Regional Trade Deals And The Mexican Auto Industry

Name Instructor Course: International Trade and Investment SPING 2018: Business Written Case 2 Date Regional Trade Deals and the Mexican Auto Industry Background Demand for vehicles in the US has grown since the country’s economy rebounded after the global financial crisis. Increasingly, American and foreign companies have set up facilities in Mexico and have targeted vehicle sales to the US. Such vehicles are allowed duty free access when many vehicle components are from the US, Canada and Mexico after the adoption of North American Free Trade Agreement (NAFTA). BMW, the German automaker has a facility in South Carolina and is set to open a new one in Mexico, but President’s Trump call for renegotiation of NAFTA and imposing tariffs on vehicle imports. Mexico has become an ideal location for car manufacturers like BMW and has advantages because of low labor costs, free trade pacts with the US and other countries and an integrated North American supplier network. Mexico’s growing automotive industry Mexico’s integration with the US resulted in many of the manufacturing industries moving beyond Mexico City and nearer the US border. There was growing demand for manufactured products including vehicles at a time when Mexico was embracing trade liberalization policies. Furthermore, the new areas of manufacturing were cheaper for manufacturers and were incentivized to move away from congested hubs to places where the cost of trade was lower. The automotive industry in Mexico is primarily targeted at exporting cars especially to the US and Mexico has provided tax incentives that have made the country ideal as a manufacturing hub for cars. Mexico’s more open economy has reduced barriers to trade that there are more foreign investors who have made Mexico their manufacturing base rather than the US. Additionally, the linkages among various supportive industries have grown stronger because they are supported by the thriving car manufacturing industry including the auto part supplies market. In any case, as the automotive industry in Mexico has grown there are more opportunities for new entrants into the country including American automakers who seek to shift manufacturing some car models in Mexico. American automobiles primarily operating in the US increasingly focus on the trucks and SUVs as they have higher margins than the smaller cars sold in the domestic market. Tariffs and vehicle imports from Mexico While President Trump has imposed tax on steel and aluminum ad shown willingness to remove the tariffs for Canada and Mexico, he may target automakers that shift from the US to Mexican production. However, tariffs should not be imposed on cars imported from Mexico as this would result to an indirect tax to American consumers since they will pay more for imported products. Even as tariffs are meant to protect the domestic industries this would not necessarily make them more competitive in the long run as the cost of production is higher in the U.S. imposing tariffs would result in lower demand for Mexican made cars, but there is no extra money raised from the import tariffs. In any case, the price would rise that the US may reduce and stop car imports, meaning that Americans would pay more for the domestic manufactured cars. While Mexico’s automotive industry has grown with automakers and suppliers preferring the lower cost of production, the supply chain are well integrated with the US and Canada. There are many vehicle components that originate from the U.S indicating higher sales car also benefit some US manufacturers who operate in the US and Mexico. Levying taxes on aluminum and steel imports will also affect the US auto makers where the global competitors would be unaffected by higher prices in these metals making the US auto manufacturers less competitive. Hence, there is no guarantee that imposing tariffs on cars imported from Mexico will improve US automotive manufacturers’ competitiveness. BMW’s operation in Mexico, a NAFTA country The adoption of NAFTA enlarged the North American trading bloc that now included Mexico besides Canada and the opened up the Mexican economy. BMW and other auto companies have not only expanded in Mexico, but they also plan to increase vehicle production in the US. Even though, BMW seeks to expand in Mexico because of free...