Since Tuesday, March 19th, a new free trade agreement for vehicles and car parts is in place between Brazil and Mexico. Consequently, car manufacturers residing in both countries can now import and export their products without the previously installed quotas and import taxes.
The previous quota regulation
Both countries formed a trade agreement in 2002 for to automotive sector which relied on tax-free quotas. The last change to the agreement has been made in 2015 which is when the free trade agreement was supposed to begin. However, the quotas remained for another 5 years while their value rose by 3% each year. In the last 12 months, between March 2018 and March 2019, the quota equalled 1,7 Billion US-Dollar for each country.
Brazil`s fear of Mexico`s economic power
However, Brazil`s automotive sector prefers the previous quota regulation. The national association of car manufacturers Anfavea argued that the quota system has to stay in place for another three years because Brazil`s industry is much less competitive than Mexico`s. Moreover, Mexico is subdued to smaller internal tax burdens and profits from a more efficient infrastructure due to its economic ties to the US. Anfavea fears that parent companies are therefore more likely to invest in their Mexican subsidiaries than in Brazil.
“Let`s see how this affects investments. The companies will evaluate this new situation in order to make their decisions.”, Anfavea`s president Antonio Megale explained on Monday.
According to him, there is another issue with the definition of the local content (the origin of the parts used to build a vehicle). The previous regulation which ends today stated a minimum local content of 35%. This percentage is now raised to 40%.
“This topic should have been discussed last year but due to the regime change in both countries there was no such deal.”, said Megale.
The Brazilian industry fears that more and more parts used for building Mexican cars will now come from other countries. In contrast to the past where Brazil had a surplus, Brazil now imports more goods from Mexico than it exports.
Consequences of the Free Trade Agreement for Brazil
According to the Brazilian Ministry of Economics the effect of the free trade agreement will be zero on the short-term because with 14% the imported volumes from Brazil lie below the current quotas. The changes made by the agreement should only become visible once the economic activity picks up.
The cars imported from Mexico are of higher value, such as the Volkswagen Jetta and Tiguan, Chevorlet Tracker and Equinox, Ford Fusion, Audi Q5 and Nissan Sentra. Brazil in turn offers smaller models with lower values such as VW Gol, up!, Ka, Onix, Civic and EcosSport.
The transition to free trade will for now only apply to cars and other light vehicles. Starting in 2019, it will also apply to trucks and busses.
Free Trade with Argentina
Another source from the Ministry of Economics said that the agreement between both countries will also urge Argentina to partake in the free trade in the automotive sector. Just like the Mexican counterparts, Argentinian cars have a higher value than Brazilian cars.
The current Agreement with Argentina will be in place until 2020 and states that for every US-Dollar in cars or car parts 1,5 US-Dollars in cars or car parts can be exported without additional tolls.
Interestingly, the last months` negotiations have only been conducted between both countries` governments – without the inclusion of representatives of the automotive sector.
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