UPS's Mexico Problem Shows NAFTA Limits

THE world's largest parcel shipper will abandon part of its Mexican business next week. The decision, which miffed Mexican officials, has exposed the limits of the North American Free Trade Agreement (NAFTA) in rectifying a nontariff trade barrier.

Atlanta-based United Parcel Service will no longer offer shipments by land from the United States to Mexico, where the company has invested $120 million since 1991. Spokeswoman Gina Ellrich calls the land service ''costly and inefficient.'' UPS will continue to offer two categories of air service priced at three to four times the land rate.

The company won't say, but Mexican officials believe the land portion of UPS's Mexico business is small. The 1,400 employees of UPS de Mexico deliver 11,000 parcels a day, compared with 75,000 a day by Estafeta Mexicana, the largest domestic parcel service. ''In Mexico today, competition is welcome,'' says Antonio Prego, Estafeta's operations director in Mexico City.

But UPS had complained ever since NAFTA took effect in January 1994. The company charged that Mexico was not allowing it to move parcels between Mexican cities using 18-wheel tractor trailers, as Mexican shippers are permitted to do and as the trade treaty allows.

After 18 months of fruitless negotiation, the office of the US trade representative resorted to the enforcement provisions in NAFTA. That has been necessary several times with Canada, America's largest trading partner, but never with Mexico, the No. 3 trading partner.

In response, the Mexican government sent to Washington last week a draft of new regulations that address the tractor-trailer discrepancy.

A US trade official says they represent ''significant movement'' favorable to the US in the Mexican position.

''It's very easy to find the good stuff'' in the regulations, he adds. But US officials will comb them for potholes before concluding that Mexico has truly leveled the playing field on trucks. If not, the US can seek binding arbitration.

On truck size, ''if national treatment is what they're asking, national treatment is what they'll get,'' a Mexican official says.

Whatever happens, UPS still will cease land shipments, Ms. Ellrich says. She explains that an even greater problem has been Mexican Customs, which insists on inspecting every package.

UPS does not face the same expensive delays at the Canadian border. Nor does it for packages shipped into Mexico City by air, she adds.

One reason is the direct computer links to customs that the much older air service has established. But UPS does not intend to make a similar investment at the US-Mexico border, Ellrich says, even though the customs snag is ''the key issue'' behind dropping the land service.

One Mexican official familiar with the situation expresses ''total surprise'' at learning through the media of the shipping giant's decision to drop its land service. ''The doors have always been open'' to UPS to raise issues, he says.

Yet now UPS is bringing up the question of customs inspections. His government cannot easily address a ''moving target'' of complaints, he says, calling the UPS decision ''peculiar.''