five companies I spoke with cited their main reason for expanding to Mexico was to follow an important client or distributor. Two of them said that NAFTA was o ne of the main influences. However, NAFTA is likely a larger factor than the plant managers may be aware of. Sc holars such as Blank and Hottenrot (1998) are skeptical that FDI influxes were due to NAFTA but, rather, were a part of the already ongoing pro cess of economic change in Mexico that began in the late 1980s However, the majority of the company representatives (3/5) interviewed in this study said that NAFTA was one of the biggest factors influencing their companys decision to operate in Monterre y. I also learned that companies who did not see NAFTA as being a major influence are probably in Mexico because they followed clients or distributors who came there to take advantage of the agreement. Mexico was taking steps to
76 improve its investment climate prior to NAFTA, but it solidified those efforts by ensuring their commitment to liberalizing foreign investment. Most of the companies I interviewed were in either stage 2 (Mexico was still hot, China was a non -issue) or 3 (After China joine d the WTO) of NAFTA as described in Chapter 3. Prior to Chinas joining the WTO, companies were eager to invest in the Mexican market in anticipation of a U.S. -Mexico FTA. At the same time, Mex ico was coming to the end of a debt c risis. Under Presidents De l a Madrid and Salinas, the nation was attempting to clean up its investment environment and make it friendlier to foreign investors. When the peso collapsed in 1994, foreign investment was halted for a few years. However, Mexicos quick recovery was follo wed by another spike in investment until 2001 (Stage 2). What happened in 2001? In Chapter 2, I attributed the fall after 2001 to the U.S. recession and Mexicos dependence on our economy. Although this was no doubt a factor, I am now also inclined to s ay that China had become the new place to be. When the Asian nation joined the WTO, investment in Mexico was reduced by approximately $8 billion from 2001 until 2003. As of 2008, total investment in Mexico had reached back up to a level over $20 billion and is potentially rising (Figure 2 2). This is about $3 billion short of its maximum but is significantly higher than the $4.7 billion FDI in 1991 before NAFTA was signed. In sum, the world investment environment is a constantly evolving playing field and one countrys advantage can quickly diminish, even if only temporarily, as Mexico discovered when China joined the WTO. Significance I conclude that NAFTA did increase foreign investment in Mexico. My hypothesis that NAFTA was successful at drawi ng and maintaining foreign investment in Monterrey, Mexico is supported by my research findings. This study was conducted at a microlevel which allowed me to draw conclusions I could not have in a macro level study. Throughout my interviews and
77 fr om add itional research on NAFTA and foreign investment, I determined that investors choose to operate in Monterrey, Mexico for two main reasons: 1) because of the protections offered to their investments under Chapter 11 and 2) because Chapter 11 underpinned the willingness of investors to come to Mexico by offering trade protections that make their investments profitable. M y interviewees strongly indicated that the elimination of tariffs and other general trade provisions were influential in the companies deci sions to locate in Mexico, and that NAFTA was likely at least an indirect effect. My study also suggested the dynamic nature of trade relations and that, when looking at Free Trade Agreements, it is necessary to examine the indirect as well as direct effe cts. The increase in foreign investment levels from 1992 to present day may be attributable to a number of factors, but my findings demonstrate that Mexicos enhanced investment environment after the Lost Decade attracted foreign investment. Carlos Salin as goal after that era was to lead his country on a path towards free market reform, but his pursuit of a Free Trade Agreement with the United States signaled to investors that Mexico was unyieldingly committed to creating a free-market economy In Chapt er 2, I stated that Mexicos troubling history of erratic swings and property seizures continued to worry investors even in light of his promise of continued reforms. NAFTA was the final piece of the puzzle that allowed Mexico to complete its process of free market reform (Orme 1996) Its member terms forced Mexico to continue on a promised path towards reform without the fear that a future political administration would undue Salinas efforts. The inclusion of Chapter 11, a section dedicated to furthe r the security of investors, added to these reforms. They no longer had to fear property seizures or other indirect means of expropriation. Under NAFTA, private investors can file suit against a government or individual party for an alleged violation of its principles. I nvestors greatly
78 benefited from the elimination of tariffs and the ability to sell into the local market, but the Chapter 11 protections ensuring agains t the loss of an entire investment and guaranteeing that their investment will be p rofitable, is even more crucial in attracting FDI. The success of these provisions is evident in the confidence of foreign investors in todays Mexican market. Limitations I intended to gain an inside perspective by interviewing representatives of U.S. -b ased companies with operations in Monterrey, Mexico with the goal of discovering whether or not NAFTA was one of their organizations main draws to Mexico. I met with plant managers, all of Mexican nationality, appointed to oversee the Monterrey operation. They were probably not actively involved in the decision-making process behind the investment. However, they were very knowledgeable and gave me insightful ideas to consider. In order to get an even deeper inside perspective as to why the company chose Mexico as a foreign location, it would be helpful to speak directly with the strategic team who made the case for Mexico as presented to the board of directors for approval. Suggestions for Future Research The goal of this study was to gain a first -hand p erspective of how much NAFTA influences investment decisions. For a more detailed understanding of NAFTAs effects on investment in Mexico, I propose further research on the matter through meetings with company boards of directors that made the final decis ion to invest in Mexico and with economists/government officials actively involved in the negotiations of Free Trade Agreements. Contributions from those parties directly involved will further illuminate NAFTAs true abilit y to attract foreign investors.
79 APPENDIX INTERVIEW QUESTIONS A. Decision to Relocate 1 When did your company relocate your operations to Mexico? 2 Can you briefly describe the decision make process that your company went through when choosing Mexico rather than an alternative nation/region? 3 What would you say is the main reason your company chose to open operations in Mexico? 4 I have read that the two main goals of NAFTA for Mexico were to increase exports and to increase FDI. Would you say that NAFTA was a large influence on your decision to move to Mexico? Why or why not? 5 Was there any specific aspect of NAFTA that had particular relevance for your company? 6 If NAFTA had not gone into effect, would you still have relocated? B. Results of Decision 1 Overall, has your companys relocation/exp ansion to Mexico been as profitable as expected? 2 Is there any aspect of NAFTA that has proven an obstacle or difficult to deal with 3 What has been your experience in conducting duty-free import and export operations under NAFTA? 4 What percentage (and which a reas) of your business is currently operating in Mexico? 5 What percentage of your products is shipped back to the U.S./remain in Mexico? 6 Have you created a division for sales/marketing here in Mexico? 7 Have their been any amendments to NAFTA which have chan ged your attitude or your business operations? Are their certain revisions you would suggest?
80 C. Business in Mexico 1 What has been your experience dealing with labor standards here in Mexico? 2 Have these standards changed during your time working in Mexico? 3 What has been your experience with environmental standards in Mexico? 4 Have these standards changed over time? 5 Have there been any major challenges when dealing with the Mexican government? 6 What has been your experience financing you operations in Mexico? 7 Does your business use Mexican suppliers? How has your experience been with them? 8 What has been your experience with the business culture in Mexico? a Monterrey in particular b Working with Mexican businessmen c Obstacles encountered D. Future Prospects 1 What is the long -term objective of your operations in Mexico? 2 How does the availability of cheaper sources of labor (in China, Central America under CAFTA DR) affect your operations in Mexico? 3 Do you feel that with the influx of manufacturing operations being m oved to Mexico, there has been a significant loss of U.S. jobs in that sector? If so, do you feel that creation of new jobs in other sectors largely of fsets that loss in the long run?
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82 Hart, M. M. and Dymond, W.A (2002) NAFTA Chapter 11: Precedents, Principles, and Prospects Carleton University Papers 7 May 2002. Retrieved 11 Jan. 2009 from http://www.carle ton.ca/ctpl/pdf/papers/chapter11.pdf Hernandez Truyol, B E. and Powell S.J. (2009) Just Trade: A New Covenant Linking Trade and Human Rights New York University Press: New York. Inter American Development Bank (IDB) and Economic Commi ssion for Latin Am erica and the Caribbean (ECLAC) (1995) Trade Liberalization in the Western Hemisphere IDB and ECLAC: Washington, D.C. Jiminez, M. R. (2001) Considerations of NAFTA Chapter 11. Chicago Journal of International Law 3 (1): 243 50. Kagan, J. M. (2005) Worke rs' Rights in the Mexican Maquiladora Sector: Collective Bargaining, Women's Rights, and General Human Rights: Law, Norms, and Practice Journal of Transnational Law and Policy 15( 1): 27. Kandell, Jonathan. (2004) Jos Lopez Portillo, President When Mex ico's Default S et Off Debt Crisis, Dies at 83, New York Times C : 11 Retrieved 15 Jan. 2009 from http://query.nytimes.com/gst/fullpage.html?res=9C06E2DC123DF93BA 25751C0A962C 8B63 Kose, M.A. Meredith, G.M. and Tow e C.M (2004) How Has NAFTA Affected the Mexican Economy? Review and Evidence. IMF Working Paper s 0459. Retrieved 9 March 2008 from h ttp://www.imf.org/external/pubs/ft/wp/2004/wp0459.pdf Mann, H. and Von Moltke, K. (2003) Protecting Inves tor Rights and the Public Good: Assessing NAFTA's Chapter 11 ILSD Tri -National Policy Workshops International Institute for Sustainable Developmen t : Mexico City, Ot t awa, Washington. Retrieved 21 January 2009 from http://www.iisd.org/pdf/2003/investment_ilsd_background_en.pdf Moon, B. E. (1996) Dilemmas of International Trade Westview Press: Boulder. Mora, G.V. and De la Mora, L.M (2003) Mexico's Trade Policy: Financial Crisis and Economic Recovery in K.J. Middlebrook and E. Zepeda (eds ) Confronting Development: Assessing Mexico's Economic and Social Policy Challenges S tanford University Press: Palo Alto. Orme, W A. Jr. (1996) Understanding NAFTA: Mexico, Free Trade, and the New North America Austin University Press: Austin. Ortiz, E. (1994) NAFTA and Foreign Investment in Mexico, in A.M. Rugman ( ed ) Foreign Investm ent and NAFTA Uni versity of South Carolina Press: Columbia. Pacheco Lopez, P. (2004) Foreign Direct Inv estment, Exports and Imports in Mexico University of Kent Department of Economics Studies in Economics Series No. 0404.
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84 BIOGRAP HICAL SKETCH Alison Boelter was born in 1985 in Spencer, Iowa. She grew up in the small town of Sanborn, Iowa with her parents and older brother, graduating from Hartley -Melvin -Sanborn High School in 2003. She earned her B.S. in International Business an d Spanish from Northwest Missouri State University (NWMSU) in 2007. She also spent a semester abroad in Monterrey, Mexico, studying International Business and Mexican culture and l anguage. Upon graduating from NWMSU, Alison was accepted to the M.A. in Lat in American Studies program at the University of Florida. As a graduate assistant for Dr. Terry L. McCoy, she helped prepare annual Latin American Business Environment Report s detailing changes in the social and economic environments in Latin American an d the Caribbean, valued by several businesses and organizations. While simultaneously conducting her research in Monterrey, Mexico during the summer of 2008, Alison worked as an intern with the local U.S. Foreign Commercial Service of the American Consula te General. This position gave her valuable experience in the practice of matching Mexican and American companies for cross -border business negotiations. Upon completion of her masters d egree, Alison h opes to pursue a career with a multinational corporat ion or governmental o rganization in South Florida, dealing with trade and international business in Latin America.