In 2015, Mexico assembled more than 3.5 million vehicles, making it the world’s seventh-largest manufacturer. But global automotive giants have even bigger plans in store: According to AMIA, Mexico’s automotive industry association, and ProMexico, its trade promotion agency, Mexico is on track to assemble four million units (including light and heavy vehicles) by 2018 and five million units by 2020. All of the big American, Asian and European global automotive groups now have a presence in Mexico, including Hyundai, Volkswagen, Renault, Nissan, Toyota, Mazda and Honda.
Foreign investors have pumped billions of dollars into the Mexican automotive sector in recent years due to its proximity to the United States, and the fact that Mexico maintains free trade agreements not only with the United States and Canada (via the North American Free Trade Agreement, or NAFTA), but also with the European Union and the nations of Central America and Mercosur, the South American trade pact. In addition, Mexico has a relatively low cost for skilled labor, which compensates for the logistical costs involved in moving components and assembled vehicles in and out of the country.
Most vehicles assembled in Mexico are shipped to the United States, for which Mexico is the third-largest supplier of imported cars, exceeded only by Germany and Japan, according to the office of the U.S. Trade Representative. Over the first 10 months of 2016, 86.1% of Mexico’s automotive exports were shipped to its NAFTA trading partners, according to AMIA. But with the inauguration of Donald Trump, who made building a wall between the United States and Mexico a key part of his presidential campaign, could Mexico’s automotive sector be at risk? The question seems inevitable: Could Mexico wind up losing its competitive advantage in the sector because of U.S. protectionist measures?
A Wide Range of Trade Pacts
On the one hand, some automotive industry experts believe that Mexico’s dependence on selling vehicles to the U.S. market will continue despite threats of protectionism, and even expand in the coming years. A few months ago, Ford announced that it would move all of its production of small models from Michigan to Mexico. That decision was harshly criticized by Trump, who threatened to impose U.S. import tariffs of 35% on cars produced in Mexico. “That sort of tariff would be imposed on the entire automotive sector, and it could have an enormous impact on the United States economy,” Mark Fields, Ford’s chief executive, said after a speech at the AutoMobility conference in Los Angeles in November, according to The Wall Street Journal.
Brad McBride, a professor at the Mexico City-based Mexico Autonomous Institute of Technology (ITAM), notes that if Trump follows through on his proposals, the impact on Mexico’s automotive industry will be significant. “As a result of a tariff on the importation of autos and components, many producers would relocate a large share of the products that they export to the Southeast — the Carolinas, Alabama, Tennessee and Georgia. This region would enjoy a big comparative cost advantage if Mexico imposes tariff barriers in retaliation for the U.S. tariffs, he adds.
“Unless the protectionists in both the Republican and Democratic parties get together, I don’t think there is going to be a big change.” –Mauro Guillen
According to Miguel Leon, dean of operations at IPADE, the business school at Pan-American University in Mexico City, the imposition of high tariffs on Mexican exports could lead to the cancelation of automotive shipments to the U.S. by American companies and consequently, “to a shortage of supply in certain products on the American market.” Leon says that if such measures were to be carried out, American manufacturers would have two options: Either jointly absorb the cost of the new tariff along with their distributors in the U.S., or redirect their global production strategy, taking advantage of the free trade agreements that Mexico has signed with numerous other countries around the world. As of January 2017, Mexico has a network of 10 free-trade agreements with 45 different countries; 32 reciprocal investment promotion and protection agreements (RIPPAs) with 33 countries; and nine trade agreements with the framework of the Latin American Integration Association (ALADI). Mexico also has signed up for membership in the controversial 11-nation Trans-Pacific Partnership (TPP), but if the Trump administration opts to withdraw from the pact, the resulting absence of the U.S. would effectively lead to the TPP’s demise, trade analysts say.
Leon notes that the damage to Mexico from U.S. protectionism would be significant because nearly 80% of Mexican automotive exports are shipped to the U.S. Moreover, the automotive sector represents about 3% of Mexico’s GDP and 18% of its manufacturing GDP. Nevertheless, Leon adds that protectionist measures undertaken by the Trump administration could ultimately have a boomerang effect that winds up damaging the United States as well as Mexico. “Mexican industry bases its productivity and competitiveness on its localization, on the youth of its labor force, and on a great tradition of vehicle assembly that goes back to 1927, when Ford produced its first car in Mexico,” Leon says. “[Mexico’s] capacity to deliver vehicles in accordance with world-class programs of cost and quality … makes it very competitive. For that reason, if the United States were to stop buying from Mexico, it would be much costlier for the United States. The supplying of vehicles to the United States would probably be left to China.”
McBride notes that the process of relocating this lost production would be damaging not only to central Mexico — where many of the new foreign plants are located — but also to Mexico’s northern states, which have prospered during the 22 years of NAFTA’s existence. “In fact, a large part of the country’s north looks like a first-world economy, especially the state of Nuevo Leon,” whose capital is Monterrey, McBride adds. “That’s because of the manufacturing economy created by trade with the United States. There is a growing middle class in Mexico, but it is probably still not enough to create enough demand to substitute for [lost Mexican] exports to its neighbor to the north.” As a result, such a blow to Mexico’s automotive industry would be “terribly negative” for Mexico, McBride says, and would become “a serious impediment to its future growth.”
“A large part of [Mexico’s] north looks like a first-world economy.” –Brad McBride
The good news for Mexico, according to Leon, is that over the next five years, “it does not seem possible that the big [foreign automotive] brands will freeze [the value of] their investments” there. Indeed, over the short term, it would be impossible for major global manufacturers to substitute for their Mexican production capacity by expanding their capacity elsewhere, while maintaining the same level of quality at a similar cost. McBride agrees with that view, although he says that there are other reasons why U.S. manufacturers would not leave Mexico, even if high tariffs were imposed by the U.S. “There is a significant and growing internal market in Mexico,” he points out. Nevertheless, McBride says that it is possible to reduce production levels in Mexico, substituting that with production growth in the southern United