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Strategic Economic Integration Agreement - Mexico & Brazil

30 Aug 2012

In November of 2010, Brazil and Mexico announced plans to initiate dialogue on a complete free-trade agreement between the two countries. A few months later a delegation of Brazilian officials traveled to Mexico to commence preliminary work for a hypothetic reduction of tariffs on all goods traded between them. The two represent Latin America’s strongest economies.

As discussed briefly in a previous post on this site, the fundamentals of “ACE 55” have masked the hopefulness of the underlying power that collaboration between the two nations could bring. The Economic Complementary Agreement (Ace 55) was negotiated between Mexico and the countries of MERCOSUR (Argentina, Brazil, Paraguay and Uruguay) in 2002 to reduce tariffs on vehicles and auto parts in an effort to boost trade in these goods between the 5 countries. Initially, the agreement appeared to be a positive move for Mexico, leaping in the direction of a strong relationship with its major Latin American market. While trade between Mexico and MERCOSUR has more than doubled since 2003, it was imbalanced in that Mexico was exporting more than the other countries that are party to the agreement. In 2011 the Mexican automotive exports to Brazil jumped 70%. As a result, in March 2012, Brazil insisted on putting artificial curbs on imports of Mexican-made automobiles, contrary what had been negotiated in the pact. After much pressure, Mexico recently agreed to revise the ACE 55 agreement so that it limits car exports to an average value of around US$1.55 billion over the course of the next three years. This signifies a major hit for Mexican automotive exporters. While these kinds of controlled trade deals are rather standard for Brazil, it’s potentially disconcerting for Mexico since it has entered into bilateral free-trade pacts with various trading partners in addition to a growing interest in participating in the new Trans-Pacific Partnership pact (TPP).

By agreeing to limit exports of cars to Brazil for a three-year period, Mexico is gambling on the long-term competitiveness of its car industry, and is aiming to encourage automakers to carry on investing in the Mexican automotive industry. Mexico is tolerant of the short-term loss to safeguard its long-term auto agreement with Brazil. Mexican trade officials hope that new investments in the automotive sector will eventually produce profits, while Mexico recuperates its tariff-free admittance to the growing Brazilian market for passenger vehicles.

The fundamental problem for Mexico is that the country is very tied to the North American market, and Brazil has trade issues with the U.S. It would be difficult for Mexico to sign an agreement with Brazil without complicating the U.S.-Mexico relationship.

Although there are negative aspects of engaging in a deal, the leaders of both Mexico and Brazil want to pursue the idea of a free trade pact for many reasons. For Mexico, Brazil’s fast growing domestic markets could help to reduce the risk that Mexican companies were exposed to during the latest global recession. For Brazil, Mexico’s economy could offer a tempting platform from which Brazilian companies could enter vast markets in the U.S. and Canada, by way of duty-free access through NAFTA.

When it comes to the automotive sector, neither Brazil nor Mexico has its own automotive companies. The two countries depend on international companies to assemble vehicles, even though both have local constituent manufacturers. On the other hand, Mexico’s automotive sector is export-inclined—with over 50% of its output sold to North America. Brazil’s automotive output is sold largely in the country’s own domestic market, which is sizeable and growing quickly.

The two economies account for almost two-thirds of Latin America’s GDP and over half of its population. A free trade relationship would become an