Why the Automotive Industry continues to invest in Mexico

Why the Automotive Industry continues to invest in Mexico

U.S. President Trump threatens automotive manufacturers to impose protectionist tariffs when transfering production sites from the United States to Mexico. However, that does not seem to prevent companies from investing in Mexico. 

It was just in April 2018 that the EU and Mexico had reached a new trade agreement and also extended their  economic relations at the Hannover Messe 2018 . Punitive tariffs could harm German-Mexican trade relation and especially German automobile manufacturers in Mexico.

If Trump´s threat of imposing 25% tariffs on the automotive industry was put into effect, Mexico as a industry location could lose attractiveness: as a matter of fact production would become more expensive and demand would be affected. Experts believe it is improbable that the German car manufacturers will move their production from Mexico to the United States due to the increase of tariffs. On the contrary, a counter effect is expected. Companies probably would invest more in other markets like Europe, China, or Japan. Supporting this assumption, it is worth mentioning that the EU and Japan have just signed the Japan-EU Free Trade Agreement JEFTA.

So far, the automotive industry still counts on Mexico. The reasons for this are numerous, just to mention some of them:

  • Competitive wages
  • Relatively well-educated workers
  • A solid infrastructure: large network of suppliers
  • About 40 free-trade agreements
  • Proximity and easy access to the important U.S. market

Mexico and the automotive industry: facts and figures

Currently Mexico is the seventh largest automotive location of the world, aiming to be among the top five until 2020 producing up to five million vehicles per year. The automotive sector is a major economic sector of Mexico, about 875.000 people are working in that industry.

The imposition of tariffs would seriously impair growth opportunities for the automotive industry, in addition to the negative impact on the Mexican economy in general. Although this industry generates only 3% of gross domestic product, around 20% of foreign direct investment flows in this sector. In the meantime, all German and American car manufacturers are producing in Mexico. Audi produces exclusively in Mexico, Mercedes, BMW, and VW operate also in the United States. Therefore, Audi would be particularly affected by Trumps tariffs.

Mexico’s production of vehicles showed an increase of  0.8% during the month of June (349.153 cars) informed the Mexican Association of Automotive Industry (AMIA). The majority of manufactured vehicles and vehicle parts are exported to the United States (nearly 80%).

The automotive industry will fight back

AMIA will present an analysis of the negative effects of the possible 25% tariffs, especially on those vehicles and spare parts that come from Mexico and Canada. The aim is to prove that importing auto parts that are 40% american would not be a threat to American national security. For this reason, the American Department of Commerce will make a recommendation to the U.S. President based on an investigation, i.e. section 232 Investigation on the Effect of Imports of vehicles on U.S. National Security. Due to this investigation section 232 Trump already took the decision to impose tariffs on aluminum and steel. Until the end of July 2018, the Ministry should have reached a decision.

Zero tariffs: A solution to the trade dispute?

Trump proposed (through the US Ambassador in Germany) to drop tariffs to zero, this was reported by the German newspaper “Handelsblatt”. The United States are willing to drop tariffs if Europe will join this offer, too.