U.S.-Mexico Free Trade: What's in It for Banks?
Orr, Bill, ABA Banking Journal
Forget Mexico the sombrero-in-hand superdebtor always on the edge of default, poverty, and social explosion.
The Mexico that many now see is a dynamic economy about to take its place beside the United States and Canada in an integrated regional economy. The new vision is shared by the Bush administration, most economists, and a growing cohort of businessmen and bankers. The North American Free Trade Area (NAFTA) could become a legal reality before the long-heralded economic unification of the European Community countries occurs at the end of next year. Tripolar global economy. Whether or not a formal North American Free Trade Area ever comes into being, the region's economies will be natural allies in global competition with two other regional economic powers.
One is Western Europe, which in time may include the transitioning economies of Czechoslovakia, Hungary, and Poland. The two key economic groups here are the 12-nation European Community (EC) and the six-nation European Free Trade Association (EFTA).
The third pole is a cluster of fast growing Asian economies powered by Japan. This group includes Taiwan, Hong Kong, South Korea, Singapore, Thailand, Philippines, Indonesia, and Malaysia.
in population, the Asian group leads with a little more than 500 million. North America has 360 million, and the 12 EC countries have 326 million.
In GNP, North America leads with about $6.0 trillion, followed by the EC with about $4.8 trillion and the Asian group with $3.5 trillion.
Together, these groups, with about 23% of the world's population, produce about 70% its output.
What's in it for bankers? The proposal for a U.S.-Mexico free-trade area came up so suddenly that many bankers haven't had time to take positions on it. But contacts with several bankers who are familiar with the plan yielded enthusiastic support for a trade agreement with Mexico folded into the existing free-trade area with Canada.
Gary Jacobs, who heads $1.2 billion Laredo National Bank in the Texas border town of Laredo, calls the NAFTA package the " most important accord the U.S. has entered into in the last 50 years.
Peter McPherson, who heads the Latin America Division of BankAmerica, also calls the agreement "historic" and hints that his bank is poised to open branches in Mexico as soon as present bans are lifted.
Citibank chairman John Reed has said that with the opening of the Mexican economy and its banking sector, " we are going to be able to operate under the same rules and conditions that apply to any Mexican bank." Citibank, which has the only private foreign bank in the country, wants to open branches all over Mexico and offer whole-enchilada retail banking to service what another Citibanker called the imminent "takeoff of the middle class" there.
Nonbank-bank American Express is eager to provide more travel-related financial services to what is already its most-profitable single market outside the U.S.
The banking payoffs of free trade with Mexico fall into three categories: trade finance, corporate finance, and retail banking.
Trade finance. As U.S.-Mexico trade grows, so will the need for letters of credit and banking expertise in foreign trade. The accompanying graph shows the pattern of this trade over the past 20 years: Exports and imports were well balanced in the 1970s, though on a slow growth path. Through most of the 80s, imports climbed steadily; exports lagged as Mexico struggled to achieve a positive trade balance.
Beginning in 1988, both exports and imports zoomed as the Mexican reforms took hold and confidence grew. Forecasters expect this rapid growth to continue, with or without a trade agreement.
Because trade with Mexico accounts for about 25% of the U.S. total and effects all regions, bankers anywhere can participate in the upsurge of trade finance. Of course, it helps if you're located at a trade gateway, like New York, San Francisco, or Laredo, Texas. …