Latin America: Who Drives and Who Follows

Bankers, financial analysts, investors, and politicians huddle daily over the world’s distressed financial systems. Diagnosis isn’t the problem—prescribing treatment is.

If the crisis were confined to the United States, the Federal Reserve Bank or Congress might be able to manage it. At the same time, no longer can the U.S. alone determine global peace much less global economic health. The world economy has entered new territory.

As a college student in political economy in the mid-eighties, I was taught that the past could serve as a good guide to the future. Now, the past may not be such a terrific road map to the future.

As companies are becoming larger and financially stronger global players, they also become subject to non-American economical and political forces. Many economic and social forces are at work in Latin America, leading to turbulence, uncertainty and change.

The Latin world not only has to manage internal change, but also the impact of economic globalization.

Nothing reflects more the spending power and economic habits of Latin America than automobile industry production figures. The increase in automobile manufacturing in Central and South America can be interpreted as a “growth chart” of the Latin American economy. Automotive vehicle manufacturing has a great mainstream economic impact on several different basic material segments, such as in the production of aluminum, steel, plastic and even all the boxes that are used to ship automobile parts. Each of these basic material segments, in turn, creates their own scrap markets.

Brazil and Mexico: The Foundation Blocks of the Latin American Economy

Currently, there are only a limited number of nations into which U.S. multinational companies are choosing to invest large sums. Brazil is one of the top three, with Mexico also among the leaders. The two nations are also regarded as significant markets for finished goods.

Last year, Ford Motor Company sold 475,000 automobiles to Brazil. Over 400 of the U.S. Fortune 500 companies have a business presence in Brazil. All told, U.S. companies combined invested  $35.7 billion in Brazil during 1997. Brazil is Latin America’s largest economy and is among the world’s largest—larger than Russia’s, Inonesia’s or Spain’s.

Besides its sheer size, why is Brazil so important to the U.S.?  It is the market for one-fifth of U.S. exports. Asia ships large numbers of exports to the U.S. and takes in return far fewer goods from the U.S., creating a significant U.S. trade deficit. Latin America, meanwhile, serves as a key destination for U.S. goods.

According to the U.S. Chamber of Commerce, last year, Brazil alone bought $12.7 billion of U.S. goods while sending $8.8 billion to the U.S. The state of Texas benefited the most from this exchange: During 1997, Texas exports to Brazil were close to $2 billion, almost four times larger than what was shipped five years before.

The devaluation of the real, Brazil’s currency, is making Brazilian goods attractive for export, but will make Mexican and U.S. exports into the same markets less competitive.

After no growth in 1998, current unemployment in Mexico is forecast to hit 12% by the second quarter of 1999. Certainly, not all is gloomy: French carmaker Renault has recently opened a $1 billion automobile plant in the state of Parana.

NAFTA STRENGTHENS U.S.-MEXICO TIES

Hark back to the national debate of 1993 about whether the United States should trade freely with Mexico. Now that the agreement has been in force for five years, it may be worth asking: Were the critics right?  Has free trade with Mexico harmed the United States? Has it been good or bad for U.S. companies? The answer, in my opinion, is certainly a NO.

After five years of free trade, NAFTA has become the largest trading market in the modern era. With approximately $500 billion in free trade taking place, NAFTA now surpasses the European common market as the fastest-growing trading zone in the globe.

Mexico’s economy is undergoing a stunning transformation. Five years after the launch of the North America Free Trade Agreement, it is fast becoming an industrial power. Free trade with the U.S. and Canada is turning the country from a mere assembler of cheap, low quality goods into a reliable exporter of sophisticated products. Last year alone Mexico exported nearly one million automobiles worldwide, making Mexico the largest automobile export producer of Latin America (followed by Brazil).

Public and private sector officials are already seeking ways to upgrade labor-intensive industries. True, Latin America needed and continues to need the low-tech jobs, but as trade becomes an increased source of employment and state revenues, Latin nations hope to raise wages and earnings by producing more complex products. Last year, the world’s largest computer chip maker, Intel, announced the investment of $500 million in Costa Rica to build a plant to assemble and test the latest Intel microprocessors.

Historically, Latin nations were case studies of extreme dichotomies: rich and poor, north and south, educated and uneducated. Yet, today with the economic, political and social reforms that have taken place over the nineties, the picture is no longer so black and white.

U.S. businesses were often victims of the old Latin America and its excessive turmoil. This process of transformation is far from over and can be very painful for companies exporting to Latin America. To consolidate Latin American advances and spread the gain among larger segments of the population, Latin America still needs to make internal improvements to enhance its competitiveness, particularly in education and financial services.

For U.S. companies wishing to seize the opportunities that Latin America has to offer, it is imperative to have a long term outlook of the region, and to be able to count on existing local human talents and assets and to recognize their capacity. We must accept and respect cultural differences, entailing leaving at least partial management of the business in the hands of locals.

Successful companies have been formed in the context of these ideas. Latin America knows how to do things well and effectively. Who drives and who follows will be dictated by “know how,” determination, resourcefulness, personal contacts and above all, TIME.

To conclude, just like in North America, NAFTA has symbolized change for Mexico. Furthermore, for the rest of the 320 million people that make up the remainder of the Latin world, trade is like an evolution or, better said, perhaps a gateway to economic, social and political stability. Just like for the automobile maker, the future is for those who see it today, not for those who see it when it has passed. Accepting future uncertainty and assuming risks are key factors for taking the lead in Latin America. I have no doubt that the leading companies of the new millenium are already successfully negotiating the risks.  RT

Carlos Rovelo can be reached via e-mail at crovelo@aol.com

Scrap Flow into Mexico Significant

Before or after NAFTA, the Rio Grande has not been a major barrier to scrap metal and scrap paper trading between the U.S. and Mexico.

As Mexico’s economy has witnessed growth in steelmaking, manufacturing, and paper making in the last 20 years, that trade has grown.

While the trading of any one commodity is by no means uni-directional, Mexico is largely considered to have a scrap deficit. Thus, Mexico’s electric arc furnace steel mills and its aluminum smelters are almost all destinations for scrap metal and paper generated in the U.S.

Most scrap dealers in the southwest U.S. have long-standing relationships with mills located south of the border. “We’ve been consistently selling ferrous scrap—and some nonferrous—into Mexico for years,” says Harry Heinkele, president of the Secondary Metals Processing Division of Commercial Metals Co., Dallas. “We consider Mexico almost a local market,” he adds.

When Wabash Alloys LLC, Wabash, Ind., opened a secondary aluminum smelter in Monclova, Mexico, last year, Wabash vice president of scrap procurement Jim Diamond noted that, “I think it can properly be said Mexico has a negative scrap base. We’ll be shipping scrap in from the U.S. and other countries.”

Scrap paper is also a heavily traded commodity in Mexico, with several paper mills in that nation accepting significant amounts of secondary fiber. Compared to the U.S., Mexico’s recovery rate of scrap paper is quite high, while its acreage of managed timberlands to produce primary pulp cannot compare to what is found in the U.S.

In the heavily industrialized (and heavily populated) regions that straddle the U.S.-Mexican border, the flow of scrap and finished materials across the border has increased with the cementing of the NAFTA pact. Manufacturers, paper mills, scrap processors, paper packers, and trade associations on both sides of the border have stepped up their efforts in the 1990s to explore opportunities across the Rio Grande.—Brian Taylor