EU Treaty Paves Way for More Global Trade Agreements

A new automotive trade pact between the European Union and Mexico gives European automakers a better starting point to decide on direct investment in Mexico.

At the same time, the treaty lessens Mexico's dependence on the U.S. while giving European companies greater access to the Mexican market. The trade pact, which takes effect July 1, will cut auto tariffs on European imports from 20% to 3.3% this year and to zero by 2003.

Even better for Mexico, the new treaty is enticing other countries around the globe to further their own automotive industries by negotiating similar agreements.

The approval of the free-trade agreement last March means European car companies finally are on the same competitive level as U.S. automakers, which have the North American Free Trade Agreement (NAFTA), says a spokesperson for Volkswagen AG, which has a plant in Puebla, Mexico.

"This treaty was looking to level the competitive conditions again," he says.

"We saw a window of opportunity to put the negotiations into effect, and that's what we did," says Chris Patten, member of the European Commission responsible for external relations, in a speech given earlier this year. "And not because we were trying to enter the North American market by the back door. What we export to Mexico cannot enter the United States, owing to origin rules."

Unlike NAFTA, European automakers without a manufacturing presence in Mexico still will be able to take advantage of the tariff cuts. But European car imports, which currently make up about 2% of the market, cannot exceed 15% until 2007, when the preferential quotas will be dropped.

The agreement includes provisions for favorable access for main components. But it also includes rules of origin.

Following on the heels of the EU pact, Brazil and Mexico recently reached a preliminary agreement to allow lower tariffs on imports of vehicles into each other's country. Under that agreement, each country can import up to 40,000 vehicles with an 8% tariff.

Brazil was charging a 35% tariff on vehicles made in Mexico while Mexico was levying a 20% tariff on Brazilian-made cars and trucks. If imported vehicles exceed 40,000, they will be subject to slightly higher rates. The two countries plan to continue talks over further trade deals.

Argentina, Brazil's neighbor and partner in the Mercosur trade pact, also hopes to see lower auto tariffs with Mexico. The automakers' associations in both countries are negotiating an agreement that would lower duties placed on vehicles and auto parts.

And to further the notion that we are living in a global economy, Singapore - an ocean away - also would like to see an agreement with Mexico. The governments of the two countries will begin bilateral free-trade negotiations in July.