In 1995, the U.S. trade deficit with Mexico was $15.4 billion, a shift from a $1.3 billion surplus in 1994. U.S. merchandise exports to Mexico were $46.3 billion, down $4.5 billion from a record-setting $50.8 billion in 1994, a 8.9 percent decrease. However, U.S. exports remain 11.4 percent above the highest pre-NAFTA level of $41.6 billion in 1994. Mexico was the United States' third largest export market in 1995. U.S. imports from Mexico totaled $61.7 billion in 1995, or 24.7 percent greater than in 1994.

The stock of U.S. foreign direct investment in Mexico was $16.4 billion in 1994, up 7.5 percent from 1993. U.S. direct investment in Mexico is concentrated largely in manufacturing and finance.

North American Free Trade Agreement (NAFTA)

The United States, Canada and Mexico implemented the NAFTA on January 1, 1994. It is a region–wide trade agreement that progressively eliminates tariffs and non–tariff barriers to trade in goods; improves access for services trade; establishes rules for investment; strengthens protection of intellectual property rights; and creates an effective dispute settlement mechanism. NAFTA also contains supplemental agreements which provide for cooperation on labor standards and environmental issues.

IMPORT POLICIES

Tariffs

Under the terms of the NAFTA, Mexico will eliminate tariffs on all industrial and most agricultural products imported from the United States within 10 years, with remaining tariffs and non–tariff restrictions on certain agricultural items phased out over 15 years.

The third annual tariff reductions were implemented by the NAFTA parties on January 1, 1996. This has reduced Mexico's average duty on NAFTA-qualifying U.S. goods from 10 percent prior to the NAFTA to an estimated 5.1 percent. The NAFTA's tariff provisions have also protected U.S. exporters from Mexico's decision in 1995 to raise tariffs from 20 to 35 percent and apply quotas on textile, apparel and footwear articles imported from countries with which Mexico does not have a free trade agreement.

During the transition period for phasing out tariffs, a number of U.S. exports are covered by tariff-rate quotas (TRQs). U.S. wood product exporters have experienced a number of problems with administration of the TRQs for construction grade lumber. This includes burdensome registration requirements and an auction process for the TRQs that is often inadequately publicized.

Safeguard Actions

Two U.S. industries currently have petitions pending regarding imports from Mexico. On March 4, 1996 the U.S. Corn Broom Task Force filed petitions under both the NAFTA safeguard and Section 202, or global,

safeguard provisions. The industry alleges that "critical circumstances" exist, and requests the U.S. International Trade Commission to determine if imports of brooms are a substantial cause of injury or substantial threat of injury to the U.S. industry. On March 11, 1996 several groups representing Florida fresh tomato and bell peppers growers and packers filed a global safeguard petition regarding imports for the fresh market. Mexico, however, supplies 90 percent of all U.S. imports. The ITC has initiated investigations on all three commodities.

Administrative Procedures and Customs

The Mexican Congress recently passed a Customs Reform Law, effective April 1, 1996. The new law should increase the transparency of the system, provide greater clarity regarding importer responsibilities and permit greater flexibility for duty payments.

To stop circumvention of its dumping orders for a wide range of textiles, apparel and footwear items from the Peoples Republic of China, on September 1, 1994 Mexico implemented new requirements that goods entering Mexico from countries not subject to the dumping order must provide an additional certificate of origin attesting the fact that the goods did not originate in China. NAFTA goods and goods marked "Made in the U.S.A." are exempt from these requirements. However, U.S. retailers had been rapidly expanding operations in Mexico and found the directive severely affects their ability to sell in Mexico the full range of goods they sell in the United States. U.S. retailers, apparel and footwear exporters, supported by the U.S. Government, are negotiating with the Mexican Government an alternative mechanism. However, while these discussions over the last year have produced a proposal that would provide a high degree of assurance that Mexico's dumping orders are effectively enforced without unduly burdening U.S. firms, Mexico has not acted on this proposal.

U.S. exporters continue to register complaints about certain aspects of Mexican customs administration. Problems remain due to the lack of prior notification of procedural changes, and the differing interpretation that customs officials at various border posts give to regulatory requirements for imports. This has occasionally resulted in the application of outsized penalties for customs law violations committed because of simple mistakes, and not in any attempt to evade Mexican Customs.

Other customs–related problems include: requirements to list serial numbers on invoices, laborious inspections at the border, the use of "reference prices," difficulty in clearing low–value shipments to importers not on the importer registry, re-registration requirements enacted with little prior notification, lack of standard procedures to address complaints, and unavailability of

reliable information on Mexican regulations. These policies have tended to target U.S. exporters of certain products, including footwear, textiles, beer and consumer electronics.

In November 1995, Mexico moved to harmonize its personal duty exemptions for returning residents. Mexico raised its monthly limit to the U.S. level, and, like the U.S., began permitting pooling by family members (i.e., a family of four can bring back $1,600 in goods duty-free). Mexico declined to raise its per-crossing limit ($50 for land crossings, $300 for air/sea crossings). For the United States, the limit is $200 per crossing, with one $400 entry allowed each 30–day period. NAFTA obligations do not cover these provisions; however, the United States remains interested in greater harmonization of these provisions by the three NAFTA countries, including broader product coverage for Mexico's duty exemptions.

STANDARDS, TESTING, LABELING, AND CERTIFICATION

U.S. exporters gained important new rights with respect to standards–related measures under the NAFTA. Both the NAFTA and Mexican law contain provisions to ensure that standards, technical regulations, and conformity assessment procedures are nondiscriminatory, that the regulatory development process allows interested parties –– including U.S. exporters –– to comment on proposed rules, and that Mexican regulators will take these comments into account.

In accordance with the Law on Metrology and Standardization, Mexico relies upon mandatory third-party certification for products subject to technical regulations ("Normas Oficial Mexicanas"). It uses a national accreditation program (SINALP) to evaluate the competency of laboratories to test to specific regulations and provide the test data used by SECOFI's Director General of Standards to grant or deny certification. The Law also foresees the privatization of certification and currently some six organizations have now been established and approved by SECOFI to perform certification in specific sectors.

The NAFTA (Chapter 9) provided Mexico with a transition period (until 1998) to facilitate the development of its testing and certification infrastructure before it is required to accept the obligation to accredit or otherwise recognize testing and certification performed by U.S. or Canadian bodies. Thus, under current procedures, U.S.-based laboratories, including manufacturers' laboratories, are unable to seek recognition under the Mexican accreditation procedures as competent to perform testing to Mexican regulations. The requirement to perform testing in Mexican-based laboratories has proven particularly difficult in sectors where technical capability is non-existent or insufficient to meet the demand, or resides solely in the laboratories of competing manufacturers. One problem of this nature was resolved in March of 1996 when the United States and Mexico reached agreement on the mutual acceptance of test data for new truck and automobile tires.

U.S. exporters have encountered other difficulties arising from implementation of Mexican technical regulations. One significant barrier is the Government of Mexico policy which does not permit product certifications of a particular model to be shared among different firms or between foreign suppliers and various customers. Instead, each importer must obtain its own product certification regardless of whether a certification had already been obtained by another importer. The inability to obtain direct certification causes numerous problems for some U.S. exporters who deal with multiple importers and for exporters who wish to change their importers or distributors. To avoid this problem, some U.S. companies have set up trading companies in Mexico to act as their importer of record. Such an option is generally not feasible for small U.S. resellers and manufacturers. However, even here, Mexican policy appears to be discriminatory against U.S. goods, since all imports are subject to inspection, with the delays and costs involved, while domestic goods are subject to random inspections.

Mexican phytosanitary standards have also created barriers to exports of certain U.S. agricultural goods, such as grains, citrus, Christmas trees, cherries, and cling peaches. In addition to product- specific rules, the process for establishing "emergency" phytosanitary standards has disrupted trade, as such "emergencies" do not follow the normal rule-making and notification process, including public comment periods. While Mexico used "emergency" rules less in 1995, it has not totally abandoned their use for ordinary rule-making. The United States remains concerned about the far-reaching extent of some new sanitary and phytosanitary import regulations, such as those for grain, and maintains an ongoing dialogue with Mexico on these issues in the NAFTA Sanitary and Phytosanitary Measures Committee

GOVERNMENT PROCUREMENT

The NAFTA and Mexico's federal procurement law, both implemented in 1994, gave U.S. suppliers guaranteed and growing access to the Mexican government procurement market, including the state–owned oil company, PEMEX, and the federal power utility, CFE. These are the two largest purchasing entities in the Mexican government. One recent success was Honeywell's Industrial Automation and Control sales to PEMEX. In 1995, Honeywell received two orders from PEMEX, for $15 and $5 million, to purchase process control systems. The $15 million order was the largest contract received to date by the controls division.

Under the NAFTA, Mexico was required to complete its list of services excluded from NAFTA coverage by July 1, 1995. Mexico did not submit its proposal until September 1995. This list includes a range of services that are an unacceptable broadening of Mexico's current exclusions. This issue is under active discussion by the NAFTA Working Group on Government Procurement.

INTELLECTUAL PROPERTY PROTECTION

As a member of the NAFTA and the WTO, Mexico has committed itself to implement and enforce a very high level of intellectual property rights protection. Notable recent achievements have been Mexico signing (but not yet ratifying) the UPOV Convention and the Patent Cooperation Treaty and reactivating its Interministerial Commission for the Protection of IPR. The later is a high-ranking interagency body that was expected to meet for the first time in more than two years in March 1996. In addition, the number of search and seizure actions undertaken by the PGR (Federal Attorney General's Office) in late 1995 and early 1996 has increased. Mexico and the United States have created a bilateral working group on IPR to discuss enforcement and other matters. The group held its first meeting in February 1996 and expects to meet on a regular basis throughout 1996.

Copyright Enforcement

In spite of this activity, piracy remains a major problem in Mexico, with U.S. industry loss estimates increasing. The U.S. recording industry reports 343 raids were conducted in 1995, seizing three million pirate cassettes, 169 duplicating machines and 10,000 legitimate CD's from shops which appeared to be using them in illegal rental. However, there were no convictions or sentences issued in 1995-96 against sound recording pirates. Raids to combat video piracy also increased in 1995 and early 1996. A number of prosecutions were pending in early 1996, but none have yet begun. Piracy of cable television signals and video games also continues to be a major problem.

Piracy of business software is also a continuing concern. Approximately 22 criminal copyright cases have been filed since 1992. As of early 1996, only two indictments have been made in these cases (some have been settled), and no trials, verdicts or sentences issued by the courts.

Copyright Legislation

The Government of Mexico has committed to introducing amendments to address a number of inadequacies in its copyright law. While work on legislation has been underway for more than two years, no draft legislation has been released, nor has Mexico's Copyright Office been able to commit to a timetable for doing so. Currently, several areas are not adequately covered, including a limit on the administrative actions that can be taken in copyright violation cases.

Patents and Trademarks

These issues are under the jurisdiction of the Mexican Institute of Industrial Property (IMPI), a free-standing body and formally the Patent and Trademark Office of the trade ministry, SECOFI. An increasing number of raids were conducted in 1995, and use of administrative remedies are increasingly useful to U.S. trademark owners.

Plant Varieties

The NAFTA required Mexico to comply with the substantive provisions of the International Convention for the Protection of New Varieties of Plants (UPOV) within two years of signature of the Agreement. The NAFTA also required Mexico to begin accepting, on January 1, 1994, applications from plant breeders for varieties in all plant genera, and to promptly grant protection. From 1991 through mid-1994, Mexico accepted approximately 200 plant patent applications from U.S. plant breeders, but has never acted on these applications. In August 1994, the Government of Mexico issued a decree removing plant varieties from the list of patentable subject matter and stated its intent to adopt a U.S.-style plant variety protection system no later than December 17, 1994. In 1995, Mexico joined the UPOV Convention. However, it has not yet adopted a plant protection system and has not acted on pending U.S. plant breeders applications.

Border Enforcement

NAFTA Article 1718 requires, by December 1995, Mexico to adopt procedures to allow U.S. rights holders to request that Mexican Customs authorities to suspend release of goods with counterfeit trademarks or pirated copyright goods. In December 1995, Mexico's Customs law was amended to grant its customs service authority to detain infringing products. The amendment and existing laws present numerous questions and potential problems. A major issue is that Mexican law does not recognize its Customs service as an authority competent to decide infringement issues. Intellectual property rights owners seeking to use Customs resources to prevent importation of infringing goods must obtain, from a competent authority, an order directing Customs to detain the merchandise. It is still not clear which agencies and/or courts are empowered to issue orders in each of the intellectual property areas. The law comes into effect on April 1, 1996. The United States be monitoring implementation closely to assure Mexico is providing effective border enforcement of intellectual property rights, as required by the NAFTA.

In December 1992, Mexico promulgated legislation for the film industry containing a troublesome provision against film dubbing. Although Mexican Trade officials gave oral indications that, in order to make the law consistent with NAFTA requirements, U.S. films would be exempted from this provision when Mexico promulgates the implementing regulations to the law, Mexico has taken no corrective action yet. U.S. industry is pursuing remedies available to it under Mexican law.

SERVICES BARRIERS

Land Transportation Services

NAFTA will eventually remove most operating and investment restrictions on land transportation services, thus facilitating the freer flow of goods and services across the border. Under the terms of the Agreement, U.S. and Mexican companies could begin applying for approval to begin providing cross–border truck and bus services into U.S. and Mexican border states on December 18, 1995. However, on that date the United States announced it would accept applications from Mexican motor carriers to operate international services between Mexico and the states of California, Arizona, New Mexico, and Texas, but that final processing of applications would be postponed until continuing concerns about commercial vehicle safety and security were addressed.

U.S. small package delivery firms are experiencing significant difficulties in receiving the national treatment that Mexico is obligated to provide them under NAFTA. Despite numerous promises and an offer of U.S. reciprocity, contingent on Mexico's granting national treatment, Mexico has not yet granted full operating authority to U.S. firms in this sector. This issue has been the subject of on–going bilateral consultations between the U.S. and Mexican Governments, including formal consultations at both the staff and ministerial level, pursuant to the dispute resolution procedures of Chapter 20 of the NAFTA.

Mexico also denies most favored nation treatment to U.S. trucking companies, which cannot obtain authorization allowing use of transportation terminals within 20 kilometers of the Mexican side of our common border. Mexico provides this capability to Canadian companies.

Telecommunications

Prior to NAFTA, Mexico had taken steps to reform its telecommunications sector, such as privatization of Telefonos de Mexico (Telmex), the national telephone company; liberalization of foreign investment rules in most telecommunications services; introduction of competition in some telecommunications service sectors; and restructuring the sector's regulatory entities. Mexico implemented a new telecommunications law codifying many of these changes in June 1995.

Mexico is scheduled to end Telmex's monopoly on the provision of basic long distance telecommunications services on January 1, 1997. The Secretariat for Communications and Transport published an interconnection plan describing the interconnection points for the Telmex network. Negotiations between Telmex and its eventual competitors are continuing on the terms of the interconnection. These should be finalized by April 30, 1996. Mexico allows 49% foreign investment in telecommunications networks and services, including basic telecommunications. An exception is provided in Mexico's new telecommunications law that allows consideration of a higher limit for foreign investment in cellular services

U.S. industry has complained about Mexico's delay in implementing its standards obligations under the Telecommunications Chapter of the North American Free Trade Agreement. Chapter 17 requires that Mexico have in place by January 1995 procedures to accept telecom test data. Mexico did so for test data relating to terminal attachment standards, but has not adopted procedures to accept test data relating to telecom product safety standards. Without both sets of accreditation procedures in place for both sets of data, U.S. suppliers cannot import their telecom equipment. In addition, Mexico's terminal attachment regime is not yet consistent with the telecom chapter requirements to limit equipment authorization criteria to that necessary to protect against network and user harm. In adopting standards and procedures to accept U.S. and Canadian terminal-attachment test data by January 1, 1995, Mexico adopted for the first time onerous, product-specific terminal attachment mandatory standards that go far beyond the minimalist regime required by the telecom chapter. The U.S. is working to resolve these problems.

NAFTA eliminated all investment and cross–border service restrictions in enhanced or value–added telecommunications services and private communications networks, most of them as of January 1, 1994, with the remainder, limited to enhanced packet switching services and videotext, eliminated on July 1, 1995. The principal remaining restriction in the telecommunications sector is the limitation to a 49 percent equity position for foreign investment in basic telecommunications services (basic telecommunications are excluded from most obligations in the NAFTA). However, the NAFTA contains language that would allow the U.S., Canada, and Mexico to negotiate an agreement on basic services in the future. Mexico has made an offer in the WTO basic telecommunications services negotiations to bind at less than currently permitted levels; the United States has requested that Mexico eliminate its foreign ownership restrictions and otherwise bind the status quo.

INVESTMENT BARRIERS

Ownership Reservations

Mexico maintains state monopolies in a variety of sectors -- including oil and gas exploration and development and basic petrochemicals -- thereby preventing U.S. private investment. In May 1995, the Mexican Government legalized the privatization of the national railroad system (FMN). This will allow up to 100 percent foreign control of 50-year concessions to operate portions of the railroad system, with a second 50-year period also available. As of the end of 1995, only general information had been provided, but the government of Mexico plans to provide specific regulations in April 1996 and to grant the first concession before the end of the year. Similarly, the new airport law passed in December 1995 and provides for airport concessions of 50-years to private investors, with foreign ownership limited to 49 percent in most cases (waivers are available in specific circumstances), with a second 50-year period also available. Regulations governing the concessions are currently being drafted and the first airport concessions are not likely to be granted before the end of 1996.

While Mexico changed its laws in 1995 to allow foreign investment in natural gas transportation, distribution and storage systems, Mexico continues to exclude U.S. investors from owning assets in other important sectors open to its own citizens, including oil and gasoline distribution and retailing, selected educational services, newspapers, and agricultural land. In 1995, natural gas distribution, transmission and storage was opened to the private sector, including foreign firms. The first private concessions are due to be bid in late March for the Mexicali, Baja California area. In all sectors Mexico maintains the right to review, and impose conditions upon, large acquisitions by U.S. investors.

These investment practices will be subject to special OECD review in 1996.