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Latin America's Auto Giants Strive to Secure Markets

7 MINS READNov 12, 2018 | 11:00 GMT
New Peugeot and Citroen cars await shipment on the pier in Rio de Janeiro, Brazil, in February 2017.
(DENYS YELMANOV/Shutterstock)

New Peugeot and Citroen cars await shipment on the pier in Rio de Janeiro in February 2017. Brazil's auto sector is aiming to expand beyond its domestic market, while its counterparts in Mexico have secured continued access to the massive U.S. market.

Highlights
  • Mexico's auto sector will remain oriented toward the United States, particularly in the wake of the signing of the United States-Mexico-Canada Agreement.
  • Brazil will continue its quest to find new export markets, as Mexico did three decades ago. 
  • Brazil's incoming administration will try to persuade members of the Mercosur trading bloc to allow each member state to sign its own bilateral free trade agreements. 
  • If Brazil succeeds in lifting Mercosur's trade restrictions, the country's auto sector will target developing markets in Asia, Latin America and Africa, where Brazilian-made vehicles would be most competitive.

When it comes to Latin American automotive production, two giants dominate the scene: Mexico and Brazil. Together, they produced 6.8 million light and commercial vehicles last year, representing around 7 percent of the globe's total output. The two are also heavily integrated into global automotive supply chains, as Mexico's auto sector is closely linked to the United States, while Brazil's auto sector has tight connections to Argentina. Historically, however, the Mexican and Brazilian automotive industries developed in vastly different geopolitical environments. Mexico is an export-oriented powerhouse, shipping nearly 70 percent of its finished vehicle production to the United States. Brazil, on the other hand, mainly focuses on supplying its huge domestic market. And thanks to the new United States-Mexico-Canada Agreement (USMCA), the future of Mexico's automotive market clearly lies in the same place as its recent past: the U.S. domestic market. Brazil, by contrast, will take steps to eliminate the domestic and regional obstacles that are complicating its efforts to expand its exports of cars and parts.

The Big Picture

Brazil and Mexico are Latin America's two leading automotive producers, but their respective auto industries could not be more different. Mexico's automotive sector, like most of its export-oriented economic industries, will remain closely integrated with the U.S. domestic market and its supply chains. Brazil, on the other hand, developed an auto industry to supply its vast domestic market. Now, Brazil is planning reforms to expand its export profile, while the country's automakers may be on the verge of greater opportunities — something that would put them at a greater chance of diversifying export markets than their Mexican counterparts.

Automotive Links Across the Rio Grande

Mexico's auto sector developed as a result of its proximity to the United States and the government's reaction to the implosion of its commodity-dependent economy in the early 1980s. After World War II, the Mexican government made import substitution a central plank of its economic policy in an effort to limit the importation of expensive, high-technology goods so that the country could acquire the technological know-how to produce them at home. In accordance with the policy, Mexico erected high tariffs and other trade barriers and passed legislation prohibiting the import of finished vehicles and parts, obliging foreign companies instead to partner with Mexican companies if they wished to invest in the auto sector.

At the same time, Mexico had become highly dependent on crude oil exports, particularly after the 1976 discovery of the Cantarell offshore oil field, one of the largest in the world. The collapse of the country's oil-based economy in 1981 due to falling energy prices, however, forced a rethink. Facing a debt default and a balance of payments crisis, President Miguel de la Madrid embarked upon a program of steady trade liberalization. The government lifted tariff and non-tariff barriers before ultimately eliminating barriers to the automotive trade. And after Mexico joined Canada and the United States in signing the North American Free Trade Agreement in 1993, a greater number of foreign automakers set up shop in Mexico to take advantage of its direct infrastructure connections to the United States, as well as its cheap labor. As a result, Mexican vehicle and automotive parts production has become overwhelmingly focused on supplying the U.S. domestic market and factories north of the border.

A chart showing Mexico's trading partners.

In terms of its export orientation, Mexico will continue to focus on supplying its northern neighbor in the decades to come. And thanks to the USMCA, Mexican production will be almost entirely exempt from Washington's proposed automotive tariffs, meaning it will retain its place in the automotive production hierarchy by functioning as a low-cost point of assembly for finished vehicles bound for U.S. consumers and for car parts bound for U.S. and Canadian factories.

Brazil's Quest for New Markets

Brazil's auto sector developed along vastly different lines. Though it embarked upon a path of import substitution much like Mexico, the two countries' trajectories diverged in the 1980s. While Mexico compensated for its economic troubles by embracing liberalization, Brazil's economic planners began planning for a customs union that would favor South Americans and keep competitors at bay. The 1991 Treaty of Asuncion created the Common Market of the South (Mercosur), an economic union with highly protectionist tendencies for certain sectors, including the production of finished vehicles and their parts. Some of the bloc's highest tariffs are on finished vehicles and their parts, totaling around 35 percent for cars that originate elsewhere. As a result, Brazilian automakers have largely sought to satisfy the needs of the vast domestic market rather than export their production beyond the neighboring Argentine market.

A chart showing Brazil's trading partners.

But Brazil's trade policy could undergo significant changes under newly elected President Jair Bolsonaro. In the past, Mercosur's leaders prohibited the group's member states from signing their own bilateral free trade agreements out of fear that such deals could harm sensitive sectors, prevent the local development of technological expertise and raise unemployment. For the past decade, however, South American policymakers have been toying with the idea of lifting the restrictions, yet the need for unanimity to overhaul such prohibitions complicates the bloc's ability to sign otherwise beneficial trade agreements. For example, a pending free trade agreement with the European Union remains unsigned, partly because Brazil objects to a sugar export quota, while both Argentina and Brazil object to the length of time over which the European Union wishes to phase in greater automotive trade. Bolsonaro hopes to lift such restrictions through negotiations with the bloc's members, but if talks fail to bear fruit, Brazil's president could adopt a harder-line approach by threatening to pull out of the bloc in exchange for unanimity from the other members.

Four graphs outlining bilateral trade between Brazil and Mexico.

What would the lifting of restriction on bilateral trade deals do for Brazil's auto industry? In theory, it would give Brasilia the ability to open new global markets for its auto sector. The Brazilian auto industry's exports have long lagged behind its vast production capacity, largely because of the South American trade bloc's strict regulations and the relative paucity of nearby markets. But it may be decades before Brazilian automakers make significant inroads in the rest of the world. Opposition from within Mercosur — mainly from Argentina, as well as from Brazil's domestic auto manufacturers and unions — will take years to overcome. Argentine President Mauricio Macri is also in a politically difficult position; he's likely to have just enough support to advance to a runoff after next October's election, but not necessarily enough to win it. Accordingly, he may shy away from loosening trade restrictions in 2019. And if Macri loses the election to a more populist opposition Peronist candidate for president, talks with Brazil over Mercosur's trade policy may run into even more roadblocks.

While Mexico's automotive future will remain closely intertwined with that of the United States, the expansion of Brazil's automotive trade will depend on a variety of factors, including market size, consumer demand and the fate of trade negotiations. In contrast to Mexico, Brazil's domestic market is largely geared toward the production of smaller and cheaper sedans, hatchbacks and pickups. Such vehicles tend to be far more competitive in Latin America, Asia or Africa where high fuel prices and low consumer purchasing power make them a more attractive option than vehicles produced to the specifications of more advanced nations. Ultimately, if Brazil succeeds in rolling back some of Mercosur's stricter conditions, the country's automakers may eventually see far more of their cars on roads outside their domestic market.

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