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Peso’s Plunge Cools Off Mexican Market As U.S. Export Destination

Thu., Jan. 5, 1995

Before Mexico’s peso devaluation, Cesar Hincks expected $10,000 for machinery parts he sent to a Mexican client. Now the deal’s only worth $6,000 if he converts the payment to dollars.

So Hincks is waiting to see whether the peso regains strength as he wonders what the devaluation will mean for the export-import business he operates from his McAllen home.

The peso’s loss of nearly one-third of its value since Dec. 20 has hurt U.S. exporters - many of them recently interested in Mexico because of the North American Free Trade Agreement - by making U.S. products more expensive to peso-earning Mexican customers.

Hincks believes smaller operators like himself are more vulnerable than the bigger players.

“They are starting to cancel orders and review their costs. I don’t know what’s going to happen,” he said of clients. “We are going to get fewer dollars. For my business, it’s bad.”

Hincks, who sells machinery replacement parts to about 10 factories in Monterrey, now plans to search for new customers in Saltillo, an upstart manufacturing market some 50 miles southwest of Mexico’s established industrial powerhouse.

NAFTA is knocking down protective tariffs, making U.S. and Canadian products cheaper in Mexico. But trade specialist Jim Giermanski said the devaluation will make many of those same products less competitive in Mexico again - at least in the short run.

“The peso has been devalued to the point where it really wipes out your expected tariff advantage,” said Giermanski, head of the international trade department at Texas A&M; International University in Laredo.

During the first nine months of the year-old trade pact, U.S. exports to Mexico were up 21.7 percent and Mexican imports were up 22.8 percent.

Giermanski said it’s too early to say how seriously the devaluation, which should provide a short-term boost for Mexicans shipping goods north, will affect the long-term trading trends.

“(U.S. exporters) will take a hit here, but I don’t think it will be longterm. It will discourage some of the more marginal players,” said Roland Arriola, director of the Center for Entrepreneurship and Economic Developing at University of Texas-Pan American. “In the long term, NAFTA is going to reduce tariffs over 15 years. I think the long view is still very bullish.”

He called the devaluation inevitable due to an overvalued peso and Mexico’s foreign trade and service account deficit, about $28 billion.

The big question, Arriola said, is whether new President Ernesto Zedillo can prevent serious inflation with wage-and-price restraints or a further crash of the peso, which would sting U.S. exporters even more.

Zedillo’s administration was widely criticized for giving mixed signals during the early stages of the economic crisis.

But Arriola believes Zedillo has four advantages over past presidents battered by devaluations: inflation-fighting experience gained as an aide to former President Carlos Salinas de Gortari, more NAFTA-related foreign investment, a stronger central bank and an $18 billion international loan package.

Still, Hincks echoed the concern of millions of Mexicans who have been squeezed for years by reduced purchasing power: “Even though the government says it’s going to keep inflation down, I don’t see how they can keep prices where they were.”

Brownsville plastics exporter Tito Perez said Mexico is better positioned to recover than it was after a crippling 1982 devaluation. He predicted the markets will settle in three to six months.

Perez, a Mexico City native who moved north after past devaluations, said his business protected itself by pegging Mexican invoices to the dollar exchange rate at the time the transaction is finished.

“By law, a Mexican company cannot sell in dollars, but you can buy and sell on the future value of pesos in dollars,” said Perez, whose businesses export 2,000 metric tons of plastic resin to Mexico per month. “A lot of people, unfortunately, did not apply that thought. A big percentage of those companies were caught with their pants down.”

Tony Aguirre, president of McAllen Bolt & Screw Inc., said the devaluation didn’t hurt him significantly because 70 percent of his business is with “maquiladoras” - foreign-owned assembly plants along the border that enjoy cheap labor and tariff advantages.

But Aguirre’s concern is that tight Mexican bank credit and government austerity programs will stifle economic growth in Mexico.

“The rates are high and the banks are very strict, so there is not enough credit available to small- and medium-sized Mexican businesses,” he said.

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