Magazine article SourceMex Economic News & Analysis on Mexico

Mexico Auto Industry Awaits Effects of NAFTA Tariff Elimination on New Automobiles

Magazine article SourceMex Economic News & Analysis on Mexico

Mexico Auto Industry Awaits Effects of NAFTA Tariff Elimination on New Automobiles

Article excerpt

The Mexican auto industry, already facing a slump in sales and increased global competition, has an additional concern this year: the elimination of tariffs for new vehicles imported from the US and Canada under the North American Free Trade Agreement (NAFTA). A NAFTA timetable stipulated that Mexican tariffs on imports of new automobiles from the two partner countries in the agreement were to be eliminated in the 10th year of the agreement, which is 2004.

The tariff elimination started with a whimper rather than a bang, with very few Mexicans taking advantage of the opportunity to acquire a new automobile in the US or Canada without having to pay import duties to bring the vehicle back to Mexico.

Through mid-January, customs authorities at locations near the US-Mexico border had not received a single request from Mexican nationals to import US or Canadian vehicles duty free. This is attributable to a variety of factors such as the weakness of the Mexican economy, which has limited the purchasing power of Mexican nationals, and the extreme security measures implemented by the US government at border points. Also, many Mexicans in a position to bring back cars are undocumented workers, who tend to buy used automobiles (see SourceMex, 2001-03-21).

The Asociacion Mexicana de la Industria Automotriz (AMIA) said another factor is the NAFTA requirement that vehicles have 2,000 km or less on their odometer and the paperwork involved in proving that the imports have a 62.5% or more North American content, thus eliminating many European and Japanese models.

Mexican dealers concerned about US prices, incentives

Still, the tariff elimination has raised some concerns within the AMIA and other industry groups because it has removed an important safeguard that had been in place for the past 10 years. This concern is tied in part to the traditionally higher retail cost of vehicles in Mexico, especially given the recent inclination of the government to levy a special tax on new cars (impuesto sobre automoviles nuevos, ISAN) in addition to the value-added tax (impuesto al valor agregado, IVA).

Among the proposals considered in some versions of tax reform presented before Congress was to eliminate or reduce the ISAN. This proposal, and all others, have not advanced because of the failure of Congress to agree on what taxes should be included in the reform package (see SourceMex, 2003-12-17 and 2004-01-07).

Industry officials said they fear that imports of compact and subcompact models will begin to increase once Mexicans better understand the procedures to bring back new vehicles from the US. "We will also see some imports of luxury automobiles, but not more than 8,000 or 10,000 units per year," said Eduardo Berlanga, president of the Asociacion Mexicana de Distribuidores de Automotores (AMDA).

US dealers have other marketing tools like rebates that are not yet available in Mexico. In the US, a rebate can reduce the sticker price by as much as US$3,000.

"With the rebates, there is a difference for Mexican consumers worth looking at," said Armando Soto, an auto-industry analyst with Kaso and Associates in Mexico City. "But, in Mexico last month, we started seeing similar discounting that helped sales. Still, in Mexico, discounts are limited to those who pay cash."

For now, the AMIA has launched an informal campaign citing the advantages of buying a car in Mexico. "People should know that Mexico remains the best option to acquire an automobile because of the ease in documentation as well as the warranties that we can offer," said AMIA president Cesar Flores Esquivel.

Domestic sales, exports slump in 2003

The concern about the opening of the Mexican auto market comes on top of the country's weak economy, which resulted in a weak performance for the industry last year. Statistics in an AMIA report published in mid-January showed the Mexican auto industry registered flat sales at the domestic level and suffered a major decline in exports. …

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