Enhanced Mexico Trade Piques EU Automakers’ Interest

BRUSSELS – Automakers in Europe are looking at what potential benefits they might draw from a future upgrade of a 15-year-old free-trade agreement between the European Union and Mexico.

The two sides announced May 11 they will start negotiations later this year on making the FTA more comprehensive by involving more regulatory harmonization than the existing deal that focuses largely on tariff reduction.

“We are aiming for an EU-Mexico deal that is comparable to the one with Canada and to the one to be concluded with the U.S.,” EU Trade Commissioner Cecilia Malmstrom says.

With the value of European car exports to Mexico reaching €1.3 billion ($1.4 billion) in 2014, EU automakers are assessing how exports could be increased following a trade-deal upgrade.

Mexican car exports to the EU were worth €1 billion ($1.13 billion) last year, according to European Commission data. This represented a significant decrease from the previous year, when the value of Mexican exports to the EU reached €1.6 billion ($1.8 billion), giving the country an edge over the €1.2 billion ($1.3 billion) in car exports from the EU.

“Mexico is an important market for Daimler, and the company welcomes the plan to modernize the FTA,” Hendrik Sackmann, senior manager at the Mercedes-Benz manufacturer, tells WardsAuto. Since the EC still must obtain a formal mandate from EU member countries to launch negotiations, it’s too early to comment on the possible outcome, he says.

During the 15 years it has had an FTA with the EU, Mexico has emerged as a preferred place for EU-based automakers to establish production, according to a report presented May 11 by the Spanish bank BBVA in Brussels. Audi currently is building a plant outside of Puebla, near Mexico City, where it will produce the next-generation Q5 CUV beginning next year.

German automaker BMW also is building a plant in Mexico, in San Luis Potosi, north of Mexico City, which will start producing some 150,000 vehicles per year beginning in 2019.

Mexico’s existing FTAs with the EU and the U.S., alongside its “competitive wages and improvements in logistics,” have been the main drivers in these developments, the BBVA report says.

It remains to be seen, however, how the upgrading of the EU-Mexico FTA, coupled with a potential conclusion of the EU-US Transatlantic Trade and Investment Partnership and of the Trans-Pacific Partnership involving the U.S., Mexico and Asia Pacific countries will influence these trends in the future.

While the EC says it wants to look at regulatory cooperation in its upgraded FTA with Mexico, it is not yet known whether the goal will be to more closely coordinate automotive technical standards, as is the case in TTIP negotiations. “We are not at this stage yet, and the TTIP and the modernization of the EU-Mexico agreement are two processes running their courses on separate tracks,” a Brussels trade spokesperson tells WardsAuto.

Consultant Guido Vildozo, manager-Latin American light-vehicle sales division at forecaster IHS Automotive, believes Mexico could benefit from a revised agreement with the EU to maintain its auto-sector growth and boost exports.

“I don’t foresee big obstacles that would prevent Mexico from increasing its production numbers and developing the industry within its territory,” he says. “If the EU deal contains a revision with lower tariffs I’m sure it will have a positive impact.”

Some other sources believe the potential agreement reached with Europe could benefit American auto-sector companies based near the border with Mexico.

“If more of them (European companies) start settling in Mexico, it would be a good thing for U.S. tool and machine manufacturers,” according to a commercial analyst who works closely with the U.S. Consulate in Mexico City. “We are sure that this will be the case with the arrival of Korean car company Kia Motors to the city of Monterrey (142 miles [230 km] south of Laredo, TX).”

In 2014, almost 26% of goods exported from Mexico to the U.S. were related to the automotive industry, a sector that represents nearly 17% of the country’s gross domestic product, according to figures from the Mexican Institute of Statistics and Geography. Auto manufacturing in Mexico has grown steadily in recent years; in first-quarter 2015 profits rose 9% from year-earlier.

Nevertheless, productivity improvements almost certainly will be needed if Mexico’s auto sector is to exploit an improved EU trade deal.

“The lack of specialized staff in Mexico represents a significant inconvenience to automotive companies that decide to settle there, this due to the time required to train staff in order to perform well,” Vildozo says.

The Business Trust Index shows the country’s manufacturing industry experienced a sixth consecutive month-to-month decline in trust among investors in April.

In terms of assembly, Vildozo does not think an enhanced EU trade agreement will increase Mexican vehicle sales to the U.S. market significantly, even if Mexico’s capacity increases as a result. The U.S. industry is just too strong, being able to deliver almost 17 million units a year, more than triple Mexico’s total production.

– with Elizabeth Machuca in Mexico City