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backLATINtalk May, 2012

Global Insider: Mexico-Mercosur Auto Moves Send Mixed Signals

Under pressure from Brasilia, Mexico agreed last month to limit its automotive exports to Brazil, prompting Argentina to threaten to revoke its own trade agreement with Mexico in an effort to gain further concessions. In an email interview, Barbara Kotschwar, a research associate at the Peterson Institute for International Economics, discussed the Economic Complementation Agreement 55 (ACE 55), the 2002 automotive trade deal between Mexico and Mercosur, the trade bloc comprised of Argentina, Brazil, Paraguay and Uruguay.

WPR: What is the current state of trade between Mexico and Mercosur, particularly Brazil and Argentina, and what is the ACE 55 agreement meant to accomplish?

Barbara Kotschwar: The current state of trade between Mexico and Mercosur is volatile, marked by the recent renegotiation of the Mexico-Brazil ACE 55 and Argentina’s rhetoric threatening to pull out of its ACE 55 with Mexico. ACE 55 is part of a greater framework agreement initiative between Mexico and the Mercosur countries (ACE 54) that aims to enhance trade and economic ties between the two sides. From Mexico’s perspective, this was a step toward increasing economic relations with its main Latin American market.

Since ACE 55 went into effect in January 2003, trade between Mexico and Mercosur has more than doubled. Auto trade (Harmonized System code 87) has also doubled, but the dynamics of trade in this sector have changed -- and have driven the dynamic of overall trade. In addition to autos, the bulk of Mexico-Mercosur trade is made up of HS categories 85, 84 and 29, which include machinery, electronics and organic chemicals.

WPR: What prompted Brazil and Argentina's moves to renegotiate their arrangements with Mexico?

Kotschwar: Brazil and Argentina’s moves are motivated by a turnaround in the trade flows: While previously they had seen a surplus in trade with Mexico, over the past few years this has turned to a deficit as the Southern Cone countries have seen their currencies appreciate against the dollar.

With regard to auto trade, until 2008, Mexico had a trade deficit with Mercosur. This changed in recent years, and a deficit of $1.75 billion in the auto sector in 2003 turned into a surplus of $1.16 billion in 2010. Mexico’s auto sector exports to Argentina grew by 33 percent per year from 2003 to 2010, with auto exports increasing from $12 million to $943 million, while imports remained roughly the same, from $331 million in 2003 to $341 million in 2010. Auto-sector exports to Brazil grew even more dramatically, at 66 percent per year, while imports from Brazil fell by 5 percent per year. Uruguay -- also a signatory to ACE 55, but which has to date not threatened to abrogate the agreement -- has seen a similar dynamic: Mexico’s exports of auto sector goods have grown by 122 percent per year, while imports in that category from Uruguay have grown by only 4 percent by year.

Overall, auto-related exports have grown from making up 6 percent of Mexico’s exports to the Mercosur countries in 2003 to 44 percent in 2010 and have fallen from 35 percent to 24 percent of Mexico’s imports from Mercosur over that same period.

The renegotiation -- and threatened withdrawal -- from this agreement are worrying, particularly if this signifies a trend in regional trade policy. International automakers have already expressed concern at these changes in long-held agreements. One purpose of trade agreements -- even limited, sectoral-scope agreements such as ACE 55 -- is to provide security and predictability for the economic actors operating within the framework established by the agreement. If countries abandon treaties when the results of those treaties are, in the short-run, seen as unfavorable -- a trade deficit, for example -- then companies will no longer have the confidence in the rules established by these international contracts. Argentina is sending a warning signal to the markets. Mexico, by renegotiating with Brazil, has sent a mixed signal to the markets about its commitment to international economic terms of engagement.

WPR: To what degree do the automotive-trade negotiations reflect broader shifts in Latin American economic and investment flows?

Kotschwar: The auto sector is highly internationalized. The companies producing the autos that are traded between Argentina and Mexico include Fiat, Ford, General Motors, Mercedes, Peugeot, Renault, Toyota and Volkswagen. Thus the auto sector represents the globalized nature of Latin American economic flows. It is also, however, a highly protected industry in Mercosur, with relatively high tariffs, prohibitive local-content rules on outsiders -- and even against other Mercosur countries. This latest auto spat seems symptomatic of the region’s turning inward, and of the bifurcation in trade policy between the inward-looking Mercosur and the outward-looking, Pacific-oriented countries, such as Chile, Colombia and Peru.

Source: World Politics Review - GAI

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