MCALLEN, TEX. -- Mexico and Texas are at battle again, and while it is not exactly The Alamo Part II, the elements of nation-state conflict are evident: tragedy, misunderstanding, disinformation, rage, political posturing and economic deprivation.

At issue is not the value of the peso, not the evil of smuggled drugs or the burden of unwanted immigrants, but rather those most American contraptions and contrivances: automobiles and liability insurance.

Mexicans have a lot more of the former, which creates problems when they cross the Rio Grande and have accidents. For decades, this has been a source of low-level animosity. Every Texan from the Rio Grande Valley to El Paso seems to have a horror story about a friend of a friend whose car was totaled in an accident caused by an uninsured Mexican who crossed the bridge.

Alonzo Cavazos, a psychiatric counselor from Harlingen, had one of those stories -- one of documented, personal grief. On Christmas night 1985, his brother, sister-in-law and niece were killed and three children injured when a Mexican driver here slammed into their car at high speed. The alleged perpetrator escaped into Mexico, but his wallet, left at the scene, showed that he was from Mexico City.

In trying to win reparations for the three orphaned children, Cavazos discovered that Texas did not require liability insurance of nonresident drivers. This so infuriated him that he took the case to his representatives in the Texas legislature. The movement, which became known as the "Cavazos Revolution," was freighted with such emotion that a bill requiring anyone driving in Texas to have liability insurance was approved without dissent during the final days of this year's session.

The law applies to all non-Texans but seems pointed toward the southern border. Liability insurance is not required in Mexico, so few Mexicans have it. A year's coverage would cost $200, and a single trip would cost between $20 and $50. That is enough in economically depressed Mexico to change the daily travel and shopping habits of thousands of Mexicans in border cities such as Matamoros, Reynosa, Nuevo Laredo and Juarez, and even many from Monterrey, the country's second largest city, about 120 miles into the interior.

The reaction to the law, which took effect Sept. 1, has been more profound than expected, revealing the fragile balance of border relations.

Mexican officials called it discriminatory and, in the words of Juarez businessman Artemio Salazar, "humiliating and aggressive against Mexicans." Rich Mexican tourists -- frightened by hyperbolic stories in their newspapers about visitors being stopped, arrested and thrown in jail -- curtailed journeys across the border. Mexican shoppers, who provide many border merchants with 40 percent or more of their business, decided to make fewer trips.

In Juarez, a city of 1.2 million, this ad hoc boycott took on an official nature when the dominant Institutional Revolutionary Party (PRI) urged Mexican shoppers to stay home and stop spending in Texas.

The first sign that the normal flow of traffic from Mexico had changed came when Pope John Paul II visited San Antonio Sept. 14. While officials had predicted that as many as 100,000 Mexican pilgrims might make the trip north, only a few thousand did. The main reason, according to Roman Catholic officials in Mexico, was that bus companies and individual drivers did not want to buy the liability insurance.

By the end of September, statistics substantiated what had seemed obvious. Bridge crossings at Matamoros, Reynosa and Juarez were down nearly 8 percent from September 1986, and sales at many border shops had dropped as much as 25 percent. Merchants such as Larry Fallek, owner of Mike's Mens Shop here in the retail center of the lower Rio Grande Valley, were hurting.

"This hit us just when we were starting to pick up again after all the peso devaluations," Fallek said. "Our middle-class customers from Reynosa and Monterrey are deciding that it's just not worth it to pay for the liability insurance just to come here and buy maybe five Arrow shirts for $150. I understand the law's motives. Everyone sympathizes with Mr. Cavazos, but the economics outweigh the benefits. This doesn't make the streets any safer."

Fallek and other McAllen merchants have studied police statistics showing that only about 2.7 percent of accidents in border cities involve Mexican citizens. They hired lawyer Al Smith to determine whether they could challenge the law on grounds that only the federal government can make laws affecting foreign commerce.

"The standard here is the importance of the law to the state," Smith said. "In this case, the interest to the state is infinitesimal." He contended that the state has a law requiring that every auto-insurance policy offered to a Texas driver have a clause providing protection against being struck by an uninsured driver.

The new law's sponsors have noted that Arizona, another border state, has a similar law, but no adverse economic impact. The difference, Smith said, is that Arizona has only one border city with a population of more than 10,000, while Texas has six border cities more than five times as populous.

Even though the economy is suffering, public sentiment in Texas rests with Cavazos and the new law. Letter-to-the-editor columns in most daily newspapers here are full of vitriolic attacks against merchants such as Fallek and Mexican drivers. P.E. Kennedy of San Benito revealed that mood in a recent letter to the Valley Morning Star of Harlingen. He wrote:

"A lot of peso-hungry merchants are weeping because their cash registers are not ringing as much as before. The Texas victim is left without recompense for his wrecked cars and broken bones while the irresponsible Mexican driver merrily shouts 'Ole!' and blithely tangos back across the Rio Grande."