Brazil and Mexico have renewed vehicle quotas for four years, postponing the creation of a free trade agreement to at least 2019. The two largest Latin American economies originally had free trade of vehicles for a brief period in 2011 and 2012, but transitioned to a quota system after Brazil complained of economic issues that were hurting the nation’s competitiveness abroad, especially in the auto industry. The new deal penned earlier this month permits $1.56 billion of duty-free vehicle imports for the first year of the agreement. This amount will increase by 3% every year until 2019 when the nations will return to free trade, barring any extension or renewal of the quota system.
Brazil was the nation pushing for the extension of the quota treaty, as they saw unrestrained Mexican vehicle exports as a threat to the already struggling domestic auto industry. As previously mentioned, Brazil is facing a competitiveness issue with its auto exports, stemming from an appreciating real and rising labor costs. This lack of competitiveness abroad had led Brazil to focus on supplying and protecting their rapidly expanding domestic market. Unrestrained Mexican vehicle imports to Brazil are a major threat to the domestic auto industry in Brazil, where the taxes, transportation bottlenecks, and powerful unions have caused the retail price of Brazilian produced cars to be up to double the price of a Mexican produced vehicle.
Mexico, on the other hand, was vying for free trade in order to further supplement its thriving auto industry. Mexico surpassed Brazil last year to become the seventh largest exporter of cars in the world. Most of this rapid growth is attributed to foreign car makers opening up new assembly plants or expanding current plants. Among these auto makers investing in Mexico include Volkswagen, Nissan, General Motors, and Ford. These companies are attracted to Mexico partly due to the low wages and improved logistics, but mainly because the over 40 different free-trade agreements that Mexico has, which give exporters in Mexico duty- free access to over 60% of the world economy.