Blog posts by Augusto Amorim

Argentina and Mexico Reach Agreement

Late in June, Argentina canceled the free-trade agreement it has had with Mexico since 2002 (as noted in my prior blog). Argentina wanted to negotiate the agreement, as Brazil successfully did with Mexico, assigning quotas to imports but Mexico did not concede. Argentina has been consistently the fifth main market for Mexican exports since 2009, although volumes jumped 177% between 2009 and 2011. Brazil went from the fourth spot in 2009 up to second place this year, even with limits to imports without tariffs.

As Mexico elected a new president, things changed. Even before his inauguration on December 1, Enrique Peña Nieto visited Argentina and announced his intention to re-negotiate the agreement, known as ACE 55. The new deal was set very quickly and on December 14, Mexico and Argentina announced a new agreement which was based on quotas.

During the first year, each country will be able to import $575 million without import taxes. For the second year, the amount was set at $625 million and $187.5 million between January and March 2015, when the agreement with Brazil expires. After that, the free trade will be re-established. Argentina estimates that the quotas will reduce imports from Mexico by 33% during the first 12 months.

Mexico will also need to increase the local content of its light vehicles. Currently around 30%, it will need to be 35% as soon as March 19, 2013. By 2016, with the free trade in place once again, it will need to be 40%. Something similar was agreed upon with Brazil. This is a great opportunity for suppliers that already produce in Mexico and an invitation for those who are considering local production.

But Argentina's main victory came outside of the automotive industry. It is true that it got the quotas it wanted, but Mexico also agreed to withdraw its complaints over trade restrictions in Argentina before the World Trade Organization. However, the organization still needs to analyze the complaints from the European Union, the United States and Japan.

Argentina had a $995 million deficit in vehicle trade with Mexico in 2011. Exports of Argentinean vehicles to Mexico went from 11 models in 2005 to just three this year. Only the Toyota Hilux, the Volkswagen Amarok and the Renault Kangoo are made in Argentina and reach the dealer network in Mexico.

Regarding production, Polk's light vehicle forecast in Argentina is 744,000 light vehicles this year, down 9.3% from last year, while we see Mexico reaching 2.9 million units or 13.2% more than in 2011.

Posted by Augusto Amorim, Lead Analyst – South America Forecasting, Polk (12.20.2012)

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