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In March 2012, Brazil insisted on putting artificial curbs on imports of Mexican-made automobiles, contrary to the long-standing pact governing vehicle trade between Mexico and the Mercosur trade bloc comprised of Brazil, Argentina, Paraguay and Uruguay.  We’re in a snit about this, because the move creates problems for Mexico and in general adds to the list of alarming actions coming out of Mercosur countries lately that are undermining the environment for trade and investment.

The Economic Complementation Agreement No. 55, known as ACE 55, was negotiated between Mexico and Mercosur in 2002 as a means of reducing tariffs on vehicles and auto parts to facilitate trade in these goods between the five countries.  It worked; automotive trade surged and the deal seemed to suit Brazil just fine as the South American giant racked up a trade surplus in cars with Mexico year after year. But the tide began to turn about three years ago, as Brazil’s strong currency and the relatively high cost of domestic manufacturing helped make Mexican cars cheaper relative to their locally made equivalents.   When Mexican automotive exports to Brazil jumped 70% in 2011, Brazil plotzed, threatening to abandon the ACE 55 protocol if Mexico didn’t accept forced reductions on its car sales to the country.  Mexico announced in March this year that it had agreed to limit the value of its automobile exports to Brazil to US$1.45 billion in 2012, US$1.56 billion in 2013 and US$1.64 billion the year after.  Considering Mexico’s car sales to Brazil exceeded US$2 billion in 2011, the curbs are substantial.  The revisions to the original agreement also include stipulations aimed at increasing the amount of auto parts Mexico’s vehicle manufacturing industry sources from Latin America.

According to the Mexican government, the export quotas will take effect for three years, after which they will be removed.  Nonetheless there are a number of aspects about this issue that we don’t like, for example:

• It suddenly throws the brakes, as it were, on a very thriving and growing market for a key Mexican export.  Mexican automotive exports to Brazil surpassed US$2 billion last year and are on a pace to blow by that mark this year, except that they will now be halted at the relatively paltry level of US$1.45 billion despite the high demand in Brazil.
• It creates an element of uncertainty in the previously strong growth trend in the overall demand for Mexico’s automotive output which has driven substantial direct foreign investment in the sector in recent years.  Foreign automotive manufacturers such as Honda and Nissan which have announced plans for major expansion in Mexico could potentially reconsider or scale back their investment plans if Mexico’s access to the Brazilian market is restricted.
• Brazil’s fair-weather attitude to its trade agreements casts a pall upon trade agreements in Latin America.  If one of the parties abides by the agreement only when the balance of trade is firmly in their favor, what is the point of negotiating an agreement?  Should Mexico and Peru now feel free to apply the same strategy to the FTA they signed last year?
• The bad-faith maneuver by Brazil effectively pulls the plug on exploration of a possible free trade agreement between Latin America’s two largest economies, at least for the foreseeable future.  During the past two years, the tantalizing possibility of such an agreement has been hotly discussed in Mexican media and preliminary explored between the two governments.  Numerous representatives of Mexican industry have expressed trepidation over the idea, due to lack of confidence in Brazil’s commitment to a level playing field.  Now, it will be harder than ever to dispute these claims.

Brazil’s President Dilma Rousseff is scrambling to boost GDP growth while the country’s currency continues to appreciate internationally.  Emergency measures such as capping imports may appease certain industry sectors, but – much like recent nationalizations of foreign industrial holdings in Argentina and Bolivia – shoring up political problems at home may come at a cost to the country’s reputation among trade and investment partners in the future.  We don’t think it’s good for Brazil in the long run, and it sure doesn’t look good for Mexico in the short run.