205. Memorandum From the Officer in Charge of Mexican Affairs (Hughes) to the Assistant Secretary of State for Inter-American Affairs (Holland)1

SUBJECT

  • Certain Mexican Economic Policies

Reference is made to your request of March 18 for a review of Mexican economic activities indicating a resurgence of isolationism and nationalism. It is understood that you propose to consider the desirability of pointing out to Mexican officials that the continuation of this development may affect possible future United States assistance to Mexico.

Inordinate nationalism appears to be innate in the Mexican national character and to be the basic cause of many of Mexico’s [Page 651]economic problems. It is evident in Mexico’s attitude toward foreign investments and in its trade policies. This memorandum will be concerned primarily with these two aspects of the problem.

Investment Policy

The official position of the present Mexican Government is that Mexico must encourage foreign capital to invest in the country because such investments are necessary to its economic development. Large segments of business and Government welcome any and all investors who add to domestic production, increase employment, and contribute to the Government’s income through taxation. A number of incentives providing a favorable climate for foreign investors appear to outweigh the disadvantages of investment in Mexico, and new enterprises financed from abroad are constantly being established there.

Another large group, representing the more nationalistic elements of business and Government, insist that new business financed with foreign funds should not be permitted to compete with any established enterprises. This group would restrict foreign capital to the less lucrative fields of investment which are not attractive to domestic capital. A leading Government proponent of this policy is the present Minister of Economy,2 although recently he has appeared to be less active in promoting it.

For the past fifteen or more years, the latter group has been spearheaded by the Cámara Nacional de la Industria de Transformación, an organization of approximately 8000 members, largely small Mexican industrialists. The Chamber has campaigned against foreign branch plants and undertakings where foreign capital is the dominating factor. With increasing competition, the organization is becoming more articulate in its demands upon the Government to restrict foreign manufacturing interests, and its newly elected President is reported to have made numerous strong statements in favor of the strict regulation of foreign investment into areas where Mexican enterprise is not already active. He has used a new term in this connection, namely, that foreign capital investment should be restricted to a “complementary” role.

That term was also used recently by the Minister of Finance who has been considered, of all members of the present Mexican Administration, to have understood the benefits which a favorable climate for foreign investment can bring to Mexico. Included in a statement to the press about the Administration’s policy on industrialization, credits and investment, was the remark that foreign direct investment should be accepted when it “complements” and does not [Page 652]eliminate national investment, and when it helps to create new employment opportunities and augments national income. Whether this represents a fundamental change in the Minister’s attitude, or a verbal concession to the pressure of the Chamber of Manufacturing Industries, is not known.

The formation of a new organization The Asociacion de Empresarios Mexicanos “to protect Mexican enterprises against the encroachment of foreign capital” has recently been reported. Two persons known for their strong nationalistic tendencies, O. L. Longoria, Jr., and Antonio Ruiz Galindo, are co-presidents. The objective of the organization is to induce the Government to prohibit the investment of foreign capital whenever it means displacement of domestic capital and to permit the investment of foreign capital only when it creates new channels of business by establishing new industries or by granting credits.

You will recall that you have sent a letter to Ambassador White suggesting that he consider discussing with President Ruiz Cortines and possibly with the Minister of Finance the possible effect upon future American investments in Mexico of nationalistic movements of that kind.

Trade Policy

Turning to the subject of nationalism in Mexico’s trade policies, there is a problem of serious concern to American exporters who, apparently in increasing numbers, turn to the Departments of State and Commerce for relief. In view of the nature of the problem, little comfort can be given them that its solution is in prospect.

Mexico’s economy has been that of a supplier of raw materials and an importer of finished goods. It is the present policy of the Government to change that situation as rapidly as possible to provide the country with a more balanced economy based upon a completely developed industry which will convert Mexico’s raw materials into processed and manufactured goods to meet domestic demands. In carrying out its objective, the Government looks also to the conservation of its foreign exchange balances and to the diversification of foreign trade to lessen dependence upon the United States as a source of imports.

To implement its policy, Mexico relies primarily upon import tariffs and direct import controls. Mexico of course has full and sovereign right to control imports in the manner it considers to be in the national interest. Moreover, its need to curb imports for balance of payments reasons must be recognized. Nevertheless, import tariffs and quantitative restrictions are used to protect domestic industries and to promote industrial development, they are manipulated at the discretion of authorities as a means of curtailing or prohibiting the [Page 653]importation of selected products, and they are not always applied as a considered policy of industrialization, but at times have been motivated by political pressure or nationalistic urging. It is this aspect of the problem which is of particular concern to us because it limits the operation of free competitive enterprise in Mexico and reduces or destroys important Mexican markets for United States products.

Mexico has granted some degree of protection through tariffs or quantitative restrictions, to almost every manufacturing industry in Mexico, regardless of whether the local product is adequate in quantity, quality and price, to meet domestic demand. A few days ago, this office received information (not yet confirmed by a report from the Embassy) that Diesel Nacional, S. A., a Fiat subsidiary in Mexico, would begin producing 10 to 60 horsepower gasoline and diesel motors in about two months, and that it had asked the Mexican Ministry of Economy to prohibit the importation of machinery utilizing motors of those sizes after June 1, 1955. According to the information received, this would affect United States manufacturers of agricultural, industrial and mining machinery who reportedly ship around $100 million of this type of machinery to Mexico annually. Another report concerned the prohibition of imports of paper cartons for the packaging of wet packed frozen shrimp although, according to the information received, the Mexican paper industry is not yet able to produce the proper packaging for one of Mexico’s most important export products. Electric concrete vibrators, equipment essential in construction work and not manufactured in Mexico, have reportedly been subjected to import licensing. An American manufacturer of wood cased pencils, whose Mexican market was nurtured carefully for a number of years until it had reached substantial proportions, has been forced to concede its loss because his Mexican distributors have been unable to obtain import licenses. Import permits for linoleum and felt base rugs have been refused, although these goods are not made in Mexico, on the ground they are not essential to the economic welfare of Mexico.

The response which the Departments of State and Commerce can make to protest against such treatment by American businessmen is very limited. We can only refer to Mexico’s policy of protecting domestic industry and to the necessity for restricting, for balance of payments reasons, imports of items which may be considered by Mexico to be in the non-essential or luxury category under present circumstances because they are, or can be, manufactured in Mexico. We refer to the absence of a contractual basis for protesting these restrictions through diplomatic channels and, by way of a constructive proposal, suggest that Mexican importers and users of the product in question take up the problem directly with Mexican [Page 654]authorities. This type of response, which represents the facts of the situation, is of course most unsatisfactory to the American businessmen involved.

As you know, we had a trade agreement with Mexico from January 30, 1943 to December 31, 1950, when it was terminated by mutual consent.3 Mexico was restive under the agreement and in the later years of its existence sought ways of circumventing it. For many months, strong efforts were made by us to retain the agreement, even to the point of our agreeing to renegotiate it. However, Mexico was willing to negotiate only upon its own terms—meaning that Mexico expected full-scale concessions by the United States and in return would consider no concessions of value to us. In fairness to our commitments to other nations in the GATT, in which Mexico has consistently refused to consider membership, we had to work out the termination arrangement. There have been indications since then that Mexico would entertain a proposal to consider trade-agreement negotiations with the United States, but only to the extent that would clearly be in its own interests, and not within the framework of the GATT.

Up to the present time, the Department has agreed with the Embassy, and the Department of Commerce has concurred, that any representations to Mexican authorities, even of an informal nature, looking to the amelioration of these import restrictions would be useless, or even counter-productive. The Mexican response to such representations would be, as it always has been, that balance of payments and domestic industry must be protected. Moreover, Mexicans know they are in no danger of losing the privileges of most-favored-nation treatment for their products in the United States market as long as present United States commercial policy prevails. Therefore, they would be more than ever firm in refusing to listen to United States requests for reconsideration of restrictive trade actions.

Contrasting our reticence in approaching the Mexican Government on actions it takes affecting American trade is the procedure adopted by Mexicans, supported by diplomatic representations, whenever Mexican interests seem likely to be affected by projected United States trade controls. There are several outstanding cases in point. A year ago, when consideration was being given to increasing the United States import duty on lead and zinc, the Mexicans made strong diplomatic representations and there was a veritable campaign in the newspapers of Mexico concerning the effect upon United States-Mexican relations of such action. Strong representations also were made with respect to certain provisions of the Agricultural Act [Page 655]of 1954 when it appeared they might result in the imposition of restrictions upon imports into the United States of tomatoes produced in Mexico. Currently, the Tariff Commission’s escape clause hearings on plywood have been the subject of a memorandum from the Ambassador and visits to the Department of a delegation representing the Mexican plywood industry.

In a somewhat different category is the organized Mexican campaign for an increased sugar quota. This has involved not only diplomatic representations and governmental and industry contacts with every United States Government official having any possible connection with sugar legislation, but United States manufacturers supplying machinery and equipment to the Mexican sugar industry have been asked to communicate with their congressional representatives to urge consideration of an enlarged Mexican quota. Several months ago, the Mexican Government insistently sought to purchase a half million tons of corn for reserve stocks. This was the subject of numerous diplomatic communications as well as conferences with State, FOA and Agriculture, and every effort was made to meet the Mexican request within the limitations imposed by pertinent legislation. However, the Mexicans refused to consider buying the corn at the market price, in accordance with United States requirements. The problem ceased to exist when a bumper corn crop, for which there were inadequate storage facilities, caused them to stop pressing for the United States corn. The Mexican Ambassador has also made strong representations with regard to increased quotas for oats and peanuts. In the latter case, he expressed disappointment when the enlarged quota, of which Mexico would supply a large part, carried with it a two-cent duty increase.

American investors and exporters will become increasingly restive under the treatment accorded them in Mexico as a result of intensifying nationalistic demands by certain elements for restrictions on foreign capital and goods, and I believe the Department would be well advised to let the Mexican Government know how important this problem has become.

As I recommended in my memorandum of March 16,4 I suggest you seek an early opportunity to discuss frankly with Ambassador Tello the unfortunate repercussions likely to result if it continues unchecked. The Ambassador has been able to obtain information for me that our Embassy could not obtain from Mexican sources, and he helped straighten out a problem concerning the military air transit agreement which seemed impossible of solution. I think we should seek his help oftener and his intervention in this one might give some small measure of success, whereas representations by our [Page 656]people in Mexico, unsupported by possible counter measures, seem foredoomed to failure.

  1. Source: Department of State, Central Files, 812.00/3–2555. Confidential. Drafted by Elizabeth McGrory of the Office of Middle American Affairs (MID). Transmitted to Holland under cover of a memorandum dated March 25.
  2. Gilberto Loyo.
  3. For documentation on the termination of the trade agreement, see Foreign Relations, 1950, vol. ii, pp. 939 ff.
  4. Not found in Department of State files.