From this week's In Other News

LIFE AFTER PESO PLUNGE

By: PAUL MERRION April 28, 1997

Jeff Victor, who's been selling his Chicago-made car wax in Mexico for more than seven years, is not sure how much tariff he pays these days.

The rate used to be 20%, and he knows that the North American Free Trade Agreement (NAFTA) will reduce that gradually to 5% over several years.

But he is acutely aware of another key change: The peso exchange rate is now almost eight to the dollar, compared with "three-something" before NAFTA went into effect.

"I don't think the peso is going back to where it was," says Mr. Victor, vice-president and general manager of Chicago-based Treatment Products Ltd. "There's no sense in waiting around for that anymore. It's time to hunker down and decide how you're going to sell."

That's a refrain heard across Illinois.

In late 1994, the year NAFTA went into effect, a massive currency devaluation by the Mexican government cut the peso's value in half, making The Treatment car wax and other U.S. goods twice as expensive in Mexico.

No major exporting state was hit harder by the peso crisis than Illinois, which saw a 25% drop in shipments to Mexico in 1995.

Although many makers of big-ticket capital goods are still struggling, others now are starting to see double-digit growth as they learn to live with a cheaper peso.

This nascent rebound comes at a time when trade with Mexico is under intense scrutiny in Congress. NAFTA's opponents are branding the agreement a failure as they argue against expanding free trade to Chile and other Latin American countries.

Their Exhibit A is the U.S.-Mexico balance of trade, which went from a $1.3-billion surplus in 1994 to a $16.2-billion deficit last year, a reversal that critics say has cost the U.S. as many as 600,000 jobs.

In the words of Rep. David Bonior,

D-Mich., a leading NAFTA opponent: "Expanding NAFTA now would be like building a new room onto your house when your kitchen is on fire and your roof is collapsing."

But among Illinois exporters, the view is that NAFTA's not to blame: The peso's plunge clearly caused the surge of imports from Mexico and a decline in U.S. exports.

"NAFTA is certainly a plus, although not quantifiable," says Ricardo Sidor, international vice-president of Vernon Hills-based paint manufacturer Rust-Oleum Corp., whose tariff was cut by more than half to 12%. "The problem is, the dollar has gone the other way."

Rust-Oleum's sales in Mexico, which "came almost to a grinding halt," have bounced back to pre-NAFTA levels since 1995. "Without the peso devaluation, we'd probably be doing today a lot more than we are," says Mr. Sidor.

The biggest fear of what would come after NAFTA -- a massive shift of jobs and factories moving south to exploit cheap labor -- has failed to materialize in any dramatic way.

"I haven't heard that 'sucking sound' yet," says Miguel Leaman, head of the Trade Commission of Mexico's Chicago office.

Shifting production

But to the extent that production has continued to move south, a trend that was under way long before NAFTA was under discussion, it's been pushed along by the cheaper peso, not NAFTA's lower Mexican tariffs.

Rockford-based Clarcor Inc., which competes against several Mexican makers of heavy-duty filters for trucks and machinery, increased production in Mexico after exports dropped 20% in 1995.

Customers "switched to the cheapest thing they could find," says Dave Anderson, Clarcor's international vice-president. And Mexican competitors have a huge price advantage "if you're not manufacturing down there and making things in pesos."

Fortunately, he adds, an increase in U.S. sales prevented any significant layoffs at Clarcor's domestic plants, and sales in Mexico are expected to reach pre-devaluation levels this year.

While Illinois exported a record $2.08 billion worth of goods to Mexico in 1994, the peso devaluation quickly zapped any gains attributable to NAFTA. The state's shipments to Mexico fell to $1.55 billion in 1995, only $40 million more than in 1993.

"People are saying it will take until 1999 to see the kind of activity you saw in 1994," says Wendy Segal, a senior associate at Technomic Consultants International, a Northbrook-based market research firm. But even now, "people are asking me about Mexico again."

Exporters seem to be adjusting to the devalued peso, often citing crime, corruption, poor infra-structure and excessive government paperwork as more serious problems facing the Mexican economy.

Instead of cutting prices or profit margins, Rust-Oleum's strategy has been to step up marketing efforts, stressing that its paint's quality means it lasts longer and therefore is more economical. "We've really sharpened our pencil very little," says Mr. Sidor.

Treatment Products is holding prices down with simpler packaging and smaller sizes for Mexican store shelves.

"The peso slowed things to a halt," says Mr. Victor. But now, he adds, "customers are starting to come out again."

Exports account for more than one-third of his family-owned company's revenues, which total less than $10 million. Mexico accounts for about 5% of exports.

Other companies are offering bigger discounts for distributors and allowing customers to stretch out payments.

"In some cases, we had to finance exports from here by letting (distributors in Mexico) sell them before they paid us," says Luis Mateus, vice-president and general manager of Latin America for the Signode division of Glenview-based Illinois Tool Works Inc.

Because many of the customers for Signode's industrial strapping products are Mexico-based exporters whose sales have boomed under the cheaper peso, the company's sales to Mexico reached $3.5 million last year, more than twice the pre-NAFTA level.

Farm goods fuel rebound

Overall, Illinois exporters are substantially back to where they were in NAFTA's first year. Illinois-based companies exported $2.03 billion in manufactured goods and farm crops to Mexico last year, up nearly 31% from 1995.

However, that recovery is largely fueled by a huge, 167% increase in the sale of corn, soybeans and other farm goods, the state's largest export category. Demand for feed grains surged last year because Mexican farmers were replenishing livestock herds that had been sharply reduced due to the peso crisis and a severe drought in 1995, according to a spokesman for the Illinois Farm Bureau.

Currency woes still grip the state's two next-largest export categories, industrial machinery and electronic equipment.

"Our customers just don't have money," says Barbara Petkus, international sales manager for Lake Forest's Portec Inc., which makes railway maintenance products. "We had virtually no sales last year" in Mexico.

Portec, which has exported to Mexico since the 1950s, may be an extreme example. Mexico is privatizing its state-owned railroad, which means the government has been deferring all but the most essential maintenance. "The government just gave up on it," says Ms. Petkus. "Even without the peso devaluation we'd be in trouble."

Equipment makers hit

The trend is evident at firms such as Moline-based Deere & Co., which saw exports of agricultural and industrial equipment fall to $29 million in 1995 from $71 million in 1994 as a "direct result of the devalued peso," a spokesman says. Last year's $34 million was slightly better, but still less than half of Deere's pre-devaluation level.

For all Illinois industrial machinery producers, shipments to Mexico fell by more than a third to $360.4 million in 1995, with a 6.4% gain last year to $383.3 million. Exports of electronic equipment fared even worse, dropping 19.7% in 1995 and another 10.4% last year to $288.6 million.

However, other industries are doing much better. Chemical exports from Illinois, down 15.6% in 1995, were up 54.7% last year.

The food ingredients division of Chicago-based FMC Corp. now enjoys a 2% tariff on exports to Mexico, while European competitors still have to pay the pre-NAFTA 10% tariff. Devaluation cut into 1994's 18% increase in exports, but "by 1996, we had fully recovered," says Peter Weber, vice-president of Latin America, adding that FMC expects "significant growth" in sales to Mexico this year.

Mexico's imports of rubber and plastic products, primary metal products, instruments and petroleum products from Illinois companies are all substantially higher than 1994 levels.

While the peso has lost half its value over the last three years, the good news is that it has remained relatively stable even though the government no longer tries to control the exchange rate, as it did before.

Exchanges add stability

Also, peso futures have traded on the Chicago Mercantile Exchange since April 1995, allowing exporters and importers to lock in exchange rates for deals that won't be consummated for many months.

"There's a lot more stability. Before, it traded all over the place," says Philip Ruffat, vice-president of Latin America for Chicago's Sakura Dellsher Inc., a futures trading firm. While he doesn't rule out "another huge slide" in the next year or so, he predicts the peso will lose about 10% of its value per year.

Relative to pesos, demand for dollars will continue to be strong even as Mexico's economy improves.

"When Mexicans have money," says Mr. Ruffat, "they buy American products."

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