Negotiation Over Trade Pact Sought

Mexico said on June 25 that Argentina has pulled out of an auto trade pact over a disagreement on the conditions of the deal. In March, Argentina announced that it would seek more favourable terms to the agreement, attempting to replicate Brazil's efforts. Brazil has concessions limiting the number of Mexican auto exports to the country following concerns about cheap vehicle imports undermining the formers' domestic production industry (see our online service, March 27, ' Brazil-Mexico Trade Agreement To Dent Nissan's LatAm Growth'). BMI believes that many automotive manufacturers are unlikely to be deterred from investing in Mexico due to restricted access to the Argentine market; further, we remain cautious of Argentina's long term potential for autos production.

Argentina's Industry Minister, Debora Giorgi, said the existing deal is 'not beneficial to Argentina in its current form and should be reworked to strike a better balance very quickly'. Mexico's government has already said, however, that it would not renegotiate the terms of the 2002 auto pact with Argentina.

Argentina's total exports to Mexico fell 23% in 2011, while imports from the country increased 39%, widening the Argentine trade deficit with Mexico to US$1.59bn in 2011 from US$590mn in 2010. The automotive sector alone registered a US$995mn trade deficit in 2011. We remain doubtful, however, that Argentina can attract significant investments from international auto manufacturers for sustained periods.

Reliant On US Market
Mexico Vehicle Export Destinations, %, Q112

Compared to Brazil and Mexico, Argentina exports relatively little to North America. As such, the country is less attractive as a potential production location for international auto manufacturers (see our online service, June 21, ' Argentina Vehicle Production And Sales Revision'). Indeed, we believe that Mexico is increasingly becoming a regional production hub (see our online service, May 29, ' Exports Report Strong Q112 Growth'). On the back of large investment commitments made by Nissan Motor, Honda Motor, Chrysler and others, BMI is currently forecasting an 8.6% year-on-year (y-o-y) average growth in Mexican autos production between 2012 and 2016 - growing faster than the regional average of 7.6% y-o-y.

Further, Argentina continues to score significantly lower than the regional average in BMI's Risk/Rewards Ratings for the autos industry in the Americas. We believe a significant relaxation in regulations for carmakers and a check on inflation will be required to help Argentina improve its score.

Despite this, some auto manufacturers have recently invested in Argentina. Fiat announced plans to invest ARS1,250mn (US$283mn) in the country in April 2012. The move will see the carmaker involved in a broad range of activities ranging from vehicle production and exports to helping in the development of the parts segment in the country. Renault Trucks signed a similar broad agreement with the Argentine Ministry of Industry and Economy in February 2012. We however, remain cautious of Argentina's long term potential for autos production.

Growth in exports is a key driver of growth in Mexican auto production; indeed, over the last year, on average, 80-85% of production was for export (see our online service, June 14, ' Production Forecast Revised').

Restrictions on sales to Argentina could further impact sales of a number of international auto manufacturers that use Mexico as a production hub for the Latin America region. Indeed, Mexico may face a growing number of regional trade agreements that limit exports to its neighbours; this represents a relatively small proportion of total trade, however, and is highly unlikely to deter investment from Mexico (see chart).

This article is tagged to:
Sector: Autos
Geography: Argentina, Brazil, Mexico

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