After 2 years under NAFTA, North America’s automotive industry is registering strong increases in both production and regional trade growth. NAFTA’s reduction of tariffs and other trade barriers, along with liberalized investment rules and preferential rules of origin, are spurring an expansion of production and sales by the automotive sector throughout North America, and indeed, throughout the hemisphere.

Because of increased global competition, U.S. automaker’s share of the domestic market has declined from 95% to 65% in the past three decades. In order to sustain competitive market share, automotive companies have been forced to rethink their strategies and form regional core networks.

Under NAFTA, automotive producers in the North American region are integrating their production strategies, strengthening their position in the domestic market, and increasing their competitiveness compared to other auto producers located in Asia and Europe.

The results have been clear. Total automotive trade levels within the NAFTA region grew by 17.6% from 1993 to 1995, and in 1995 represented 23.9% of overall trade between Mexico, Canada and the United States. Over the same period, total vehicle production by North American-based auto producers increased by 14.3%.

Although Canada is currently the largest trading partner with U.S. auto producers, it is Mexico which perhaps holds the greatest potential for increasing regional auto industry competitiveness. Trade between the United States and Mexico in this sector has grown substantially in recent years, totaling $25.68 billion in 1995. U.S. auto and automotive parts exports to Mexico totaled $8.64 billion last year, and U.S. automotive imports from Mexico totaled $17.04 billion.

Furthermore, the evidence indicates that rising U.S. imports from Mexico are increasingly replacing imports from other countries in a number of automotive sectors. For example, according to the U.S. Department of Commerce, recent trade data show that Mexico’s share of U.S. imports for small cars increased from 10.7% in 1994 to 15.9% in 1995. At the same time, total U.S. imports of these vehicles from all sources actually declined.

The growth of U.S.-Mexico production sharing in the automotive sector accounts for a large part of this trend. The benefit of this for both countries is confirmed by data from the U.S. International Trade Commission, which shows that U.S. imports from Mexico that result from production sharing contain a much higher share of U.S.-made content than similar imports into the U.S. from Asia.

Two factors are playing a key role in the growing success of U.S.-Mexico production-sharing partnerships. Both NAFTA and Mexico’s close proximity to the United States are yielding reduced costs and economies of scale, substantially increasing the competitiveness of North American-made vehicles vis a vis other global producers.

Automotive production partnerships now account for 34% of all U.S.-Mexico industry production-sharing ventures, and are providing important bi-national growth opportunities in the sector. For example, partnerships between assembly plants in northern Mexico and auto plants in the central U.S. (where final auto assembly takes place), have allowed Mexican firms to gain technological know-how, and U.S. firms have benefited from increased efficiencies in production.

Another significant trend for the success of the region’s auto producers lies in utilizing Mexico as an export base for other Latin American markets. Because of Mexico’s other regional free trade agreements, vehicles and parts produced in Mexico now have preferential treatment in Latin American countries such as Bolivia, Chile and Costa Rica.

In 1995, General Motors (GM) exported 12,000 Cavaliers to Chile from Mexico according to recent reports, and sold a record 130,000 vehicles throughout Latin America in the first quarter of 1996, a 14.4% increase over the previous year.

Navistar International recently announced that it will begin building heavy-and medium-duty trucks in Monterrey, Mexico for export to Chile. By using Mexico as a production base, Navistar avoids the 11% tariff imposed on exports from the United States and is able to export trucks to Chile tariff-free.

The potential for exports from this region is evidenced by the recent record automotive production levels in Mexico, which registered a 37.5% increase in the first half of 1996. Fully 81.7% of the 625,167 units produced in Mexico during this period were marketed as exports.

Although domestic automotive sales in Mexico declined in 1995 during the economic crisis, U.S. producers were able to register a 16% increase in market share in Mexico last year, compared to 11.3% in 1994. With Mexico’s economic recovery underway, sales to its domestic market in the first half of 1996 rose 57% over the same period in 1995, with total sales reaching 140,090 units.

Chrysler, for example, has seen a 10% rise in exports to Mexico in 1996, with its domestic sales in Mexico increasing from 12% to 15%. Recently, Chrysler announced plans to invest $100 million over the next ten years in the construction of a metal stamping plant in Coahuila, Mexico - a further vote of confidence for the long-term potential of NAFTA and the advantages of doing business in Mexico.

This article appeared in The Exporter, September 1996.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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