In 2002, Brazil and Mexico signed a bilateral free trade deal, under which vehicle and automotive parts imports were exempt from the almost 35% duty levied on vehicle imports from outside Mexico and Mercosur.
So far, so good, but since last year, the Brazilian government has been discussing – and even implementing – several measures to protect its domestic manufacturing sector. Official data indicates that Brazil’s vehicle imports from Mexico increased by 40% last year, while Brazil’s vehicle exports to Mexico decreased by the same proportion, leading to a deficit of almost US$1.7bn.
In an effort to redress a situation that was no longer of any advantage to Brazil, representatives from that country gathered with Mexican representatives three times in Brasilia and once in Mexico to discuss a renegotiation of the agreement. Brazilian authorities want Mexico to buy more Brazilian buses and trucks, in order to stabilise the country’s (im)balance of trade, and to include a quota device for Mexican vehicle imports.
Official data indicates that Brazil’s vehicle imports from Mexico increased by 40% last year, while Brazil’s vehicle exports to Mexico decreased by the same proportion, leading to a deficit of almost US$1.7bn.
The quota system would be similar to the one Brazil operates with Argentina, whereby the volume of tax free imports depends on exports.
After the meetings, both countries agreed on the quota system: the import of Mexican cars will be restricted until 2015, pegged at US$1.45bn in the first year, US$1.56bn in the second year and US$1.64bn in the third. The numbers were defined based on the average number of imports in the three previous years. The intention is for the index of Brazilian exports to rise gradually from 30% to 45% over the next four years.
The World Trade Organization (WTO) accepted Brazil’s plans once it became clear that there was no benefit to Brazil in the existing trade agreement. This is the second time that Brazil has implemented protectionist measures to defend its local industry.
When are we going to start manufacturing more sophisticated cars? That – rather than taxation and protectionist measures – is the way to solve this problem.
As previously discussed in this column, Brazil last year ruled that prices of vehicles with less than 65% local content manufactured outside the South American Mercosur trade region or Mexico (until now) would rise in line with Brazil’s IPI (industrial product tax) increase.
The problem of the balance of trade and the taxation of imported cars is a direct result of Brazil’s vehicle manufacturing strategy: the country builds predominantly high-volume mainstream cars. As the country’s situation improves, so the demand in Brazil increases for medium and large vehicles, including SUVs. The need to import these vehicles affects the balance of trade. When are we going to start manufacturing more sophisticated cars? That – rather than taxation and protectionist measures – is the way to solve this problem.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Jeannette Galbinski is the Director of Setec Consulting Group (www.setecnet.com.br). Setec Consulting Group is one of the largest consulting, training and auditing companies in Latin America. Founded in 1994, it is headquartered in Sao Paulo, Brazil, with offices in Manaus (Brazil), Buenos Aires (Argentina) and Santiago (Chile).
Jeannette Galbinski has a doctorate in Production Engineering from the University of Sao Paulo (USP), M.Sc. Quality and Reliability from Technion Institute of Technology and a degree in Statistics from USP, and she specialised in Industrial administration at Fundacao Vanzolini. Jeanette is a certified Master Black Belt and international consultant specialised in implementing Quality Systems and Tools and Six Sigma projects. Jeannette also writes for Banas Qualidade, Brazil’s most recognised quality magazine. E-mail: email@example.com Twitter: www.twitter.com/Setecnet
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