What’s Ahead for U.S.-Mexico Relations
February 21 2012 by JP Donlon
Claudio Gonzalez, 72, is one of the few remaining members of a vanishing breed of senior business figures that have won both deep respect at home and a strong international reputation abroad. From 1973 to 2008, he served as CEO of Kimberly-Clark de Mexico and continues today as that company’s non-executive chairman. (The company is a highly profitable joint venture, with the American parent owning 48 percent and Gonzalez as the principal Mexican shareholder.)
His nominal title belies his standing as the de facto voice of that country’s business community. Gonzalez’s role is akin to the ones Citicorp’s Walter Wriston and DuPont’s Irving Shapiro once filled in the U.S., GEC chairman Lord Weinstock held in the UK and Fiat’s Gianni Agnelli and Sony founder Akio Morita served in Italy and Japan respectively. Prime ministers and presidents come and go; but the real stuff was likely sorted out when this crowd got together, whether on the slopes of Aspen or Davos.
A graduate of Stanford University, Gonzalez, whose children are also U.S.-educated, with some living in New York and Boston, is worried. The increasing tension over illegal immigration along the border with Mexico coupled with the violence stemming from the drug war threatens to derail Mexico’s attempt to attract tourists and investors alike. In addition, Mexicans tend to react when American presidential aspirants publicly call for “boots on the ground” along the border.
“Talk of this kind only exacerbates old frictions,” he says. “Uh oh, here come the gringos again to try and take over.” Add to this toxic mix the recent gun-walker scandal in which ATF officials oversaw the transfer of 2,000 weapons across the border to brutal Mexican drug cartels.
Gonzalez is touring the U.S. speaking to business leaders, the news media and anyone else who might listen, trying to convince America that its second-largest trading partner after Canada is not entirely the one they see in six o’clock newscasts about drug lord slaughters of innocents and civilian police seemingly helpless to stop them. Mexico has dramatically moved up in the World Bank/World Economic Forum annual competitiveness rankings from 66th place in 2010 to 58th place this year. (The U.S. position slipped from 4th to 5th over the same period.)
World Bank analysts score Mexico favorably on its regulatory improvements that facilitate entrepreneurial dynamism by reducing the number of procedures and the time required to start a business. This development, coupled with the country’s traditional competitive strengths, such as its large internal market size, fairly good transport infrastructure, sound macroeconomic policies and strong levels of technological adoption—however positive—are, nonetheless, darkened by security concerns and remaining rigidities in its energy sector.
Presidents Bush and Salinas were able to get NAFTA approved by agreeing to keep immigration and Mexico’s energy sector off the table. Seventeen years later, those issues, Gonzalez thinks, are ready to be dealt with. He anticipates that the U.S. and Mexico will ultimately hammer out a guest-worker program, whereby a fixed number of registered people will be permitted limited residence for fixed periods of stay. Wholesale deporting of illegals, he argues, would just shut down entire industries, such as resorts like Aspen where he frequently skis. (“The entire resort is run by people from Chihuahua.”) Border control is ultimately in Mexico’s interest, as its need for skilled workers is rising. The country is now the ninth-largest producer of autos in the world and the sixth-largest exporter of autos. It now has an automotive agreement with Brazil, a country with a great thirst for automobiles, and not enough internal capacity to satisfy it.
Although imports from China dominate headlines, Mexico is America’s third-largest import partner, with the U.S. being Mexico’s largest partner on imports. “We import more in dollars than Japan and China together,” Gonzalez points out. “A billion and a half dollars of legal merchandise crosses that border, going north and coming south every day.”
Mindful that both countries face a Presidential election year in 2012—polls in Mexico currently favor Enrique Peña Nieto, the PRI candidate—Gonzalez anticipates a new beginning for both countries to build a better economic future.
You tell us that Americans do not have a balanced view of Mexico. What are we overlooking?
We all see news reports of drug cartel violence and insecurity. We can’t hide it and we are working to control it. But there are other things going on in Mexico that get lost—things that are good. The economy is growing at a good clip. [Note: 4 percent annual GDP growth compared to U.S.’s 2 percent.] We have good macroeconomic fundamentals—a low deficit and low inflation. We’re creating jobs. We don’t owe that much, and what we owe is increasingly longer-termed and locally financed. Exports are increasing by double digits. We’re also working on getting a stronger domestic economy going because we recognize that our dependence on exports is good, but it can’t be the only driver. In addition, we’re making progress on other issues that are indirectly tied into the economy but will take time to have an effect: namely, quality in education.
Significantly, Enrique Peña Nieto, the candidate who is currently leading in the polls, wants to head in a new direction. For example, he has spoken about opening up the energy sector to private-sector investment for capital, technology, and for governance, without giving up ownership of the oil. This is pretty much what Brazil has done. This would be another growth driver, because we’re way behind in that sector. Mexico and North Korea are the only places that don’t permit private-sector investment in the energy sector. Even the Cubans permit it.
At the same time, we’re about to achieve universal health coverage in the country, which is another big step forward. Slowly but surely, we’re building up more of a middle class, which is our objective. But because our two economies are closely tied, we are hopeful that the U.S. can avoid a double-dip recession.
Oil is Mexico’s biggest source of foreign currency, followed by remittances, which suggests that the government has an economic interest in encouraging migration across the U.S. border or at least turning a blind eye.
We could speak all afternoon on this, but let me give you my personal opinion: It’s a great tragedy, because these people who go off to a new land, adapt and learn a new language are valuable and courageous people. We need such people in Mexico.
Think of the risk-taking entrepreneurs you no longer have.
That’s right, and consumers. We’re not going to have them either. The flow of people has its origins in the economic crisis of ’94-’95. We wiped out the middle class in our country. They lost their homes and their jobs. Many companies had to shut down. It was devastating, and it coincided with a bulge in our population demographics. When people ask me why this happened at the same time with NAFTA, January 1994, I tell them that the combination of population bulge, our economic crisis and the fact that the U.S. economy was doing great was too overwhelming. We’ve got to find ways of keeping Mexicans in Mexico and we’re working on it.
So, what’s the plan?
Grow jobs. It’s the only way. Also, we’ve done a good quantitative job in education through improving secondary schooling. Now, we must extend this improvement into higher education. More of our kids want to go onto higher education, and we’re investing heavily to make that happen. Already, we are graduating 90,000 engineers a year. But this takes time. There’s no magic wand.
You say Mexico is struggling with democracy. Some would say the U.S. is as well. But unique to Mexico is the particular concentration of power. Some argue that the country is basically run by its wealthiest 1,000 families, all of whom know each other and are wired-in with the PRI. Why would this group want to broaden Mexico’s middle class and challenge the existing power structure that has ruled the country for more than a century?
Some people say it’s really just 300… but this is changing—not fast enough—but it’s changing. We’ve got our share of billionaires, and all of them that I know—and I know all of them—are investing hard.
Inequality is a huge issue in Mexico, and one that we’re prepared to overcome by closing the gap with more jobs. If it means political power diffuses, so be it. But there’s another factor at work, too. Lots of those families have not had to give up ownership in their company, because the country has not grown as fast as it is capable of growing. The moment we start growing closer to our potential—and opening up the energy sector would be a step in the right direction—then, they’re going to run out of means to keep their companies growing. They’re going to have to rely on a more robust stock market and give up some control in order to secure the financial backing to grow or sell their companies.
It’s got to happen if we want to grow and become a more stable democracy.
Given that 18,000 U.S. companies have operations in Mexico, what happens there is of no small importance to American business leaders. What single myth about Mexico do you think persists in the minds of U.S. CEOs that you would most like to dispel?
Great question. Fear that Mexico might not be able to work through its security situation. Some may still be troubled by Mexico’s history of expropriations in the past—oil, for instance.
Are those days behind Mexico?
If they’re not, we’re sunk. I’ve talked with Enrique Peña Nieto. He’s a pragmatic young man, a quantum leap difference from any other elected official. He’s outwardly focused and well-traveled in the U.S., Europe and Asia.
I’ve talked to him about some of these myths, such as security and energy, and he’s determined to see these issues through.