IMPLICATIONS OF THE MEXICAN CRISIS FOR US TRADE AND INVESTMENT AND IN LATIN AME

Created: 1/19/1995

OCR scan of the original document, errors are possible

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O^IccTfrican and Latin American Analysis

Implications of the Mexican Crisis for US Trade and Investraent Interests in'Latin America mmm

Intelligence Report

reverberations from Mexico's financial crisis probably will adversely affect US exports elsewhere in the region, slow Latin American efforts to integrate with Mexico and join NAFTA, and increase Braijl's chances of becoming thehubouth American free trade area.

-- Higher interest rates worldwide and decreased availability of financing would dampen investment growth and consumption, causing the demand for US goods to be lower than previously expected.

At the same time, the steep fall of the peso probably will cause Mexican goods to displace those of other countries In the USrend that could increase trade friction with Central American and Caribbean governments upset by the temporary withdrawal of the proposed Interim Trade Program.

Brazil's proposal loouth American free trade area may become more attractive if other countries believe Mexican Imports would present stiff challenges to domestic producers and if they worry about the effect of NAFTA membership on their trade deficits.

On (he other band, the tumult in Mexico could lead to greater US investment opportunities in Latin American countries not suffering from Mexico's ills.

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-- Reduced lending and some governments' desire to improve foreign Investors' perceptions of their policies are likely to spur the privatization of state enterprises.

- Moreover, Latin governments' recognition of (he need for Increased direct foreign investment and for financial market reforms could help reduce barriersS firms and provide arguments for enhancing protection for intellectual property rights.

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Tbe Financial Markets' Impact on Latin American Imports

Foreign investors' shift away from emerging markets in the wake of the Mexican debacle has reduced die chances lhat LatinMexico-will post an increase in iu OOP growth rateercent4ercent during the next three years.inimum, even if Latin American governments can attract portfolio capitil back, corporations and public-sector entities probably will face delays in placing bonds for investment projects due to turmoil in internationa] financial markets and even higher interest rates due in pan to risk premiums. If investors remain uneasy about Latin American leaders' ability to keep their economic programs on track--cspeoiaIIy in Argentina and Brazil-and rising. US interest rates further diminish the attractiveness of Latin American financial instruments and stocks, financing could become more scarce.

Before Mexico's crisis, (lie increase in real economic growth elsewhere in the region seemed likely to widen the current account deficit of the eight largest South American countriesillionillion. Financial analysts had projected that direct and portfolio investments would have covered aboutonns of this amount .

Potential difficulties in raising foreign financing and concerns (hat larger trade deficits would heighten investors' worries could prompt some governments to retrench in order to curb import growth.

Ixiwa-than-potential growth in Latin America would aggravate losses in USin:

percent drop in.tbe real exchange rate against the dollarDP growth hue likely to range5jerceni thisexico probably will importillion less from the United States than if it badevaluation and grownercent

-- ercentage point reduction in the GDP growth rate in the rest of Latin America would cause US exports to be0 million lower than earlierH

Potential Problems Ahead for BUateral Trade Uelationsahd Free Trade*"ri.r.

The peso's plunge and the sharp contraction implied for Mexican real wages are likely to caule-Jome displacement of Central American and Caribbean exports on the US market and create bUateral -*

percent increase in production by Mexico's assemblywith gains in competiuveness,ignificant threatto the United States of assembled garments from countries in-

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worried aboui the impUcations of NAFTA for their clothing sectors, Caribbean and Central American leaders probably will step up pressure on Washington to give them the same access as Mexico to the US market. |

The weakness-of the Mexican peso also will work against regional integration efforts.

accord.

Given Mexico's pressing domestic problems and its uncertain economic prospects, the Zedillo goverrtment may shift free trade negotiations with Nicaragua and Peru to the back

AlthoughSalvador, Honduras, and Guatemala'jrobably will continue free trade talks with Mexico, the president of Guatemala's Central Bank says that he will recommend revising the strategy for negotiating tariff cuts in order to guard against widening Guatemala's trade deficit with Mexico.

Costa Rica, Colombia, and Venezuela-which already have free trade agreements withlikely to resort to safeguards to protect domestic manuf acturers if thereurge of Mexicanome products still under negotiation in Colombia and Venezuela's free trade agreement with Mexico are virtually certain to remain excluded from the

Progress towardree trade area of the Americas (FTAA) probably will slow.

-- Chile's Finance Minister has indicated publicly that he expects the

timetable for free trade talks with Washington to slip because heexico's misfortunes will mtensity debate on fast track in the US

Although the benefits of the FTAA willtrong lure, Mexico's balance-of-payments crisis might cause some countries to reevaluate the timing for seeking NAFrA^

The situation could work to Brazil's advantage in making itself the hub of afree, trade

- The Zedillo administration's likely continuing pi!coccupation IfVith its

financial troubles may give room to President Cardoso to take the leadegional trade issues, provided that Brazil docs not experience any dramatic capital flight

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proposal to concentrate on integrating regional trade blocs and to link South America to NAFTA only after eight toears may gain more appeal if Mexico is perceiveduch tougher competitor and if

other countrieswotrvabout the impact of NAFTA rnembership on their .trade deficits. | |

Potential Benefits for US Investors

Although the crisis may slow liberalization efforts in the next few months as other countries wait to sec if the situation stabilizes, it could, on balance,ositive effect on US investment opportunities over the medium term.

cieased availability and higher cost of foreign financing probably will spur privatization arid initiatives to attract foreign partners in upgrading uTfrastructurc.

Latin American governments' heightened awareness of the need for increased direct foreign investment rather than volatile portolio investments could also help stimulate efforts to ease restrictions on investment and will provide an additional lever in gaining better rjTOtection for intellectual property

-- Bvcn though thetfom0

arid probably will cause foreign exchange controls in some countries to remain inay provide an impetus to open financial services to foreign banks and to draw up designs for private pension plans to promote domestic savings. I ,

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Table 1

Current Accounl Balance

Billion US$

(01

"

6

Projected

This table Is Confidential Nofom.

2

Net Equity Investment Flows

Argentina

Brazil

Chile

Colombia

Ecuador

Peru

Venezuela

Total

US S

M

ifigsaa

09

Net equity Hows Include direct foreign Investment and portfolio investment.

Projected

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