International Trade/Offshore Manufacturing/Sourcing/Export/Import/Consulting Foreign Investment in Mexico By Timon L. Marshall Introduction to Mexico With a surface area of 764,000 square miles, Mexico is the 13th-largest country in the world and third-largest country in Latin America. Mexico's population of approximately 87 million ranks 11th in the world and includes a work force of nearly 28 million people. Mexico's work force is characterized by its youth, a relatively high literacy rate and an abundance of low-skilled labor. Mexico's gross domestic product for 1993 was nearly US $350 billion. In addition to having the fourth-largest oil reserves in the world, Mexico leads the world in production of silver and avocados, is third in production of coffee beans and is a leading producer of coal, copper, iron ore, lead, manganese, sulphur and zinc. Its major exports are petroleum, cotton, coffee, tomatoes, shrimp, copper, automobiles and automobile parts, manufactured glass, iron bars, steel pipes and pharmaceuticals. Major imports into Mexico from the U.S. include automobile parts, chemicals, mechanical equipment, high-technology products, cattle and meat, and agricultural products. Mexico is strengthening its economy and showing an aggressive interest in world trade, an interest which Mexican President Salinas de Gortari sees as vital to perpetuating Mexico's economic recovery and growth. In 1986, Mexico formally joined the General Agreement on Tariffs and Trade, and on January 1, 1994, the North American Free Trade Agreement ("NAFTA") became effective between Mexico, Canada and the U.S., thus creating the world's largest and richest trading zone, with an estimated market of 362 million consumers and a combined gross national product of over US $6 trillion. By establishing a free trade relationship with the U.S., Mexico hopes to significantly increase trade with its northern neighbor, which is already its largest trading partner. After Canada and Japan, Mexico is the U.S.'s third-largest trading partner. In 1993, U.S.-Mexico trade exceeded US$87 billion, nearly three times the amount of trade between the two countries in 1986. Until recently, Mexico's market potential was largely foreclosed to U.S. and other foreign investors because of Mexico's protectionist policies, including high tariffs and state ownership or state control of industries such as energy, telecommunications, railroads, banks and airlines. Under the Salinas administration, Mexican markets have opened up with new laws and government attitudes that encourage foreign investment. To stimulate foreign trade, the Mexican government unilaterally lifted most import licensing requirements and reduced tariffs. Firm fiscal discipline, including a wage/price stabilization program begun in 1987, has reduced the inflation rate from over 150% in 1987 to 8.2% in 1993. In recent years, the Mexican government has privatized most non-strategic companies. From 1982-1991, nearly 900 firms were privatized, merged or closed, including Telefonos de Mexico and 18 commercial banks. Divesting 160 firms generated US $10.6 billion to help pay for internal debt and social programs. In addition to its privatization efforts, Mexico is allowing more foreign ownership in previously protected sectors. Most economic activities are now unregulated and open to 100% foreign ownership. The challenge for Mexico's economy remains its high foreign debt. Debt restructuring in 1989 under the Brady Plan, together with increased oil export earnings, have helped some, but interest payments on Mexico's foreign debt still consumes about 20% of all Mexican exports (down from 35% in 1986). Mexico has enjoyed success in reducing its foreign debt, while the government has demonstrated its willingness to continue with and expand the economic reforms it has set in motion. The ratification of NAFTA is a strong step toward strengthening these reforms and ensuring their permanence, and will provide a strong basis for broadened free trade throughout the hemisphere. The Foreign Investment Law Mexico's new Foreign Investment Law ("FIL") was passed in December 1993 as part of its NAFTA implementation package. The FIL replaces the Law to Promote Mexican Investment and to Regulate Foreign Investment (the "LPMI") and essentially codifies most of the regulations to the law to promote Mexican investment and to regulate foreign investment (the "Regulations"), which were promulgated by the Salinas administration to liberalize the restrictive LPMI. Pursuant to the transitional provisions of the FIL, the regulations will remain in force, to the extent not inconsistent with the FIL, until new regulations are prepared. Among other things, the FIL eliminates all performance requirements (except where certain investment incentives are involved and those that are not prejudicial to international trade); expands the scope of the neutral investment provisions introduced in the regulations; and reduces or eliminates many of the notifications and authorizations previously required for foreign investments under the LPMI. The FIL defines "foreign investment" as an investment made by foreign individuals or corporations; foreign economic entities with no legal status; or Mexican companies in which foreigners hold a majority interest. In general, the FIL allows up to 100% foreign investment in most economic sectors without requiring that such investments be screened and authorized by the Ministry of Trade and Industrial Development (SECOFI) through the National Foreign Investment Commission (CNIE), as was previously the case under the LPMI. Despite the liberalization of foreign investment under the FIL, some investment is still significantly re-stricted. Direct investment by non-Mexicans is generally either prohibited or limited with respect to the following categories of investment: Activities reserved to the Mexican state. Article 5 of the FIL lists the following activities as being reserved exclusively to the Mexican state: the minting or printing of currency, postal services, telegraph and radio-telegraph services, satellite communications, petroleum and other hydrocarbons, basic petrochemicals, radioactive minerals, generation of nuclear energy and electricity, railways, control and supervision of ports, airports and heliports, and any other areas that may be expressly reserved to the Mexican state by specific legislation. Activities reserved to Mexican nationals. Under Article 6 of the FIL, foreign participation is excluded from the domestic land transportation of passengers and cargo (excluding messenger and parcel services), the retail distribution and sale of gasoline and liquid gas fuel, radio broadcasting and other radio and television services (with the exception of cable television), credit unions, development banking institutions, and professional and technical services expressly reserved to Mexican nationals by specific legislation. Activities in which foreign investment is limited to a specified equity percentage. Under Article 7 of the FIL, foreign ownership is allowed up to 10% in production cooperatives; 25% in domestic air transportation, air taxi services and specialized air transportation; 30% in financial group holding companies, multiple banking institutions, securities firms and stock exchange specialists; 49% in insurance companies, bonding companies, foreign exchange companies, bonded warehouses, financial leasing companies, financial factoring companies, limited-purpose financial companies, investment management companies, arms manufacturers, companies engaged in the printing and publication of periodicals for domestic distribution, basic telephone services, series "T" shares of companies holding agricultural, ranching and forestry properties, fresh water and coastal fishing within the exclusive economic zone (with the exception of aquaculture), harbor administration, shipping dedicated exclusively to domestic commercial transports, services related to railways, and the supply of fuel and lubricants to ships, airplanes and railroad equipment. Under Article 8 of the FIL, certain additional economic activities require the prior approval of the CNIE for foreign investment to exceed 49% in the following activities: harbor services for piloting, towing, mooring and lighterage; shipping companies engaged in trans-oceanic transportation; the administration of air terminals; private educational services; legal services; credit information companies, insurance agents, cellular telephone services, securities rating companies; construction of pipelines for oil and oil derivatives; and drilling of oil and natural gas wells. In addition to the industry-specific restrictions set forth in Articles 5 through 8 of the FIL, the CNIE has also reserved the right to review and approve proposed acquisitions by foreign investors of more than 49% of the capital stock of Mexican companies engaged in economic activities other than those mentioned above when the total value of the assets of the targeted company exceeds a threshold amount established by the CNIE on an annual basis. Moreover, even though only a small percentage of foreign investments require the approval of the CNIE, all foreign investments (with the exception of neutral investments, which are discussed below) must be recorded in the National Foreign Investment Registry. Foreign investments in real property. The regulations and the FIL contain provisions for the use of trusts (fideicomisos) with Mexican banks as investment vehicles to overcome certain investment restrictions. For example, Mexico has created certain "restricted zones" in which direct foreign investment is prohibited. These zones include all real property within 100 kilometers of Mexico's borders and 50 kilometers of Mexico's coastlines. Nevertheless, the FIL authorizes the creation of trusts with terms of up to 50 years for the purpose of allowing foreigners to hold and use real estate for residential purposes within these zones. The FIL also permits such trusts to be renewed for additional terms of up to 50 years. This, in effect, provides a potential 100-year holding period for such property. In addition to trusts, Article 10 of the FIL allows foreigners to invest directly in Mexican companies holding title to real property within the restricted zones, provided that such companies have a "calvo clause" (that is, a provision pursuant to which the foreign investor agrees to consider itself as a Mexican national and not to invoke the protection of its government in matters relating to the real property) inserted within their bylaws; the property is used for non-residential purposes; and the acquisition of such property is recorded with the Ministry of Foreign Affairs. Neutral Investments. In order to permit access to foreign capital markets by publicly traded Mexican companies, SECOFI may authorize a public placement of "participation certificates" issued by 30-year trusts that acquire and hold the stock of the underlying Mexican company. These certificates only provide economic rights to the shares held by the trust, and not voting rights. For this purpose, special series of shares (class "N" or neutral shares) may be issued specifically for the placement, which may only be acquired by the trust. Moreover, SECOFI may authorize credit institutions to acquire Class A shares (i.e., those reserved for Mexicans) of companies listed on the Mexican Stock Exchange if such companies intend to make new investments to expand their economic activities. The Effect of NAFTA. Chapter 11 of NAFTA provides comprehensive protection for tangible and intangible investments in the industrial, service and energy sectors in each of the three countries. Although the FIL, which applies to all foreign investors and not just those from the U.S. and Canada, codifies most of the investment guarantees stipulated in the NAFTA text, there are certain additional assurances provided for under NAFTA which are not found in the FIL. Conclusion Trade between the U.S. and Mexico prior to NAFTA grew because of the many reforms enacted unilaterally by the Salinas administration. With the full implementation of NAFTA, however, economic growth should be faster and more sustained because of the extensive bilateral liberalization of trade barriers. NAFTA also evinces a long-term commitment by the U.S., Mexico and Canada that investors can trust to endure longer than the terms in office of the current administration of each of the member countries. It is not only Mexico's economic reforms and NAFTA that are driving trade and investment to Mexico. Competition from the Pacific Rim that combines high-technology resources with low labor costs in Asia is an arrangement that some U.S. industries could benefit from in partnership with Mexico. And global competition aside, Mexico as a target market is also now more inviting. With a steadily increasing disposable income due to a stable economic recovery, U.S. goods are in high demand in Mexico. Mexico still has a long way to go to become a developed nation, but it is taking significant steps in that direction and it will take those steps quicker now that it has opened its doors to foreign investment. Initial indications suggest that in the foreseeable future, foreign investment in Mexico will continue; a movement that translates into both help for Mexico and profit for the foreign investor. This article was fprovided by Carlsmith Ball Wichman Murray Case & Ichiki, 555 South Flower Street, 25th Floor, Los Angeles, CA 90071-2326; Phone: (213) 955-1200 or in Mexico City at (011)(52)(5) 281-2428. Advertise on this site Put your company on this site!