After 45 days of talks, Brazil and Mexico finally reached a consensus on reviewing their free trade accord on vehicles.
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Mexico agreed to a limit, by value, on the number of cars and light commercials exported to Brazil until 2015 while Brazil abandoned, for the time being, its long-desired inclusion of lorries and buses, originally scheduled for 2020.
In the first year, each country will have the right to export US$1.45bn worth of motor vehicles to the other; $1.56bn in the second year and $1.64bn in the third, all duty free.
In practical terms, this is effectively a quota of about 100,000 units in the first 12 months, 108,000 in 2013/14 and 113,000 in 2014/15. From then on, free trade will resume.
Mexico has also agreed to raise the minimum local content in cars it exports from 30% now to 35% for 2013-2016, and to 40% by 2017. Brazil easily fulfils this local content goal but, at 40%, Mexican automakers will have a hard time keeping their prices competitive.
Thirty percent local content in Mexico corresponds to 60% under Mercosur rules. The reason for the difference is the Mexicans use direct calculation to proportion the content of local parts and those from other regions, considering cost and labour only. In the Mercosur region, other indirect costs are included (even for marketing).
When trade under this bi-national accord started in 2002, Mexico imposed unit-based quotas for Brazilian cars exported in the first four years. After all, with the devalued real currency of the time, they feared a market invasion. It was good business for Brazil, though, which exported 1.5m units in 10 years, and also for Mexican car buyers who could get new compact cars at low prices.
Things began to change when European and Japanese products began to be freely imported into Mexico and the appreciation of the real destroyed the competiveness of Brazilian exports. The Mexican peso devalued against the US dollar, too, and the scenario reversed over the last three years.
The forecast for 2012 was over 300,000 Mexican models entering Brazil both duty free and unaffected by the new additional federal IPI tax (on manufactured goods like VAT or GST; the acronym in Portuguese is IVA). Brazilian shipments to Mexico, however, would not have reached half this volume since its cars are competitive only if the dollar is worth over BRL2.50 (BRL1.81 currently).
All this means is Nissan, at first, is most severely hit because its imports from Mexico would account for more than two thirds of sales in 2012. Yet, if it wishes to import above quota, that can be done by paying the added IPI tax and full duty.
In 2014, the Japanese brand (having foreseen what would happen if it did nothing) will have its first, company-owned manufacturing plant in Resende (RJ). It currently shares the Renault facilities in São José dos Pinhais (PR).
Chrysler produces cars in Mexico, and pays no Brazilian import duty, but will be exempted from the extra IPI only if it establishes manufacturing operations in Brazil as well.
By early April, a timeline for the new Brazilian automotive regime should be announced, the outlook will become more clear [perhaps enabling BMW to finalise plans for its Brazilian plant – ed] and the latest plan should complement the new transitionary rules now finally agreed with Mexico.
Brasil and Mexico to revisit trade accord
