Impact of US policy on LatAm auto industry
In the wake of new trade policies being developed by US President Donald Trump, the scenario of the automobile industry in Latin America will likely change and it all depends on how current negotiations are dealt with.
Although the Trump administration is aimed at increasing employment and reducing the trade deficit in the United States, some countries see the new direction of the US to be unfair as it restricts imports to the country.
Despite this, business with Brazil (Latin America’s largest vehicle fleet market) is quite strong in terms of the US brand.
Although Brazil imposes high taxes on imports, it is home to a number of automobile plants, including Chevrolet which has been the best-selling brand in the country two years in a row.
To further push sales in terms of biofuels exports to Brazil, the US is seeking relief on the current tariffs and quotas on ethanol to the country. At least half of Brazil's automobile fleet uses ethanol.
In the meantime, the US has also increased duties on biodiesel imports coming from Argentina after claims of dumping were made by the US Trade Commission last year.
Currently, the main policy dispute which could highly affect the automobile industry in Latin America, especially Mexico (the region’s second largest automobile fleet market), are the US proposed updates to the 24-year old North America Free Trade Agreement (NAFTA).
NAFTA’s seventh round talks - which were mostly focused on steel trade negotiations - just took place in Mexico City last week (Feb 26-Mar 4). An eighth and final round is expected in Washington DC at the end of March, according to the NAFTA schedule.
Mexico's President Enrique Peno Nieto meets US Presidential candidate (at the time) Donald Trump in 2016 (SOURCE: Reuters)
In terms of the automotive industry, to qualify for a 35% export tariff exemption under the agreement, US officials want 85% of the content of cars made in the region to originate from North America and most of it - at least 50% - to come from the United States.
Today, while NAFTA stipulates that 62.5% needs to come from North America, the US content only represents about 30%. As such, the other NAFTA members – Mexico and Canada – are not very keen to agreeing on the updates.
Although Mexico may consider a number between 62.5% and 85%, it is seeking to maintain the original NAFTA term for prototype vehicles, being 50% for up to five years after the prototype started being manufactured. Neither Mexico nor Canada is likely to accept the 50% US rule.
Meanwhile, though overall foreign direct investment in Mexico’s automotive industry is holding firm, some OEMs have already started preparing for their transition from Mexico to the US.
For one, Fiat Chrysler Automobiles (FCA) will shift production of Ram Heavy Duty pickup trucks from its Saltilo plant in Mexico to Warren Michigan (near Detroit). The automaker will invest US$1bn in the facility and the move is expected in 2020.
According to Ford CEO Mark Fields, the company is planning to invest a total of US$9bn in US plants over the next four years. “We will do what makes sense for the business,” he said in a Forbes interview.
As the final round of NAFTA negotiations is still a few weeks away, how much the new US strategy will affect Mexico and Latin America is yet to be seen. Although the US coalition does seem to be holding their ground, we will need to wait until April to know more.