Despite drug war, trade with Mexico is booming

By Jason Buch, David Hendricks
San Antonio Express News

A sign advertising hiring at the Corning maquiladora hangs outside the plant in Reynosa, Mexico. Photo: Lisa Krantz/Express-News


McALLEN — As the rest of the world tries to claw its way out of the economic downturn, businesses here and across the Rio Grande are hanging “help wanted” signs.

It’s evidence that despite the drug violence in Mexico that killed more than 15,000 people last year, and the negative attention that has all but destroyed border tourism, trade between that country and the U.S. has recovered and surpassed prerecession levels. Last year, trade was at an all-time high.

Mexico, the No. 3 trading partner of the U.S. and No. 1 of Texas, conducted more trade — almost $400 billion worth — with this country in 2010 than any other year since the U.S. Federal Reserve Bank began tracking the numbers in 1980.

“This is still the closest place to the U.S. to serve in the U.S. market,” said Jesus Cañas, an economist for the Fed in Dallas. “Mexico is still a great platform. This manufacturing relationship goes back to the ’60s.”

Raw materials flow south to factories that once were concentrated on the border but have begun to spread out across Mexico.

Car parts return from Monterrey, Mexico’s industrial capital. Consumer electronics are built in Ciudad Juárez, across from El Paso, and shipped into the U.S. The Rio Grande Valley is becoming an important entry point for Mexican agricultural commodities bound for U.S. markets.

But questions about the future of U.S.-Mexico trade loom behind the good news. Foreign investment, which funds Mexican manufacturing, hasn’t shown a post-recession recovery the way trade numbers have.

Some existing businesses have seen their bottom lines hurt by the violence. Others simply have had to make minor changes to protect their employees.

But the economic incentives of doing business in Mexico far outweigh the costs brought on by the drug war violence.

“We have a plant to run. We’re committed to it,” said David Hawkins, vice president of operations for Metal Industries Inc., a North Carolina company that operates a maquiladora, a foreign-owned factory, in Reynosa. “We can’t just close and leave.”

Truck traffic on the World Trade bridge complex, Laredo, Texas.

Trade along the border

U.S. demand for goods such as automobiles, clothing and consumer appliances fuels Mexico’s manufacturing industry.

When trade between the two countries fell in 2009, it wasn’t because of conflicts between drug traffickers. It was because U.S. demand for Mexican-manufactured goods plummeted.

By last year, that had changed. Total U.S. trade with Mexico topped $393 billion, up 28 percent from 2009 and up 7 percent from 2008, according to the Bureau of Transportation Statistics.

Texas plays a major role. Six of the top 10 ports trading with Mexico are in the Lone Star State: El Paso, Eagle Pass, Laredo, Hidalgo, Brownsville and Houston. Together, they account for more than 60 percent of all U.S. trade with Mexico.

The big daddy of binational trade is Laredo, with two commercial bridges where, each day last year, an average of more than 10,000 trucks crossed each way. The port saw $121 billion in trade between the two countries, nearly a third of all U.S.-Mexico trade.

Unlike the McAllen-Reynosa area downstream and the El Paso-Ciudad Juárez area upstream where maquiladoras are king, the economies in Laredo and its Mexican sister city, Nuevo Laredo, rely on logistics, and the shipping of raw materials to the Mexican interior and finished products back north.

In Reynosa, a town of 600,000, 141 maquiladoras employ more than 84,000 people. The factories added more than 4,000 jobs last year, and for every 10 of those, one job was added on the U.S. side of the Rio Grande, said Keith Patridge, president and CEO of the McAllen Economic Development Corp.

Mike Myers, the general manager of the Metal Industries plant in Reynosa, said that in March he hired 10 people, the first time he’d added staff in two years.

Across from Del Rio in Ciudad Acuña’s industrial parks, where 42 maquiladoras employ 27,071 in the city of about 136,755, the situation is much like Reynosa, said José Ramón Lozoya, a customs broker and the president of Ciudad Acuña’s chamber of commerce. Factory managers have been holding job fairs to staff their lines as a recovering U.S. auto industry creates demand for parts.

“They’re increasing, but now the problem is there’s not enough people to fill those jobs,” Lozoya said.

In Ciudad Juárez, where factories employ 194,069 — about 10 percent of all maquiladora workers in Mexico — the dollar amount of trade grew more than 30 percent in 2010 to $56 billion.

Last year in Ciudad Juárez, a city of 1.3 million, more than 3,000 people were reported killed in cartel turf wars. But despite the unchecked violence, the wheels of industry keep turning.

In the past 18 months, Ciudad Juárez maquiladoras added 28,000 jobs, said Manuel Ochoa, vice president for binational development at the El Paso Regional Economic Development Corp.

Gunmen opened fire on three Eagle Ottawa Leather company buses on a Ciudad Juarez highway in November, 2010, killing four maquiladora workers.

The drug war domino

Trade between the U.S. and Mexico is increasing despite an actual drug war that has moved beyond trafficker-on-trafficker and trafficker-on-police violence. Legitimate businesses are forced to pay protection, and their employees are kidnapped and subject to ransom demands.

A produce distributor with operations in McAllen told the story of a truck driver bringing strawberries to the U.S. through northern Mexico. The driver was kidnapped and held for ransom, and when his boss wouldn’t pay, the kidnappers killed him.

In January, a Black & Decker maquiladora manager was killed in Reynosa. Buses filled with factory workers have been attacked outside Ciudad Juárez.

The violence means those involved with trade along the border need to alter their business plans, said J.O. Alvarez, a Laredo customs broker whose business has locations across the U.S. and Mexico.

One customer had to start crossing denim shipments in El Paso because the cargo was getting stolen in Nuevo Laredo, sometimes right out of the Mexican customs lot. Other trucking companies have taken to providing high-value cargo with armed escorts, he said.

In Reynosa industrial parks, fences have sprung up around maquiladoras, and private security forces cruise the streets.

Domingo Auces, marketing director of San Antonio-based Precision Mold & Tool Group, recalled that a son of a Mexican executive at a factory making products for Black & Decker, a Precision customer, was kidnapped while playing soccer. Various companies, including Precision, lent money to the executive to pay the ransom.

“It hasn’t stopped him (the executive) from working there. It hasn’t stopped us from doing business with them. These are risks you are going to run into,” Auces said.

Employees at the Metal Industries Inc. maquiladora in Reynosa, Mexico. Photo: Lisa Krantz/Express-News

Why companies stay

Poverty remains a big problem in Mexico. According to the CIA World Factbook, 18 percent of Mexicans live under the poverty line, using the food-based definition of poverty. Using the asset-based definition, almost half the country is impoverished.

While that’s hardly good news for Mexico, for U.S. companies it means that to set up operations, Mexico is cheaper than doing business in Asia and certainly cheaper than in the U.S.

And even with the increased costs for security, changing shipping routes, developing contingency plans, and the inefficiencies and lost sales that come from not being able to meet with customers in dangerous parts of Mexico, the reality is that it’s still very cheap to manufacture in Mexico.

Manufacturing costs in China are about 94 percent of U.S. manufacturing costs, according to a 2009 report from consulting firm AlixPartners. In Mexico, manufacturing costs are only 75 percent of what they would be in the U.S., according to the report.

Production workers in the U.S. make about $15 an hour, according to data from the U.S. Bureau of Labor Statistics. Industrial workers in Mexico make about $3.50 an hour, as opposed to $3 an hour in China, according to a report from the National Council of Maquiladora and Export Manufacturing Industry.

But the savings in labor are eroded with the higher cost of shipping from Southeast Asia. It costs $4,300 to ship a 40-foot container from Hong Kong to San Antonio via Long Beach, Calif., and will take 24 to 26 days to get there, according to DHL Global Forwarding. It costs $1,800 to drive a 40-foot trailer from Ciudad Juárez to San Antonio, and the trailer will get there in eight to 10 hours.

The result is that 95 percent of goods manufactured in Mexico end up being shipped north of the Rio Grande, Cañas said. And border cities are popular among foreign manufacturers because higher-wage employees like engineers and managers can live on the U.S. side of the Rio Grande and commute to work.

Tamaulipas state police on patrol (AP)

Challenges for growth

It’s not all good news for Mexico’s manufacturing sector, however. Foreign investment in Mexico hasn’t increased significantly.

Speaking to the Mexican Senate in early April, Agustín Carstens, the head of Mexico’s central bank, raised concerns about the impact the country’s war against drug traffickers is having on foreign investment.

Numbers from the bank show foreign investment in Mexico in 2010 was only $17.7 billion, down from an average of about $25 billion before the recession. And of that $17.7 billion, $5 billion came from the purchase of Fomento Económic Mexicano S.A.B. by Dutch brewer Heineken N.V., said Rafael Amiel, IHS Global Insight’s director for Latin America Economics.

For the time being, Mexico’s automotive and manufacturing sectors have enough capacity to continue meeting U.S. demand, he said. But there are questions about the future of Mexico’s manufacturing industry, which relies heavily on foreign investment, Amiel said.

It’s not always the violence itself that’s a problem, Amiel said. The negative news coming out of Mexico makes companies leery of setting up shop there, even though some areas of the country are safe.

“There’s a clear, clear difference of what’s going on in border cities and border states and what’s going on in southern Mexico,” he said. “But I’m not very optimistic that new ventures will come to Mexico.”