Alfidi Capital Pays Attention to Mexico and Silicon Valley

We often hear about the special relationship between the US and Great Britain.  It's cemented by language, culture, common law, and a long absence of conflict.  There may be some other special relationships out there that some of us have ignored.  I found out about another special relationship last week when government and business entities from the US and Mexico met in Silicon Valley to promote bilateral trade.

The City of San Jose's Office of Economic Development let us know just how lucrative the trade relationship is for California.  Mexico's GDP is growing this year and it's California's largest export market.  That's a whole lot of refried beans, pardner.  I didn't know that the federal government of Mexico had a trade promotion organization named ProMexico.  The Mexican Consulate in San Francisco informed us that ProMexico is their equivalent of the US Commercial Service.  They said the US is Mexico's #1 FDI source, and I tried to confirm this in OECD's Statistics with no luck.  "Made in Mexico" products have the highest percentage of US content of any domestically sourced products in the world; in other words, Mexicans put more US subcomponents into their goods than any other country.  The country has not done well in developing lower-tier suppliers and must rely on a high percentage of US-made components.  The regional breakdown of Mexico's economy is important.  Northern Mexico has generally higher purchasing power and more industrialization than southern Mexico.  This is clearly a good opportunity for US suppliers to continue to target maquiladoras in northern Mexico.

The Consulate said that US retirees in Mexico are mostly an untapped market for US-branded services.  Yeah, I'm pretty sure the makers of medical alert devices and motorized scooters are salivating at the chance to sell down there.  I also learned that Mexican startups rise seed-round money in the US because there's very little to find in Mexico.  It's hard for startups to qualify for business loans from Mexican banks because their interest rates are high.  It sounds like Mexican startups take CustDev seriously if they seek early adopters in the US to obtain market data.

The US Commercial Service introduced their Silicon Valley Export Assistance Center, which I didn't know existed.  See, I learn stuff too.  US companies doing business in Mexico can easily launch into other Latin American countries.  The Commercial Service can customize trade missions for a single company due to their extensive contacts in-country, starting with their Mexico country page.

Please note that the SBA also connects with the Silicon Valley Export Assistance Center.  Our government really does work well when the business sector is the client.  Uncle Sam protects intellectual property rights at StopFakes, safeguards critical technologies at the Bureau of Industry and Security (BIS), sponsors emerging markets through the US Trade and Development Agency, and finances trade at the Ex-Im Bank.  Our taxes pay for these services and they're pretty effective, so businesses would be crazy not to leverage them to the max.  Check out the SBA's export loan programs and OPIC's investment services (like their Expanding Horizons workshops).

The San Jose Silicon Valley Chamber of Commerce presented the local region's perspective.  I don't come down often enough from San Francisco to use their services but I'm intrigued by their program for reintegrating military veterans into civilian life.  The Joint Venture Index of Silicon Valley tracks this region's economic health and sponsors public-private solutions.  I recall that San Francisco once had a public-private partnership called the Private Industry Council but it was merged into a City office during Gavin Newsom's administration.  The Silicon Valley Leadership Group assembles the region's leading employers to speak in one voice on public policy.  I didn't quite see the direct connections to trade with Mexico but the region certainly has the right policy players in place.  I also learned that "embeddedness quotient" describes employee happiness.  Who knew?  I didn't.

Mexico and the US have a lot going on.  That's pretty special.

The Limerick of Finance for 04/22/12

When Wal-Mart went to Mexico
It paid for permission to grow
But a bribe isn't smart
If the check's from Wal-Mart
"Hasta la vista, amigo!"

Free Trade For Cuba

The US economic embargo against Cuba is half a century old.  It has utterly failed to accomplish its stated purpose of regime change in Cuba.  It is prone to leakage because the US does not enforce it with a naval task force that can interdict seaborne commerce.  The pain it inflicts on ordinary Cubans has spurred some to seek refuge in the United States, adding to our country's immigration burden.  This embargo is even outside the norms of the trade relations the US had with other Communist bloc countries during the Cold War.  The US allowed American companies to buy Soviet oil and sell the Russkies some Midwestern wheat.  Trade relations gave the US an additional lever it could pull to influence the Soviet Union's internal human rights policies.

Let's try a radical, outside-the-box solution to our Cuba problem.  The US should lift the embargo and negotiate a free trade agreement with Cuba.  The immediate effect of such a deal would be a rush of American companies looking to offshore low-wage production to Cuba.  The follow-on effect would be newly prosperous Cuban workers looking to spend money on material goodies.  Access to modern goods helped ordinary Soviet citizens see what they were missing in a system of central planning.  A little middle class spending in Cuba would go a long way toward breaking Communism's psychological grip on the island.

The US can declare victory in the last Cold War front in the Western Hemisphere.  The Castro boys have one foot in the grave anyway.  Opening up trade relations now would undermine any plans they may have for a familial transfer of power in the style of North Korea's Kim dynasty.  The Cuban-American lobby may not like this approach but they are much less influential now than in the 1960s.  If Richard Nixon could go to China, then modern American leaders can go to Cuba.  Economic influence is an element of national power.  We should use it to invite Cuba into the capitalist world.

Nota bene:  I have never smoked a Havana cigar.

Which Way Out Of Recession Is Up To Bond Market

Which way do we go from here?  Read on to find out. 

The good news is that the number of idle container ships is at its lowest level since just before the recession hit.  That's a global figure indicating a healthy world economy with plenty of consumer spending pushing orders for finished goods.  The U.S. shares in the good news with steadily rising factory orders and NAFTA cross-border trade way up in February. 

The bad news is that diesel prices keep climbing.  That's not good for trucking within NAFTA if carriers can't pass on fuel surcharges (yeah, YRCW, I mean you).  More disturbing is that the U.S. wants to play chicken with the international bond market by seeing how long it can delay raising its debt limit.  One of these days, Asian central banks are going to call that bluff.  I won't go long Treasuries again until after that momentous occasion. 

The good news up front is due to ultra-low interest rates and more consumer spending enabled by foreclosure delays.  Neither of those forces are sustainable after the bond market takes a hike from Treasury purchases. 

Full disclosure:  Still no position in YRCW. 

Road To Mexico Opens Wide

The prospect of a new U.S.-Mexico trucking accord is nothing new to loyal followers of Alfidi Capital (all three of them).  The preliminary agreement is ready, sort of.  U.S. negotiators need to iron out a few details that can irk some members of Congress' transportation-related committees.  The final deal will be ready for legislation once the relevant industry players have made appropriate campaign contributions. 

Business groups are celebrating too early.  Union labor can still sabotage the deal by making impossible demands that may find an audience in Washington.  The Teamsters in particular are up in arms at the possibility that Mexican drivers will work longer and harder for a fair wage than their union brethren ever will.  They didn't get the message that trucking firms hurt by the high cost of fuel need any lever they can find to stay competitive.  Teamsters are better off blaming their woes on Middle Eastern unrest than on cross-border competition closer to home. 

Full disclosure:  No position in trucking stocks at this time. 

Cheers To Cross-Border Trucking

The arrival of NAFTA heralded a new era of prosperity for North America.  The years since this landmark free trade agreement have allowed economic links on this continent to deepen and mature, especially in the transportation sector. 

The U.S. is making Mexico an offer it can hardly refuse.  A new trucking agreement will make it easier for Mexican trucking firms to operate in the U.S.  This move is long overdue.  Canadian truckers already enjoy such an arrangement, so extending the terms to Mexico furthers the harmonization of transportation rules across the continent.  Removing impediments to cross-border shipping will make it easier for shippers to forecast their logistics costs and track deliveries.

The details of the official proposed framework should allay any fears that Mexican truckers will pose traffic hazards or undercut U.S. truckers' margins.  The agreement will require Mexican firms to meet U.S. standards in safety and environmental impacts.  Inviting Mexican firms to compete on those terms will raise the quality of long-haul delivery service. 

Opposition to the proposed framework is already stirring.  Protected groups always fear innovation and competition when their sinecures are threatened.  They should examine the hard facts that harmonization of cross-border trade through NAFTA has contributed substantially to economic growth for all three participating nations.

Extending U.S. trucking standards to Mexican truckers can potentially provide opportunities for U.S. truckers.  YRC Worldwide's logistics division could see growth in the freight-forwarding traffic it handles if Mexican truckers are allowed to backhaul goods from the U.S.  Arkansas Best may benefit if its partnership with a Mexican carrier gives it more transshipment options across the border. 

The free flow of trucking across the U.S.-Mexico border will be a boon for trade once the final details of this program are confirmed by both sides.  A permanent agreement should require Mexico to lift any tariffs it imposed in retaliation for the U.S.'s elimination of the earlier pilot program.  That in itself will be a welcome development for American exporters. 

Full disclosure:  No positions in YRCW, ABFS, or any Mexican trucking firms.