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Date: Fri, 28 Apr 1995 12:06:26 -0700 (PDT)
From: IATP <
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To: Recipients of conference <
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Subject: NAFTA & Inter-Am Trade Monitor 4/28
NAFTA & Inter-American Trade Monitor
Produced by the Institute for Agriculture and Trade Policy
April 28, 1995
Volume 2, Number 13
__________________________________________
Headlines:
- THE FALLING DOLLAR
-BAILING OUT BANKS AND INVESTORS
- COSTA RICA IN THE MIDDLE ON BANANAS
- COFFEE PRICES EXPECTED TO RISE
- NAFTA SUPER-HIGHWAY PROMOTED
- BRAZIL'S UNEASY ECONOMIC PEACE
- NAFTA: CHARGES OF UNFAIR TRADE
THE FALLING DOLLAR
As the value of the United States dollar continued to decline on world
markets, Michel Camdessus, the managing director of the International
Monetary Fund (IMF) called on the U.S. to raise domestic interest rates
to strengthen the dollar and prevent inflation. Camdessus, speaking in
mid-April, said the dollar had fallen below the acceptable trading range
since February, and that its "accelerating" decline is creating world
financial instability. The dollar, already in decline during February, fell
by an additional 11 percent against the yen and by six percent against
the Deutsch Mark from March 1 to mid-April.
Foreign investors, who put $57 billion into mergers, acquisitions and
joint ventures in the U.S. last year, are eager to close deals while the
dollar is weak. European and Japanese tourists are also expected to flock
to the U.S. this summer, taking advantage of favorable exchange rates.
Persio Arida, president of Brazil's central bank, said the weaker dollar
has had the effect of a devaluation for Latin American currencies,
making Latin American exports more attractive around the world.
While Latin American exports to Europe, Japan, and Asia Q countries
outside the dollar zone Q become more competitive, as they would in
the case of a currency devaluation, the internal effects of a currency
devaluation, such as inflation, are avoided.
After hitting an all-time monthly high of $12.2 billion in January, the
U.S. trade deficit decreased to about $9 billion in February, at least in
part as a consequence of the weakened U.S. dollar, which made U.S.
exports more attractive on the international market. The U.S. trade
deficit with Mexico hit a record $1.3 billion, but the U.S. reported its
first trade surplus with Asia's newly industrialized nations and a
continued narrowing of its deficit with Japan.
German and Japanese officials have insisted that propping up the
dollar is the responsibility of the U.S., which has hesitated to intervene
in currency markets or to raise interest rates. Even when Washington
moved to prop up the dollar during the first week of April, speculators
kept buying and selling in large numbers and drove it back down again.
George Graham, "IMF Calls on US to Raise Interest Rates,"
FINANCIAL TIMES, 4/19/95; Richard Lawrence, "US Trade Deficit Hits
New High as Exports Dive," JOURNAL OF COMMERCE, 3/23/95;
Nancy Dunne, "Kantor Hails Decline in US Trade Deficit,"
FINANCIAL TIMES, 4/20/95; Richard Lawrence, "IMF Chief Seeks to
Double Funds to $440 Billion," JOURNAL OF COMMERCE, 4/19/95;
"Suddenly, It's Time to Buy American," BUSINESS WEEK, 3/27/95;
David E. Sanger, "As Dollar Falls, Economic Powers Blame Each
Other," NEW YORK TIMES, 4/11/95; "A Day in the Decline of the
Dollar," NEW YORK TIMES, 4/24/95.
BAILING OUT BANKS AND INVESTORS
Mexico's fourth-largest banking group, Grupo Financiero InverMexico,
reported a first quarter loss and skyrocketing past-due loans. Bank
executives said that their 55 percent increase in past-due loans during
the quarter was probably lower than the rise for the entire Mexican
banking system. Bad debts had stood at an uncomfortably high 7.33
percent of the banking industry portfolio before the current economic
crisis. InverMexico showed virtually no new loans during the quarter,
which is probably typical of the banking sector.
Coming to the rescue of the banking sector, the Mexican government
introduced a new financial instrument, the Unit of Investment (UDI).
While the structure of the UDI plan is complex, its intent is to index
debt principal to inflation, to set real interests rates of up to 12 percent,
and to stretch out the maturity of participating corporate loans for up to
12 years. The UDI plan was approved by Congress on March 28, with
only one dissenting vote. According to a Latin American banking
analyst for New York's Morgan Stanley, "Essentially, they're extending
maturity on borrowings by up to 12 years; funding to do so must come
from somewhere." Most observers believe that the UDIs will function
to transfer risk from the banks to the government.
UDIs will be available to some small to medium-sized businesses and
homeowners and farmers. Leaders of the El Barzn agricultural
movement have been critical of the plan, with Barzn Mexico City
coordinator Alfonso Ramrez Cuellar calling the plan deceitful because
"all it really does is strengthen banks' finances." Only "viable" loans
are eligible for UDI treatment. Borrowers will receive no new funds,
just a change in the terms of their current loans. UDIs are "voluntary"
instruments, which must be agreed to by both lender and borrower in
each case.
In addition to the UDI plan, the government's Bank Savings Protection
Fund (Procapte) has been created to provide capital infusions to keep
large banks afloat. Estimates of the amount needed from Procapte to
rescue Mexican banks, privatized just three years ago, range from $4
billion up to a $25 billion, depending on the evolution of past-due loan
portfolios. Between bank rescue funds and maturing Tesobonos
(government bonds that must be paid in dollars on maturity), most of
the $53 billion rescue package could be used up by the end of 1995.
In related news, Michel Camdessus, managing director of the
International Monetary Fund (IMF) admitted that the IMF had failed to
react quickly enough to Mexico's developing economic crisis during
the last half of 1994. According to Camdessus, the failure was due in
large part to the IMF's failure to sufficiently monitor the sustainability
of flows of investment funds in a world now characterized by massive
free flows of capital. The banking industry's Institute of International
Finance predicted that net private capital flows to major developing
nations will drop from about $160 billion last year to just over $80
billion this year, with Latin America's share of the total dropping from
about $60 billion last year to about $1 billion in 1995. The outflow from
Latin America in 1995 will include an estimated $21 billion paid out as
investors cash in maturing bonds.
Corporate interests in Mexico are pressuring the government to drop a
proposed windfall gains tax, which would apply the corporate tax rate
of 34 percent to gains from currency fluctuations. Mexican central bank
statistics show that more than $5 billion fled the country during the last
quarter of 1994, generating large profit margins when the peso lost
nearly 45 percent of its value. The windfall gains tax would target
profits resulting from the devaluation of the peso, and would be
charged against capital as it is repatriated. Companies and wealthy
individuals argue that the government cannot really track capital
movements and determine profits made from them and that, in any
event, Mexico needs repatriated dollars more than it needs to tax
profiteers.
Craig Torres, "InverMexico's Bank Unit Swung to Loss in 1st Period,
Boding Ill for Entire Sector," WALL STREET JOURNAL, 4/21/95; Leslie
Crawford, "Mexico Enables Banks to Refinance Corporate Debt,"
FINANCIAL TIMES, 4/4/95; Al Taranto, "UDIs Q and Now for the
Details," EL FINANCIERO, 4/10-16/95; "Pressure to Drop Windfall
Tax," FINANCIAL TIMES, 4/21/95; Rosa Elba Arroyo, "A Costly
Proposition," EL FINANCIERO, 4/3-9/95; Michael Tangeman, "UDIs
Win Green Light," EL FINANCIERO, 4/3-9/95; Robert Chote,
"TWeaknesses in IMF Shown by Mexico,'" FINANCIAL TIMES,
4/23/95; Richard Lawrence, "Flow of Private Funds to Third World
Seen Plunging Following Mexico Crisis," JOURNAL OF COMMERCE,
4/21/95.
COSTA RICA IN THE MIDDLE ON BANANAS
The long-running banana wars between the European Union (EU) and
Latin American banana producers have become more complex with
increasing United States involvement. On one side, the EU has
implemented a complex quota system designed to favor producers
from African and Caribbean nations (ACP) over the larger Latin
American producers. While clearly restrictive of trade, the EU
"framework" agreement has been grandfathered into GATT
provisions, and Latin American nations have little chance of winning
international judgment against it. Some Latin American nations,
including Costa Rica and Colombia, have agreed to abide by the
agreement, accepting in return slightly more favorable quotas from the
EU.
The United States entered the fray on behalf of Chiquita Brands, a U.S.
banana company that is heavily involved in Latin American
production. Having failed to change the EU banana quota system, the
U.S. has now threatened bilateral trade sanctions against Costa Rica and
Colombia. The U.S. apparently hopes to take them out of the EU
market entirely, causing banana shortages in Germany, and thus
indirectly pressuring the EU to lift its ACP framework agreement. U.S.
trade officials justify their intervention on the grounds that banana
gathering, shipping and ripening account for 75 percent of retail value
of bananas. A Costa Rican official says that his country is being
scapegoated in the EU-U.S. dispute, claiming that the U.S. government
is "blaming the victim."
John Zarocostas and John Maggs, "Costa Ricans Feeling Squeezed in
Banana Dispute," JOURNAL OF COMMERCE, 4/24/95.
COFFEE PRICES EXPECTED TO RISE
As Latin American producers continue plans for withholding a portion
of the coffee harvest, and as poor weather reduces the amount of
Brazilian harvests, coffee prices are expected to rise from about $1.70
per pound for beans to as much as $2.50 per pound during the crop year
running to September 1996. Led by Brazil, which produces 30 percent
of the world's coffee, Latin American producers have been negotiating
an agreement to regulate supply and demand. Although no agreement
has been signed, they have tacitly agreed to withhold up to 20 percent
of exports.
In late March, Brazil's National Monetary Council approved $91
million from the National Coffee Fund for use as marketing loans in a
voluntary retention program. Coffee growers had pushed for a
voluntary retention program, while coffee exporters preferred an
export quota system to allocate the 80 million-bags-a-year coffee crop.
Mexico, the world's fifth-largest coffee producer, has seen production
fall from 5.5 million 60-kilogram bags to only 4 million for the cycle
ended in March. Years when coffee was a barely profitable crop led to
deterioration in capacity. Six of every 10 Mexican producers are poor
Indians, who often lack access to technical and financial resources
needed to improve yields. Mexico's 700,000 Indian coffee farmers
produce only 30 percent of the total crop, and often reap little benefit
from increased world prices because they have to accept what brokers
are willing to pay them.
Roderick Oram, "Coffee Supplier Warns of Further Big Price Rises,"
FINANCIAL TIMES, 4/20/95; "Brazil Approves $91 Million for Coffee
Plan," JOURNAL OF COMMERCE, 3/31/95; Howard Simon, "US
Coffee Traders Fear Latin Cartel Could End Revival," JOURNAL OF
COMMERCE, 4/17/95; Daniel Dombey, "Bitter Brew," EL
FINANCIERO, 4/10-16/95.
NAFTA SUPER-HIGHWAY PROMOTED
A Texas coalition, the Interstate Highway 35 Corridor Coalition, is
lobbying to get I-35, which runs from Minneapolis, MN to Laredo, TX
extended into Mexico as the "NAFTA Superhighway." According to
the Coalition, 80 percent of international trade enters Mexico by truck,
with half of the amount passing through Laredo.
The group calls for major road improvements and new processes to
speed up customs inspections, tax collection, and toll payments. David
Dean, head of the Coalition, describes the plan:
"The idea is that a truck in Monterrey, bound for Chicago or Winnipeg
or wherever, goes into the interior [customs] station in Monterrey.
Customs officials from all three countries could inspect the cargo, seal
the container, weigh the truck, check emissions controls, immigration
papers, insurance, safety standards. The truck files a route plan, a bar
code is affixed to its side or a satellite transmitter is put on top; all taxes,
tariffs, duties, overweight charges of every description encountered
along that route are pre-paid by the trucking concern. A smart-card
with a computer chip is encrypted into the vehicle and the truck then
enters the Nafta superhighway system in Mexico." According to Dean,
the truck could then proceed through express lanes for inspections and
customs, avoiding lines of100 trucks and delays of up to 48 hours that
increase costs at present.
"Keep on Truckin'," EL FINANCIERO, 4/3-9/95.
BRAZIL'S UNEASY ECONOMIC PEACE
Brazilian President Fernando Henrique Cardoso's visit to the U.S.
included appearances before investors in New York and pledges to
continue opening Brazilian markets, as well as meetings with U.S.
President Clinton and other government officials in Washington.
President Clinton said Brazil is "poised to take its rightful place as a
shining example for all the Americas and the world." Cardoso praised
Clinton's plans for reform of multilateral financial institutions, and
said he joins in calling for better monitoring of international capital
flows and for assistance to countries hit by capital flight.
Capital flight from Brazil has hit $7 billion since President Cardoso
took office 100 days ago, and Brazil's trade surplus has reverted to a
monthly trade deficit. Foreign reserves have plummeted, and the
Brazilian monetary unit, the real, was devalued slightly in early March.
U.S. business interests, somewhat nervous over the Brazilian
economic picture, are also concerned by the refusal of the Brazilian
Congress to pass tightened intellectual property legislation long
demanded by the United States. Legislation backed by Cardoso and
passed by the lower house is bogged down in the Senate.
Even as President Cardoso promoted his country's economic stability to
investors in New York, the lower house of Brazil's Congress approved
a government measure to raise the minimum wage by 43 percent.
Senate passage is expected to come in time to allow implementation on
May 1. Constitutional changes proposed by President Cardoso have
been more difficult to push through Congress, with Cardoso's
proposals for social security law changes and for privatization of
industries still stuck in Congress. On March 24, President Cardoso
promised major agrarian reforms, but these are expected to anger large
landowners and to face tough going in Congress.
Diana Jean Schemo, "Brazil's Chief, in U.S., Says He'll Insist on Key
Reforms," NEW YORK TIMES, 4/20/95; Angus Foster, "Brazil's
Minimum Wage to Rise 43%," FINANCIAL TIMES, 4/21/95; Roger
Wilkinson, "Brazil/U.S.A.," VOICE OF AMERICA, 4/17/95; "Brazil:
President Henrique Cardoso's First 100 Days Marked by Growing
Opposition to Constitutional Reforms," NOTISUR, 4/21/95.
NAFTA: CHARGES OF UNFAIR TRADE
% NAFTA arbitrators rejected the U.S. Commerce Department's
justification for sanctions on two Mexican leather producers, saying the
judgments were based on bad data and the companies were not given
proper notice of the decision. The case stems from 1981 complaints by
U.S. leather apparel makers against Mexican competitors based on
Mexican government subsidies, which resulted in imposition of
penalty duties on Mexican exports. Although the Mexican subsidy
program ended a few years later, the U.S. Commerce Department last
year imposed a penalty on two new firms, based on inaccurate data that
it refused to correct.
% South Florida tomato growers lost a bid before the U.S. International
Trade Commission (ITC) for emergency protection from Mexican
imports. According to a University of Florida researcher, Mexican
tomato growers increased exports to the U.S. by 18 percent, depressing
markets and exceeding NAFTA quotas. According to the Florida
Tomato Exchange, in early January all tomatoes were bringing as much
as $12-14 per box, but increased Mexican shipments drove the price
down to $4-5 per box. The Florida growers' petition for long-term relief
is still pending before the ITC.
"Hell Bent for Leather," JOURNAL OF COMMERCE, 4/18/95; John
Maggs, "Panel Rejects Growers' Plea to Restrict Tomato Imports,"
JOURNAL OF COMMERCE, 4/19/95; "Researcher Says Mexico
Exceeded Tomato Quotas," JOURNAL OF COMMERCE, 4/12/95; Larry
Waterfield, "Florida Seeks to Curb Flow," THE PACKER, 4/17/95.
_______________________________________________
Produced by the Institute for Agriculture and Trade Policy, Mark
Ritchie, President. Edited by Mary C. Turck. The NAFTA & Inter-
American Trade Monitor is available free of charge to Econet and
IATPNet subscribers. For information about fax or mail
subscriptions, or other IATP publications, contact: The Institute for
Agriculture and Trade Policy, 1313 5th Street SE, Suite 303,
Minneapolis, MN 55414. Phone: 612-379-5980; fax: 612-379-5982;
e-mail:
[email protected]. For information about IATP's contract research
services, contact Dale Wiehoff at 612-379-5980, or e-mail:
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