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LATIN AMERICA: "Impact of Proposed Mexican Tax Reforms on Maquiladoras and Their Foreign Principals"

LATIN AMERICA: "Impact of Proposed Mexican Tax Reforms on Maquiladoras and Their Foreign Principals" article.

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back to index backLATINtalk January,  2017


How Trump’s Trade Policies Could Disrupt Mexico’s Growing Auto Sector

In 2015, Mexico assembled more than 3.5 million vehicles, making it the world’s seventh-largest manufacturer. But global automotive giants have even bigger plans in store: According to AMIA, Mexico’s automotive industry association, and ProMexico, its trade promotion agency, Mexico is on track to assemble four million units (including light and heavy vehicles) by 2018 and five million units by 2020. All of the big American, Asian and European global automotive groups now have a presence in Mexico, including Hyundai, Volkswagen, Renault, Nissan, Toyota, Mazda and Honda.

Foreign investors have pumped billions of dollars into the Mexican automotive sector in recent years due to its proximity to the United States, and the fact that Mexico maintains free trade agreements not only with the United States and Canada (via the North American Free Trade Agreement, or NAFTA), but also with the European Union and the nations of Central America and Mercosur, the South American trade pact. In addition, Mexico has a relatively low cost for skilled labor, which compensates for the logistical costs involved in moving components and assembled vehicles in and out of the country.

Most vehicles assembled in Mexico are shipped to the United States, for which Mexico is the third-largest supplier of imported cars, exceeded only by Germany and Japan, according to the office of the U.S. Trade Representative. Over the first 10 months of 2016, 86.1% of Mexico’s automotive exports were shipped to its NAFTA trading partners, according to AMIA. But with the inauguration of Donald Trump, who made building a wall between the United States and Mexico a key part of his presidential campaign, could Mexico’s automotive sector be at risk? The question seems inevitable: Could Mexico wind up losing its competitive advantage in the sector because of U.S. protectionist measures?

A Wide Range of Trade Pacts

On the one hand, some automotive industry experts believe that Mexico’s dependence on selling vehicles to the U.S. market will continue despite threats of protectionism, and even expand in the coming years. A few months ago, Ford announced that it would move all of its production of small models from Michigan to Mexico. That decision was harshly criticized by Trump, who threatened to impose U.S. import tariffs of 35% on cars produced in Mexico. That sort of tariff would be imposed on the entire automotive sector, and it could have an enormous impact on the United States economy,” Mark Fields, Ford’s chief executive, said after a speech at the AutoMobility conference in Los Angeles in November, according to The Wall Street Journal.

Brad McBride, a professor at the Mexico City-based Mexico Autonomous Institute of Technology (ITAM), notes that if Trump follows through on his proposals, the impact on Mexico’s automotive industry will be significant. As a result of a tariff on the importation of autos and components, many producers would relocate a large share of the products that they export to the Southeast — the Carolinas, Alabama, Tennessee and Georgia. This region would enjoy a big comparative cost advantage if Mexico imposes tariff barriers in retaliation for the U.S. tariffs, he adds.

According to Miguel Leon, dean of operations at IPADE, the business school at Pan-American University in Mexico City, the imposition of high tariffs on Mexican exports could lead to the cancelation of automotive shipments to the U.S. by American companies and consequently, to a shortage of supply in certain products on the American market.” Leon says that if such measures were to be carried out, American manufacturers would have two options: Either jointly absorb the cost of the new tariff along with their distributors in the U.S., or redirect their global production strategy, taking advantage of the free trade agreements that Mexico has signed with numerous other countries around the world. As of January 2017, Mexico has a network of 10 free-trade agreements with 45 different countries; 32 reciprocal investment promotion and protection agreements (RIPPAs) with 33 countries; and nine trade agreements with the framework of the Latin American Integration Association (ALADI). Mexico also has signed up for membership in the controversial 11-nation Trans-Pacific Partnership (TPP), but if the Trump administration opts to withdraw from the pact, the resulting absence of the U.S. would effectively lead to the TPP’s demise, trade analysts say.

To read entire article, please click here.

Source: Knowledge @ Wharton - GAI





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