With the NAFTA, doing business with our continental neighbors has never been easier.
The North American Free Trade Agreement (NAFTA) is the most comprehensive regional free trade pact ever negotiated. Four former U.S. presidents stood in support of Bill Clinton on January 1, 1994, as he signed off on a historical pact designed to allow unfettered trade between Canada, Mexico and the United States. Experts will, no doubt, continue to debate the efficacy of NAFTA, yet it is clear that there are winners and losers in this multinational trade deal. However, politics aside, the alliance has reduced many barriers for American companies seeking to penetrate a global marketplace, both north and south of the U.S. border.
Built upon the 1989 U.S.-Canada Free Trade Agreement (CFTA), NAFTA brings 380 million people together in one continental marketplace to produce nearly $8 trillion in goods and services annually. During the first year of the Agreement, business between NAFTA partners boomed. U.S. exports to Canada, our largest trading partner, rose by more than 14 percent to exceed $114 billion in 1995. Mexico, our third-largest trading partner, increased imports of U.S. goods by a whopping 22 percent, representing an additional $9.2 billion entering the U.S. economy during only the first year of trade under the Agreement, according to the U.S. Department of Treasury (DOT).
NAFTA's Impact on Trading With Our Neighbors
Since the United States and Canada had a pre-existing agreement, NAFTA's impact on trade with our neighbors to the north has been overshadowed by the enormous impact on trade between the United States and Mexico. Upon NAFTA's initial implementation, half of all U.S. exports to Mexico became eligible for duty-free treatment. Remaining tariffs are scheduled for elimination at the five-, 10- and 15-year marks of the Agreement.
NAFTA has helped level the playing field between the partnering countries by calling for standardizations across the board, from tariffs to quality measurements. For example, post-NAFTA numbers from the DOT indicate the average Mexican tariff on U.S. products has fallen from 10 percent to 4.9 percent, while the average U.S. tariff on Mexican products has only fallen from 4 to 2.3 percent. The standardization of quality measurements is another key benefit for U.S. exporters to Mexico. Pre-NAFTA, U.S. exports had to meet higher standards than Mexican imports, greatly adding to the cost of shipping goods down south.
"Under NAFTA, U.S. goods meet the same standards as the Mexican or Canadian goods in their own markets," says Pat Helton, director of the Northwest Texas International Trade Center at Texas Tech University. "You know what the requirements and standard levels are before you ever ship, so you don't get your goods down there and find out you can't sell them because there was some vague requirement you didn't know about."
Perhaps the greatest impact of NAFTA, however, was the promise of stabilization for the entire North American market. Prior to the NAFTA, Mexico's first reaction during economic hard times was to close the borders and shut down trade. During the 1982 financial crisis, for example, Mexico imposed 100 percent duties on many imports, cutting U.S. exports to Mexico in half. It took six years for U.S. exports to recover to pre-crisis levels, according to the DOT.
With NAFTA in force, Mexico had to keep its borders open to trade when the peso devaluation crisis hit in late 1994. "This allowed U.S. businesses to continue trading in Mexico," says Helton. "Business fell, but it was still at a much higher level than pre-NAFTA. And even though the country was in crisis, we still sold more goods to Mexico than we did before NAFTA."
Big Business Down Mexico's Way
Indeed, NAFTA has meant big business down Mexico's way for many U.S. companies. Mexico is an attractive market made up of about 92 million willing buyers of American products. This country represents the largest middle class in Latin America, and Mexican consumers are very loyal, in general.
There are two sides from which to enter any foreign market, as an importer or as an entity. Helton says if you are going to market directly to the end buyer, then you must have a presence in the country. "You are going to have to sell your products face to face to the buyer and demonstrate that your products are better than what they are already using," says Helton.
Alternatively, many companies penetrate the Mexican marketplace via a third-party distributor or sales representative. Either way, says Helton, do your homework first. "We look at Mexico sometimes as a Third World country, and it's not," says Helton. "It's a pretty sophisticated market down there, and a lot of people make mistakes by just blindly rushing in."
Mexico has become a bastion for U.S. manufacturers trying to take advantage of the reduced cost of labor and open availability of facilities. Texas-based UniMark Group Inc., a vertically integrated fruit growing, processing, packaging and distribution company, operates two entities in Mexico. Soren Bjorn, CEO of UniMark, says the fruit company leverages the low cost of production in Mexico with the high value of the end product in the U.S. and Canadian markets.
Mexico's proximity to the States must not be undervalued, says Bjorn. "One of the biggest costs we have as a company is transportation and logistics," he explains. "Mexico is an ideal location because it's so close to the United States that you don't have to deal with ocean or plane freight."
Even with the NAFTA, however, doing business in Mexico is hardly risk-free. Helton points out that business owners must consider the total cost of penetrating any foreign market. While your product may sell for one dollar in the States, exporting to either NAFTA partner will involve shipping, insurance and documentation costs. In addition, Helton strongly advises making payment arrangements up front before exporting to any foreign distributor.
"American companies are used to shipping goods to retailers on open accounts, but this may not be the wisest choice in foreign countries," cautions Helton. He describes an American company that was expecting payment in dollars and received a debit for pesos. "If payment arrangements are not made in advance, the outcome might not be pleasant," says Helton.
Long Arm of the Mexican Law
U.S. companies looking south must be prepare to do business in a more complex and formal legal system. While the Mexican government is reducing the number of statutes and regulations, there are still unique requirements that must be fulfilled. Law firms in major Mexican cities are familiar with documents U.S. companies must file to set up shop inside the border. The most notable legal challenge, however, is strict Mexican labor laws.
Labor laws in Mexico are more protective of the worker, and it does not have the right to work legislation found in most U.S. states. "Mexican law gives you about 20 situations where you can legally fire an employee," says Jose Felipe Garcia, a legal consultant to National Law Center for Inter-American Free Trade "If you fire an employee for any other reason, then you are in default, and he can sue you in labor court. The results could be paying fines or even reinstating the worker to his former job."
Garcia says unions in Mexico are much less repressive today, working more effectively as part of the labor force and the economy as a whole. For companies choosing to establish entities in Mexico, like UniMark, dealing with labor unions is a legal requirement. Bjorn says employing Mexican executives to operate the subsidiaries and negotiate with the labor unions has proved a wise decision.
"I rely on them to do the best possible job in negotiating with unions, and the unions realize it is that manager who has the power," says Bjorn. "I think that builds a certain level of trust and makes things a lot easier."
The long arm of the Mexican law has also become more efficient in protecting intellectual property rights. In the 1970s and '80s, intellectual property rights were commonly violated in Mexico at the expense of designer brand names like Nike and Reebok. Today, the Mexican Institute of Industrial Property (IMPI) has a more strict policy against this type of infraction and thoroughly investigates possible violations. Further, the IMPI scrutinizes patent applications for copyright infringements, even down to the pronunciation of trademark names, for phonetic similarities between Spanish and English words.
Mexico, Up Close and Personal
Entering the Mexican market, however, goes far beyond setting up shop and abiding by the law of the land. As in most Latin American countries, finding success in the world of Mexican business will depend on your ability to establish personal relationships with your potential Hispanic business partners.
"Much of what you do in Mexico is keyed to whether or not you know someone and whether or not they like you," says Terri Morrison, president of Getting Through Customs, a software and training firm for international business travelers, and co-author of Dun & Bradstreet's "Doing Business Around the World." Helton agrees: "You really need to go down there and get a personal relationship started. They want to know who you are before they really want to know what your deal is," says Helton. "Things take time down in Mexico."
The slow pace of business in Mexico can be frustrating to many fast-track American executives, but this is just one of the many cultural challenges awaiting U.S. companies south of the border.
While most Mexican businesspeople speak English, making a sincere effort to speak a few words in Spanish will show that you respect the foreign language. Cultural differences also have a direct effect on negotiating with Mexicans. One nuance of the Mexican culture is a business day divided up by "medio dia," or a lunch that can last several hours. For this reason, Garcia suggests making business appointments in the morning and realizing that Mexicans may show up very late for afternoon meetings.
"Be prepared that on your first day of arrival, you will not even talk about business," says Garcia. "Three- and four-hour lunches, with cocktails, are the norm." Garcia says to refuse a drink at lunch can be offensive to your Mexican host. "In Mexico, they like to know you and learn about your family and your personal likes and dislikes," he explains. And in future meetings, it is customary to first inquire about the well being of a Mexican's family before introducing a business tone to the conversation.
Bjorn says in Mexico, there is a greater sense of responsibility to the community and this, too, has an affect on negotiations. "In Mexico, you have to go through more of a deductive process," he explains. "You basically have to convince management that doing this is ultimately a benefit to the community." However, Morrison warns that being too assertive will call a halt to all negotiations. A John-Wayne bravado will not play out well in Mexico.
Distribution and Marketing in Mexico
New challenges lie ahead after you've done the deal. Distribution and marketing are priorities for U.S. companies trying to sell their wares in a diverse Mexican market. Arizona-based Innovative Environmental Products (IEP), an environmental technology company, has manufacturing plants in Mexico producing cleaning solutions and regional offices in Canada. Jim Edwards, founder of IEP, says that you have to take your product into Mexican stores on a daily basis, selling only small amounts of merchandise during each visit.
"It's a very different channel of distribution than we're used to in the United States," says Edwards. "In some Mexican accounts, if you don't have merchandisers who can go put your product on the shelf, the retailer won't let you in the store. If you don't have a means of getting your product into the store in a price-competitive manner, you're dead."
Edwards says this obstacle has spurred the Mexican business community to form alliances where one manufacturer acts as a conduit for three other manufacturers to get their merchandise in the store.
On the marketing side, Helton says not to assume that price will be the deciding factor because, more and more, Mexicans are beginning to purchase on factors of quality as well as price. In addition, Edwards says in Mexico a more hands-on, "mano a mano" marketing approach is necessary.
"You have to acclimatize yourself to the types of products Mexicans will need. There are products that have to go to each faction of the marketplace. Target your market and stay in that framework," advises Edwards. "The key to the whole thing is that as the middle class emerges, this creates dynamic growth for either partner under NAFTA."
Doing Business With Our Canadian Counterparts
U.S. trade with our Mexican neighbors has been a boon. Still, opportunities in the Canadian market must not be ignored. Merchandise exports from the United States account for approximately 70 percent of the Canadian import market. Well over $300 billion in two-way trade takes place each year between the two countries.
Americans have long regarded Canada as an extremely attractive and accessible place to do business, and NAFTA has seen American exports to Canada increase by more than 20 percent since its 1994 debut.
A key advantage for many American companies is working in a Canadian business environment that is more like our own than any other country in the world. Jim Warnock, attorney with the Toronto-based law firm of McMillan Binch, points out that a great number of Canadian national corporations are either subsidiaries or have large U.S. ownership in them. The decision to either export or set up shop in NAFTA's northernmost market is generally based on tax considerations for the investing company.
"If you are going to set up a manufacturing operation or a fairly significant sales organization, setting up a corporation in Canada might be a good planning technique," says Warnock. "Alternatively, if you are just going to sell goods to the Canadian market on a smaller scale, you can really do that out of your existing U.S. organization."
Canadian and U.S. business laws are very similar in many cases, says Warnock. Intellectual property is well protected in Canada, and labor laws are reflective of the American system, with the exception of right to work legislation. Compared to doing business in Mexico, Canada is a low-risk market to enter. However, Morrison stresses that although the two countries are similar, there are cultural and linguistic differences that provide U.S. companies with unique challenges.
Canada: A Cultural Rainbow
Most Americans don't realize the extent of Canada's cultural diversity, and this represents the greatest challenge for most U.S. companies doing business there. As you travel from east to west across the Canadian border, you will experience a cultural rainbow, of sorts. On the East Coast, Toronto is home to English-speaking citizens, while in Quebec, French is the language of choice. In Western Canada, British Columbia is predominantly English speaking, but a large Asian population has settled in the region that demands a different business strategy altogether.
Negotiating in each of these regions must be handled with an individualized approach. The English-Canadians, for example, will have no trouble telling you when they don't agree with your plan. "In that environment, you are probably going to offer some opinions they don't like. You can't take offense at that," says Morrison, "it's just the normal mode of communications, and it's no worse than Americans being pushy or using hyperbole too much."
The French-Canadians are experienced debaters, and U.S. executives are expected to share their insights with the group. "If you can't offer educated opinions, you aren't going to get any respect in the French environment because conversation is such a key element," says Morrison. "Whether your opinion converges or digresses with whatever is on the table, you are supposed to offer it in an intelligent and perceptive way."
Finally, a growing number of Asian entrepreneurs in western Canada make decisions based on consensus. Morrison says when negotiating with Asians, realize that they have probably already reached an agreement before they even walk in the room. And the Asian businessperson has a more gentle approach to negotiations. "They will not tell you directly that they don't like the proposal. Instead, the will use terms like 'difficult' and 'challenge'," says Morrison. "That's how they assertively say no."
The Canadian mindset is also much different than in the United States in regard to business hours. While many Americans work nights and weekends, in Canada, business is conducted on more of an eight-to-five schedule.
The Canadian market is no mirror of the States, either. In addition to bilingual labeling laws and a diverse population spread mostly along the southern border of the country, marketing styles are slightly different than in the United States. Warnock says cultural idiosyncrasies pose significant challenges for marketers on both sides of the U.S.-Canada border. "The marketing techniques that work in the United States might not have the same appeal here," he explains. "I've noticed Canadian companies that go down and operate in the U.S. have the same problem."
NAFTA in the Next Century
Regardless of your political view of NAFTA, few will argue that the pact has raised a level of awareness about North American trade opportunities and has ushered many domestic companies into a global marketplace in their own backyards.
"NAFTA really gave globalization a shot in the arm in terms of getting free and open trade options between three neighbors going, just as you have in the European Union (EU)," says Morrison. "You really need to go into the broader arena, and you can't afford to ignore global markets."
NAFTA's full potential will not be realized until the next century, when the Agreement is completely implemented in 2008. While discussions about NAFTA's worth continue, new free-trade debates are emerging as Latin American countries, like Chile, hope to gain entry into this historical pact. While the United States remains undecided about Chile, this small Hispanic country has basically circumvented the States by entering into individual agreements with both Canada and Mexico. In addition, Mercosur, the Latin American trade pact that includes Argentina, Brazil, Bolivia, Chile, Paraguay and Uruguay, is currently in negotiations with the EU. As pacts pave the way to a global market, experts say U.S. companies must learn how to do business in different cultures and languages.
"NAFTA has nothing to do with how business is conducted in Canada or Mexico. You still have to globalize your thinking," says Edwards. "Each and every country has its idiosyncrasies on how they do business, and as a foreigner going into that marketplace, you either accept it, or it's going to be a rude awakening."
Resources for Doing Business Under the NAFTA
Since the signing of NAFTA, many organizations have formed to assist U.S. business owners in opening trade lines with our North American neighbors.
For information relating to NAFTA in general, visit:
For information specific to Canada, visit:
For information specific to Mexico, visit:
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