Changes on imports and local production rules are expected in coming months following more negotiations over Brazil’s long-established auto accord with Mexico.
From 2000 to 2011, Brazil exported 1.5m vehicles to Mexico and imported 500,000, favouring the country by some US$13bn in trade surplus. Yet important changes have happened along the way.
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At first, Mexico had a strong currency versus the real, which had just devalued severely then. At the time, a quota regime was established, too. Brazil made use of the full quota to export while the Mexicans were not price competitive here, nor had suitable products.
The currency exchange factor has considerably changed this scenario. By 2011 the deficit for Brazil amounted to some $1.5bn. With the US dollar at R$1.70 and the Mexican peso devaluation against the dollar, Brazilian exports free-fell and imports grew.
Fresh announcements of new manufacturing plants and investments in Mexico (Mazda, for instance) points to this outlook being unlikely to change quickly. The Brazilian market keeps expanding and internal costs are on the rise.
While this country wishes to balance trade with Mexico, the latter rather prefers to leave things as they are. At the first bilateral meeting with officials there were no changes. Brazil has decided to play tough and the next meeting early in March is expected to be more productive for both sides.
The current free trade is for cars and light commercials only, with no duty tax and IPI-free (tax on manufactured goods here or added value tax in other countries). The tax exemption is applicable for makes produced in Mexico and Brazil only, outside the Mercosur block.
Brazilian lorries and buses must be taxed (duty) when imported into Mexico. Since they are worth about 10 times as much as a compact car, a zero tax for heavy commercials would improve the trade relationship favouring Brazil. This is something that might enter the negotiation.
Minimum local content in Mexico is 30%, 65% in Brazil. The calculation formulae differ, yet they nearly match in the end. Local content of brands produced here for years passes 85% and, again, the exchange factor distorts costs. The harmonisation of these calculations is also on the negotiation agenda.
The Brazil-Mexico negotiation will include Mercosur countries as well and may drag on for weeks or months. An accord will eventually come and the most likely outcome is a resumption of a quota scheme for both sides much like that in place between 2000 and 2006.
