The news of Ford’s recent announcement that it would withdraw investment in a $1.6 billion factory in San Luis Potosi and would invest $700 million in a factory in Flat Rock, Michigan has me thinking about the Mexico/Brazil automotive tiff that has been going on for the past five years.
This is not the first time Mexico’s vibrant automotive industry will feel the brunt of protectionist government policies (or, in this case, statements about potentially impending policies).
It started in 2002, when Mexico and Mercosur, of which Brazil is a member, signed a free trade agreement, ACE 55, that allowed for the unrestricted shipment of vehicles across borders.
By 2011, Brazil’s automotive industry was under pressure caused primarily by a strengthened real, which hurt exports abroad and thus weakened the automotive industry. As a result, Brazil’s trade deficit in vehicles with Mexico grew to $1.6bn in 2011, as they were unable to export their pricier vehicles.
Brazil was not happy with this development, so in 2012 they decided to put a quota on Mexican vehicles that could enter the country in order to protect the Brazilian automotive industry. In March 2015, Mexico and Brazil extended the quota arrangement until 2019.
While this was not good news for the Mexican automotive industry, it was not crippling. Brazil/Mercosur is a large export market for Mexico, but it is not the main market; it would not ruin the industry to kick the can down the road for a few more years.
The US, however, is a completely different beast. Brazil’s market is but a blip on the map compared to that of the United States. The Mexican market depends greatly on US demand and its ability to export at competitive prices to that market. While the San Luis Potosi announcement is unlikely to make an immediate dent in the existing supply chain, in which products cross the US/Mexico border multiple times before they are completed, the threat of uncertainty looms large for Mexico.