From iatp@igc.apc.orgSat Apr 29 16:18:05 1995 Date: Fri, 28 Apr 1995 12:06:26 -0700 (PDT) From: IATP To: Recipients of conference 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: iatp@iatp.org. For information about IATP's contract research services, contact Dale Wiehoff at 612-379-5980, or e-mail: dwiehoff@iatp.org