Automotive manufacturing operations in Mexico have expanded in Mexico due to investor enthusiasm directed at the country.
In addition to the low costs, high productivity rate, skilled labor, and geographical proximity, Mexico has many free trade agreements with dozens of countries, making Mexican automotive product more price competitive throughout the world.
One agreement that is specifically geared to the automotive industry is the Economic Complementation Agreement No. 55, known as ACE 55. ACE 55 was negotiated between Mexico and the countries of MERCOSUR (Argentina, Brazil, Paraguay and Uruguay) in 2002 to reduce tariffs on vehicles and auto parts in an effort to assist trade in these goods between the five countries. ACE 55 is part of a greater framework agreement initiative between Mexico and the MERCOSUR countries called that aims to improve trade and economic ties between all involved parties.
From the perspective of Mexico, the automotive industry agreement represents a leap in the direction of enhancing trade relations with its major Latin American counterparts.
Since January 2003—when ACE 55 went into effect—trade between Mexico and MERCOSUR has more than doubled. Automotive trade between these Latin American prospered, and the arrangement was apposite for Brazil as it accumulated trade excess in cars with Mexico. The deluge began to turn as Brazil’s sturdy currency and the comparatively high cost of domestic manufacturing helped make Mexican cars cheaper relative to their locally made counterparts. As a result Mexico agreed to a ceiling on the number of automobiles that it exports to Brazil.
While trade in all areas between Mexico and MERCOSUR countries is growing, including in the areas of machinery, electronics and organic chemicals, the dynamic tendencies of the automotive sector have catalyzed the dynamic of overall trade. Until 2008, Mexico had a trade deficit with MERCOSUR. This has changed in recent years. The red ink in trade in the auto sector had transformed into a surplus of $1.16 billion by 2010. Furthermore, Mexico’s trade in automobiles and light vehicles with Argentina accelerated greatly, increasing by over $930 million, while imports remained generally the same. Auto sector exports to Brazil grew even more, by about 66% per year and imports from Brazil fell by 5% per year. Uruguay has seen similar activity; Mexico’s exports of automotive sector goods have grown by 122% per year, while imports from Uruguay have only grown at a rate of 4% per year. In total, auto exports from Mexico have grown from making up 6% of the country’s total exports in 2003 to 44% in 2010. Mexico’s imports from MERCOSUR have fallen from 35% to 24% of Mexico’s total imports over the same period.
2011 particularly showed the Mexican automotive exports to Brazil jump 70%. As a result, Brazil threatened to abandon the ACE 55 agreement, if Mexico didn’t assent to adhere to forced reductions on car sales to the country. These reductions, implemented in March 2012, put artificial curbs on imports of Mexican-made automobiles, contrary to the long-standing pact governing vehicle trade between Mexico and MERCOSUR. When compared to the car sales in 2011, the restraints that have been put in place are sizeable. The move could create problems for Mexico, and in general reflects negatively on the spirit of free trade between the MERCOSUR countries and itself.
Mexico agreed to limit the value of its automobile exports to Brazil to $1.45 billion (2012), $1.56 billion (2013), and $1.64 billion in 2014. The adjustments to the original agreement also contain terms aimed at escalating the amount of auto parts in Mexico’s vehicle manufacturing industry supplies from Latin America. The Mexican government stated that the export allocations would be in effect for a three year period, after which they will be removed.
Brazil’s president, Dilma Rousseff, is struggling to economic policy aimed maintaining Brazilian GDP growth, while the country’s currency continues to appreciate. Protectionist actions taken by Brazil may be done so at a detriment to the country’s status among trade and investment partners in the future. Renegotiation of the ACE 55 agreement is worrisome for many prospective partners.
Mexico, by agreeing to Brazil’s terms, has sent a mixed signal to the markets about its commitment to international economic rules of engagement.