Mexico Automotive Industry: Headwinds coming from the North

The Mexican automotive industry has experienced strong growth since the signing of the North American Free Trade Agreement (NAFTA) in 1993. The sector representativeness rose, from 1.5% of GDP and 8.5% of the manufacturing output in 1993, to 3% of GDP and 18% of manufacturing output in 20151. It is currently the world’s seventh-largest vehicle manufacturer and the largest in Latin America (after overtaking Brazil in 2014). However, the industry’s bright performance is not perceived positively by all. Since the beginning of his election campaign in 2016, United States President Donald Trump has continually attacked the NAFTA. He has blamed the agreement for the deep trade defi cit that the US holds with Mexico (USD 71.1 billion in 20172) and for destroying US jobs. The automotive industry is one of his favourite targets, and not by chance: transportation and related equipment represents roughly 13.9% of total US exports to Mexico and 33.7% of total US imports from Mexico3. Overall, it is the sector with the greatest trade imbalance within the United States.

Coface downgraded its assessment for the Mexican automotive industry from “medium risk” to “high risk” in December 2017, following the US Presidential Elections, in part due to the sector’s exposure to potential NAFTA changes.

NAFTA renegotiations began in August 2017, and have since been extended until at least the end of the fi rst quarter of 2018. The agreement currently requires fi nished vehicles to contain 62.5% of their parts from partner nations if they are to take advantage of dutyfree imports across the continent. US negotiators wish to raise this ratio to 85%, with 50% guaranteed to US producers. The proposal has been categorically rejected by the Canadian and Mexican governments, as well as by vehicle manufacturers in each of the three countries, who argue that an 85% ratio is not feasible.

The final outcome of negotiations may be postponed to 2019, especially taking into account the electoral calendar in Mexico and in the United States this year. The main short-term consequence is on investments, which are currently on hold. Coface believes that the most likely scenario remains the one where a trade deal that largely preserves cross-border trade and investment links between the three members is reached.