Trade Talks Set To Resume

Mexico and Argentina ' s auto industry associations have reached an agreement over free-trade in vehicles, and urged their respective governments to initiate a dialogue over resuming trade. BMI believes that greater trade flows between the two countries, with both economies increasing volumes rather than restrictive quotas , will facilitate growth in vehicle production and export. If such an agreement comes to fruition, it would provide upside risks to our longer-term production and export forecasts for Argentina. BMI still maintains a bearish outlook for vehicle production in the country, but we believe that expanding trade with Mexico would significantly boost exports.

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.

Argentina was concerned that its autos market was being flooded with cheap Mexican imports, and its domestic producers were unable to compete. Indeed, in June 2012 , Argentina pulled out of the auto trade pact with Mexico over a disagreement on the conditions of the deal ( see our online service, June 26, 'Negotiation Over Trade Pact Sought' ). BMI believes that, under a renegotiated deal, Argentina's domestic manufacturers may be offered some protection from cheap Mexican imports inundating the market.

Earlier in the year, Brazil modified its trade pact with Mexico, adding a quota to limit cheap imports from Mexico and protect domestic production ( see our online service, March 27, 'Brazil-Mexico Trade Agreement To Dent Nissan's LatAm Growth' ). As a result of this, Mexico agreed to restrict its autos sales to Brazil to some US$1.45bn a year between 2012 and 2014. Vehicles sold within this quota are imported tax-free, but those above this level are subject to 35% tax. BMI believes a similar agreement could potentially be reached between Mexico and Argentina.

In an announcement on September 20, Mexico's President-elect Enrique Pena Nieto said that the country should endeavour to expand trade flows with Brazil in the auto sector, rather than curbing them ( see our online service, September 21, 'Solution Sought To Long-Running Trade Dispute' ).

Still Bearish

Although we believe renewed trade negotiations with Mexico could boost production and export levels, we remain doubtful that Argentina can attract significant investments from international auto manufacturers for sustained periods.

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, November 6, 'Production Forecast Revised Upward, But Still Bearish' ).

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.

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

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