Export Quotas Hamper Auto Exports to Latin America

Mon, 09/01/2014 - 10:25

Brazil remains Mexico’s third largest export market after the US and Canada despite a 22.9% drop in exports between 2012 and 2013, indicative of a general declining trend seen over the last couple of years. This is in stark contrast to the 421% increase seen in exports to Brazil between 2007 and 2011. The drop in exports came about as the result of a 2012 agreement between Brazil and Mexico that capped auto exports to the South American giant under a threeyear quota system after the nation’s auto trade deficit with Mexico tripled to $1.55 billion in 2011.

The agreement was entered into in spite of the establishment in 2003 of ACE 55, the Economic Complementarity Agreement, which established rules for gradually deregulating automotive trade and reducing tariff payments between Mexico and Brazil in order to move the two Latin American giants closer to a bilateral free trade relationship.

ACE 55, which also includes Argentina, Paraguay, and Uruguay, was amended to set automotive export quotas for Mexico after an exponential rise in Mexican exports to Brazil and a drop in Brazil’s own market. Pursuant to the amended agreement, Mexico agreed to curb exports to Brazil over a three-year period. The quota restrictions apply to both countries with the intention that steps toward free trade will resume once again in 2015. As long as the quotas are in place, any exports over the quota levels will not be exempt from the countries’ bilateral preferential tariff rates. The agreement also saw Mexico vow to increase Latin American auto parts imports to 40% from the former level of 30%. Despite the negative impact on local exports to South America, decision-makers in Mexico accepted the short-term consequences of the agreement in the hope of enjoying free access to the Brazilian market in the longterm. OEMs producing cars in Mexico are standing ready to seize this new opportunity.

In accordance with the terms of the agreement, yearly quota levels have been applied, with OEMs allocated portions of the allowance based on criteria set by the Ministry of Economy. The details of the quota allowances for the period from March 2014 to March 2015 declared that export levels would be set at US$190 million, to be divided between Ford, Chrysler, GM, Honda, and Volkswagen. US$71.55 million of this amount was allocated for Nissan Mexicana and North Pole Star as new entrants. The remaining $118.4 million of the quota was to be allocated between Ford, Chrysler, GM, Honda, and Volkswagen. María Verónica Orendain de Los Santos, Director General of the Directorate of Heavy Industries and High Technology, explains how the quota levels were established, saying, “When designing the quota we incorporated the interests of the automotive industry. It is a complex process that ensures two things: that the quota is used to its full potential and that the local industry follows an ordered process in order to achieve that goal.” According to Orendain de los Santos, no OEMs receive preferential treatment when being designated a place within the quota. “The designation is based on how well the OEM used its space in the past. OEMs have to have an historic relationship with the agreement. New OEMs can enter it but they have to meet specific investment conditions,” explains Orendain.

Industry experts doubt whether a true free trade relationship will soon exist between Mexico and Brazil, bearing in mind Mexico’s close ties with the US market and Brazil’s protectionist approach to trade. Brazil has a complex relationship with the US, and Mexico is not a key-trading partner for the South American mammoth, meaning that the two countries’ commercial interests are not all that closely aligned. Nonetheless, with reports from Brazil of excess production in the over-inflated domestic automotive production sector, the stagnation of bilateral trade with Mexico is hardly a positive outcome. Brazil’s bet on demand from the Argentina market has fallen short, and when the quota restrictions with Mexico end next year, the country may well look more favorably on unfettered automotive trade with Mexico.