the impact of mercosur on the automobile industryctrc.sice.oas.org/geograph/south/okeefe.pdf ·...

THE IMPACT OF MERCOSUR ON THE AUTOMOBILE INDUSTRY

Thomas A. O’Keefe and Jerry Haar

THE NORTH-SOUTH

AGENDAPAPERS • F I F T Y SEPTEMBER 2001

The Southern Common Market (MERCOSUR) automobileindustry constitutes an important underpinning for the efforts toachieve economic integration of South America’s Southern Coneregion. Worldwide, the automotive sector has been a vitallyimportant source of employment, revenue generation, andmanufacturing growth. This paper analyzes the factors that havecontributed to the transformation of the automotive industry ofMERCOSUR, including national and regional policies, industrydevelopments, and global economic forces. Although automobilemanufacturers based in the MERCOSUR region have managed tobecome remarkably more productive during the 1990s, they stillhave been unable to reduce manufacturing costs to internationallevels. Much of the explanation for this problem lies in a host ofnational administrative barriers and inordinately high andregressive local tax rates. Most manufacturers based in theSouthern Cone are producing automobiles that are competitivelypriced only in the protected regional market. The need of manyMERCOSUR-based automobile manufacturers to compensate forlocal overcapacity by seeking out new export markets creates astrong incentive for those manufacturers to pressure SouthernCone governments to implement much-needed reforms.

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THE IMPACT OF MERCOSUR ON THE AUTOMOBILE INDUSTR Y


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NORTH-SOUTH AGENDA PAPERS • NUMBER FIFTY

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Introduction

Atransformation of the automotive industry, par-ticularly the segment involved in production

of finished vehicles, has taken place in theSouthern Common Market (Mercado Común delSur/Mercado Comum do Sul — MERCOSUR/MER-COSUL) region of South America, at a time whenMERCOSUR member states opened their econo-mies to global competition and to participation inan ambitious subregional economic integrationproject. This Agenda Paper provides an overviewof the factors that have contributed to this recentindustry transformation. The paper also examinesthe factors involved in the formal incorporation ofthe automotive sector into the MERCOSUR projectand discusses the impact this development is like-ly have on the subregional automobile industry.

The main reason for focusing on the MERCO-SUR region’s automotive sector lies in the fact thatthe industry “has been the main propulsive manu-facturing activity in the development of advancedeconomies during the twentieth century — includ-ing Japan’s achievement of advanced-nation statusfrom a position of backwardness. In addition, themotor vehicle industry has been at the nerve cen-ter of inter-industry relationships, becoming amajor force in the transformation of technologies,markets, and institutions.”1 In the particular caseof MERCOSUR, the automotive sector was respon-sible for about one-third of total intra-regionaltrade flows during the 1990s, at a time when over-all intra-MERCOSUR trade quadrupled. In 1999,when the share of the automotive sector in intra-MERCOSUR trade shrank to one-sixth of totalintra-regional trade flows, overall intra-MERCOSUR

trade contracted by nearly 30 percent. Accord-ingly, the automotive sector constitutes an impor-tant underpinning for efforts to achieve economicintegration in South America’s Southern Cone.

Another reason for focusing on MERCOSUR’sautomotive sector stems from a 1996 paper byWorld Bank economist Alexander Yeats, whichgenerated much controversy after it was leaked tothe press.2 In his paper, Yeats charged that “[r]oadmotor vehicles (Standard Industrial TradeClassification 732) played a major role in th[e]overall shift” in the regional orientation of exportstoward MERCOSUR, a trend he labeled “perverse”and trade-diversionary away from more efficientsources of imports because “economic theoryholds that developing countries, like those in theMercosur, do not have comparative advantage incapital intensive goods.”3 Yeats attributed this“troublesome” trend to “Mercosur’s nontariff barri-ers [that] are also structured along lines thatstrongly reinforce the trade-distorting effects of theagreement’s preferential tariffs.”4 This AgendaPaper will challenge a conclusion implicit inYeats’s study, namely, that MERCOSUR does notnow nor ever will have a comparative advantagein the production of automobiles. In addition, thispaper will examine whether MERCOSUR’s tariffand nontariff barriers do protect an industry thatmanufactures products that are technologicallyobsolete and not competitive on the internationalmarket.

This study begins with an overview of theeconomic changes that swept South America dur-ing the 1990s and examines the concurrentrestructuring and transformation of the internation-

THE IMPACT OF MERCOSUR ON THE AUTOMOBILE INDUSTRY


Thomas A. O’Keefe is President of Mercosur Consulting, Ltd., in Washington, D.C., and an Adjunct SeniorResearch Associate at The Dante B. Fascell North-South Center at the University of Miami. Jerry Haar is a SeniorResearch Associate at both the North-South Center and the Center for Human Resources at the Wharton School ofthe University of Pennsylvania. The authors are particularly grateful for the contribution made to this study by JuanJosé Amell, who conducted and shared his extensive field research in the State of Paraná, Brazil, between December1999 and February 2000. The authors also thank Guillermo Devoto of the Argentine Ministry of Foreign Relations forhis considerable logistical support in facilitating personal interviews in Argentina; Ralf-Otto Limbach of Volkswagenand Dave Killinger of Ford Motor Company for their generous cooperation; and Roberto Domínguez and CarlMariano for their invaluable research assistance. Jeffrey Stark, Director of Research and Studies at the North-SouthCenter, also provided excellent comments, suggestions, and editorial advice.

A NORTH-SOUTH AGENDA PAPER • NUMBER FIFTY2

al automobile industry in the face of globalization.The paper then provides a brief historical back-ground on the Southern Cone’s automobile indus-try, so as to put current developments in perspec-tive. The paper’s third section looks at what hashappened during the 1990s to the automobilemanufacturing sector in the Southern Cone at bothnational and individual company levels. The lastsection discusses the problems and obstacles indevising a definitive MERCOSUR automobile poli-cy and examines the compromise transitionalagreement that has been achieved, as well as itslikely impact on the local automobile industryover the next few years. This discussion providesa preview of the issues and dilemmas that arelikely to resurface in any negotiations to create afuture Free Trade Area of the Americas (FTAA). Inthis respect, it is interesting to note that Brazilalready has indicated that it will treat the automo-tive industry as a “sensitive sector,” meriting spe-cial protective treatment in any future FTAA nego-tiations.5

This paper is limited in focus to that part ofthe automotive sector involved in the productionof passenger cars, light commercial vehicles,trucks, and buses. The paper does not give exten-sive coverage to farm equipment nor to the autoparts and components industry (including chassismanufacturers). Chile, an associate member ofMERCOSUR, is included because its substantialtrade and investment links to its Southern Coneneighbors make eventual full integration of Chile’sautomotive sector with the wider MERCOSURautomobile market inevitable.

The research for this paper encompassed awide variety of secondary sources as well as per-sonal interviews with automobile company execu-tives, licensees, and relevant trade association representatives in Argentina, Brazil, Chile, andUruguay between December 1999 and August2000.

The Global Automobile IndustryDuring the 1990s

Automobiles comprise one of the largest sectorsof the global economy. Production averaged

50 million units annually during the 1990s, andoutput was projected to top 60 million in 2000.Nearly 75 percent of global motor vehicle produc-tion and sales emanated from the United States,Canada, Japan, and Western Europe; however,

future growth is expected to come from Asia,Latin America, and Eastern Europe.6

The most important trends in the industry arethe intensification of competition and globaliza-tion. With domestic competitive pressures increas-ing, manufacturers have no choice but to leveragetheir brands, engineering, development, and pro-duction costs by penetrating and competing inoverseas markets. As more and more producersdo so, global competition increases worldwide.7

This competition is heightened by the Internet,faster communication, lower trade barriers, andrising income. The resulting globalization of theautomobile industry has boosted product quality,hastened product development, lowered costs,and increased rationalization and efficiency.

Within this competitive milieu and despite thediversification of automobile manufacturing, morethan 50 percent of global business is handled byfive companies (GM, Ford, DaimlerChrysler,Volkswagen, and Toyota). Restructuring and con-solidation, begun in the early 1990s, continueunabated.8 Traditional large-scale vertical integra-tion within a single nation has waned in favor ofa flexible horizontal diffusion of operations thatcross geographic and national borders — anotherresult of the changing patterns of demand and theemergence of new offshore competitors.9

With most future growth coming from Asia,Eastern Europe, Russia, and Latin America,automakers seeking to sustain global market sharewill have to build cars appropriate for nontradi-tional markets — markets in which transportationinfrastructure is poorly developed, per capitaincome is lower, and gasoline prices are muchhigher than in the United States.10 The emergenceof new competitors and capacity offshore also isimpacting the global automobile industry. Manycountries are expanding their automotive sectors(via investment, tax, and regulatory incentives),since the automobile industry is a major driver ofeconomic growth, high-wage employment, andtechnology transfer. However, capacity is exceed-ing local demand, and this overcapacity is intensi-fying competition for market shares in bothdomestic and export markets.

As part of the globalization of the automobileindustry, mergers, acquisitions, and alliances havedramatically decreased the number of independentautomakers. Moreover, international acquisitionsand investment alliances are blurring the industry’snational boundaries (see Figure 1). Beginning in1998 with the Daimler-Benz AG and Chrysler

THE IMPACT OF MERCOSUR ON THE AUTOMOBILE INDUSTRY 3

Corporation merger, cross-border activity intensi-fied significantly. GM, the world’s largest automak-er, increased its ownership interest in IsuzuMotors Ltd. and Suzuki Motor Corp.; acquired theremaining 50 percent of Saab Automobile AB forUS$125 million; and announced plans to take a20-percent equity stake in Fuji Heavy Industries,the maker of Suburu vehicles, and a 20-percentstake in Fiat. Ford, the world’s second-largest car-maker, acquired Volvo’s automobile business in1999 for $6.45 billion and announced plans to buyLand Rover PLC from BMW. DaimlerChrysleragreed to a controlling 34-percent stake inMitsubishi Motors, and Renault purchased 37 per-cent of Nissan Motors as part of its strategy toboost its presence in Asia, particularly in Japanand South Korea. Figure 1 presents a picture ofthe merger activities of the global power playersin the automobile industry.

Consolidation in the global auto industry isbeing driven by three major trends: the increasing

importance of strong brands, manufacturers’ needto enter difficult markets, and the rising cost oftechnology. Ford and Volkswagen have aimed atacquisition of internationally known brands, espe-cially “up market” brands, such as Jaguar, Audi,and Land Rover. Renault has pursued an Asiaentry strategy, and GM has aimed to acquire newtechnology and parts more cheaply, as illustratedby its increased stake in Fiat (a leader in efficientand highly automated engine factories) and itssourcing of low-pollution/low-cost V-6 enginesfrom Honda.11 Ford’s CEO, Jacques Nasser, assertsthat consolidation is inevitable: “It isn’t about get-ting bigger... [but] being better and quicker andmaking sure that what we’re doing fits into anoverall strategy and makes sense.”12 However, asthe Daimler-Benz/Chrysler merger illustrates, con-solidation often produces conflict as a result oftwo companies’ strong and distinctive heritages,different corporate cultures, and ill-conceived andpoorly executed post-merger integration plans.13

Consequently, corporate performance can beaffected negatively, leading to a decline in equityvalue of the new enterprise.

Two other trends worth noting pertain to theperformance of automobile manufacturing in theUnited States and developments in Latin Americanmarkets. In the first instance, the U.S. auto sectoris gaining significantly on Japanese firms in effi-ciency. The Ford Taurus plant in Atlanta was con-sidered the most efficient in North America in1999, and while Ford is ranked the most efficientautomaker in the United States, GM experiencedthe largest increase in efficiency in 1999. Due tobetter management and organization — includingdramatically better labor relations — the “BigThree” U.S. automakers have narrowed the pro-ductivity gap between their plants and those ofJapanese competitors.14 Clearly, improved researchand development (R&D); robotics; lean productionsystems; and manufacturing, quality, andergonomic improvement in vehicles also havegiven a big boost to U.S. auto manufacturers.Moreover, foreign automakers producing in theUnited States also have benefited from the revital-ization and advancements in the automotive sec-tor. Now, more than 58 percent of passenger carssold in the United States are produced by the BigThree, with the balance (42 percent) being soldunder foreign nameplates; however, most of thoseforeign vehicles are produced in “transplant” facili-ties, foreign-owned plants (mainly Toyota, Honda,and Nissan) located in North America.1 5


Still another trend is the up-and-down courseof automobile manufacturing and sales in the LatinAmerican market. The region still is recoveringfrom the adverse effects of currency fluctuations,brought on in part by the Asian crisis and theJanuary 1999 devaluation of the Brazilian real.Currency depreciation has lowered the value ofinvestments in the region, and, along with reces-sions in the Andean countries and the SouthernCone, this decline has dampened consumerdemand. The fact that operating expenses, such aslabor and raw materials, are lower in dollar termshas helped cushion the severity of the downturn.Latin American automotive demand fell in 1999from 1.6 million to 1 million units.16 All the majorcar companies suffered losses, and only after thesecond quarter of 2000 did consumer demandbegin its rebound. As an example, Brazilian auto-mobile output increased to 168,000 units in April2001, up 24.1 percent from April 2000.17

The one bright spot in the Latin Americanautomobile market is Mexico, where productionhas tripled in the last 12 years to manufacturemore than 1.4 million autos in 1999, exportingmore than 80 percent of its output to the north.Although labor costs have provided a large advan-tage for Mexico, according to Thomas Varig, direc-tor of communication and government relationsfor Volkswagen in Mexico, “Quality and productiv-ity [are] going to be even more important for thecompetitiveness of the Mexican auto industry.”18

Unquestionably, the Latin American automo-bile industry is undergoing transformation. Thestructure of the industry has been changing formore than a decade, as policymakers abandon theimport-substitution model in favor of market liber-alization, regional integration, and export produc-tion. Additionally, models of organization andindustrial relations in the automotive industry havebeen reformed through work practices associatedwith flexible production, and governmental institu-tions and political parties also have elevated auto-mobile manufacturing and assembly (and theunions representing workers in this sector) to animportant role in economic development.19

The global trends in the automobile industry,cited above, appear to be leading toward a “uni-versal market,” in which trade restrictions, localpreferences, and cultural differences are offset bycommon aspirations.”20 Analysis of the interplay ofcompetitive forces and economic factors in theMERCOSUR region provides a vivid case exampleof the extent to which global trends in the auto-

mobile industry affect Brazil, the Southern Cone,and MERCOSUR’s “imperfect” customs union itself.

A Historical Overview of the Souther nCone Automobile Industry

The automotive industry in South America hasits historical roots in a small factory set up

Buenos Aires at the beginning of the twentiethcentury by an Argentine entrepreneur namedHoracio Anasagasti, who began assembling simplevehicles using imported Bleriot auto parts fromFrance.21 In 1916, Ford set up its first SouthAmerican assembly plant in Argentina, which wasfollowed by new assembly facilities in Chile(1924); Brazil (1925, 1926, and 1927); and Mexico(1926). During the late 1920s and early 1930s, theother major U.S. automobile companies, GeneralMotors and Chrysler, began building factories inLatin America as well.

The initial efforts by the U.S. “Big Three”to set up assembly plants in Latin America wereundertaken primarily because of the savings thatcould be obtained through shipping semi-knocked-down (SKD) or completely knocked-down (CKD) kits as opposed to exporting com-pletely built-up (CBU) vehicles to the region.22

Accordingly, the initial investment in assemblyplants was made prior to the granting of any tariffadvantages for local assembly, motivated primarilyby a wish to avoid high transport costs.23

During the inter-war period (1918-1940), theLatin American automobile industry came to becompletely dominated by U.S. companies.24 Inaddition, the Latin American market becameextremely important for U.S. manufacturersbecause “these Latin American countries could beused to extend the production runs of parts andcomponents made in the United States, whereasthe highly protected European markets couldnot.”25 The importance of the Latin American mar-ket is underscored by the fact that after Canada,Argentina was the largest foreign market for theU.S. automobile industry between 1925 and1929.26 Perhaps not surprisingly, by 1930,Argentina “had one of the highest vehicle densi-ties in the world, higher than that of mostEuropean countries.”27

World War II and the period immediately after1945 saw new automobile production in LatinAmerica drop sharply, as raw materials were redi-rected to support the war effort and new vehiclesand spare parts could not be imported from


abroad. Interestingly, this situation led to thegrowth of a substantial Latin American spare partsindustry, needed in order to keep the existingfleet of vehicles operating.28 These suppliersbegan as small workshops, operating virtually as acottage industry, but they provided a basis uponwhich a local auto parts industry later could bedeveloped.29

By the mid-1950s, as the pent-up demand forautomobiles following the end of World War IIhad been satisfied in the United States andEurope, U.S. and European firms began placing agreater emphasis on expansion overseas, includingLatin America, through exports, expansion ofalready existing subsidiaries, or creation of newones.30 This renewed interest in the LatinAmerican market came at a time when govern-ments throughout the region were attempting toencourage industrial development through importsubstitution policies. Given the key role played bythe motor vehicle industry in the successful post-war recovery of the U.S. and Europeaneconomies, the automobile industry was assigneda major role in the development strategies ofcountries such as Argentina, Brazil, and Mexicoduring the 1950s and 1960s.31

In order to force foreign manufacturers to pro-duce vehicles locally, many Latin American gov-ernments in the 1950s began to impose very highimport duties on finished automobiles, and theyincreased local content requirements for vehiclesmanufactured locally. For example, by 1960,import duties for imported passenger cars rangedfrom 400 percent to 500 percent in Argentina andfrom 30 percent to 150 percent in Mexico, withChile in an intermediate position.32 These protec-tionist policies soon were accompanied by out-right prohibition of imported vehicles, as waseventually the case in Argentina and Chile.

During the 1960s and 1970s, two different pat-terns of automobile production existed in LatinAmerica. One involved integrated vehicle factoriesthat included all the major operations — stamp-ing, casting, forging, machining, and assembly —which typified the major producers in Brazil andArgentina from the 1960s onward. The other pat-tern, typical of Chile, Colombia, Peru, Uruguay,and Venezuela, consisted of simple assemblyplants that imported most of the needed parts andcomponents but also purchased a few from localsuppliers.33

One significant characteristic of the post-WorldWar II Latin American automobile industry in

sharp contrast to the import substitution modelemployed in Japan, for example, was the heavyLatin American reliance on using transnational cor-porations to promote vehicle manufacturinginstead of building up indigenous vehicle produc-ers.34 Among the negative consequences of thispolicy were the restrictions included by the multi-national automobile corporations in their technol-ogy transfer contracts with their Latin Americansubsidiaries or licensees, which often prohibitedexport sales.35 This limitation led to underutiliza-tion of existing capacity and made it impossible toachieve efficient scales of production, which,along with tying purchases of intermediate andcapital goods and overpricing inputs, contributedto the high cost of the end product in LatinAmerica.36

In an attempt to counteract the effects of aweak domestic market, the Argentine governmentin the mid-1960s made the first efforts to promoteautomotive exports to other countries participatingin the Latin American Free Trade Association(Asociación Latinoamericana de Libre Comercio —ALALC). These managed trade arrangementsallowed Argentina to increase duty-free finishedvehicle exports to other ALALC countries inexchange for importing certain component partsfrom them.37 This new development was verybeneficial for the multinational automobile corpo-rations, as it allowed increased integration of theirLatin American subsidiaries.38

During the mid-1970s, the Argentine govern-ment made an even more concerted effort to pro-mote exports, again mostly to other ALALC mem-ber states — particularly Brazil, Chile, Paraguay,Peru, Uruguay, and Venezuela. The total numberof vehicles exported went from just under 2,000 in1971 to approximately 15,500 units in 1974.39

Interestingly, while the ALALC countries dominat-ed 89.7 percent of Argentine vehicle exports in1973, another 3.5 percent of exports went to theUnited States and Europe, and 7.8 percent went toCentral America (including Cuba), Asia, andAfrica.40 This successful and rapid entry into theworld market was largely the result of strong gov-ernment fiscal and financial incentives thatallowed the multinational automobile producers tocompensate for high domestic production costsand thereby become more internationally competi-tive.

By the early 1980s, in part as a response to alocal recession, an increasing regional integrationof production appeared to occur among affiliates

located in the countries of the former ALALC (nowcalled the Latin American Integration Association[Asociación Latinoamericana de Integración —ALADI]), particularly among Argentina, Brazil, andUruguay.41 Within the international intra-firm divi-sion of labor during this period, Argentina wasgenerally assigned (particularly in the trade withBrazil and the developed countries) the export ofcomponents 1) requiring a substantial labor input,especially of skilled labor, when there was a rela-tive cost advantage; 2) enjoying relatively mini-mum-efficient-output scales (as in a number ofcastings and forgings); and/or 3) being graduallyphased out of developed country sales, but forwhich a local demand still existed. In addition,CKD units and major subassemblies (such asengines and gearboxes) were exported fromArgentina primarily to Uruguay, Colombia, andVenezuela.42

Although some export incentives were intro-duced in the late 1960s, export promotion for theautomotive sector in Brazil gathered particularsteam in the early 1970s under the Special FiscalBenefits for Exports (Benefícios Fiscais aProgramas Especiais de Exportação — BEFIEX)program. The government was motivated primarilyby its desire to generate foreign-exchange earn-ings rather than by broader concerns of industrialpolicy and attaining of economies of scale throughexports.43 By the late 1970s and early 1980s, how-ever, Brazilian-based firms themselves increasinglylooked to exports as an alternative to a weak localmarket. The fact that Brazil had the lowest pro-duction costs in Latin America also allowedBrazilian-based automobile manufacturers to gainimportant export markets in Latin America andAfrica, beating out Argentine affiliates.44 The endresult was that the automotive sector as a whole,including the auto parts industry, became respon-sible for the largest share of Brazil’s manufacturedexports during much of the decade of the 1980s.45

By 1980, Brazil emerged as an importantexport base to supply components and/or finishedvehicles not just for South America, but for theentire international automobile industry.46 Brazil atthe time represented obvious advantages overArgentina as a strategic location in South America,given its larger internal market with greater poten-tial for expansion, lower wages, less-active laborunions, and very attractive and stable export-incentive scheme, backed by a military govern-ment sympathetic to multinational investment (incontrast with the policies of the Argentine govern-

ment at the time).47 During this period, Brazil alsowas more successful than Argentina in keepingthe rate of increase of wage costs below theincrease in productivity.48 Exports as a share ofpassenger car production in Brazil peaked at 41percent in 1987 and, as the economy improvedand internal demand increased markedly, settledat 18 percent in 1990.49 One important result ofthis growth in exports was that within less than adecade, the Brazilian motor industry had gonefrom being a drain on foreign exchange earningsin the early 1970s to being a net contributor bythe 1980s.50

The Southern Cone AutomobileManufacturing Industry during the 1990s

The 1990s marked a decade of dramatic growth,development, and change in the Southern

Cone. The widening and deepening of neoliberaleconomic reform policies begun in the 1980s —the launching of MERCOSUR and increased com-mercial development and competition — positive-ly impacted Southern Cone manufacturing.Nevertheless, economic slowdowns in Argentinaand Brazil, exacerbated by the Mexican peso crisisof 1994 and the devaluation of the Brazilian realin January 1999, caused a setback for the automo-bile industry — one from which the SouthernCone has yet to recover.

Argentina

The Argentine automotive industry experienceda boom throughout most of the 1990s, when

national production went from just under 100,000vehicles in 1990 to a high of about 450,000 unitsin 1998, primarily in response to a surge in localconsumer demand (see Figure 2). The foreignmultinationals attempted to capture this increaseddemand by investing some $4.5 billion dollars inthe country’s automotive sector between 1995 and1998. By 1999, however, the Argentine automobileindustry experienced a sharp downturn in outputas a result of a domestic recession that hadalready begun to engulf the country by the end of1998 and was soon exacerbated by the Brazilianmaxi-devaluation of the real in January 1999. Withthe maxi-devaluation of the real, exports to Brazilplummeted as production costs in Argentina sud-denly became about 30 percent more expensive.Prior to the devaluation, some 90 percent of


Argentine automotive-sector exports had gone toBrazil alone. For all of 1999, Argentina was able toexport only about 100,000 vehicles (down fromthe 238,000 units exported the year before).

In reality, the maxi-devaluation of the realonly exacerbated a problem that was becomingincreasingly apparent throughout the 1990s, name-ly, Argentina’s higher production costs over thosein Brazil. This explains why truck and bus pro-duction in Argentina had been falling steadilysince 1994 despite increases in local demand andwhy entire production lines of heavy commercialvehicles and farm equipment were being shiftedto Brazil. Following the maxi-devaluation of thereal in January 1999, production costs in Argentinaincreased 12 percent by the end of 2000.51

Argentina’s automotive industry today is heavi-ly concentrated in the production of passengercars and, to a lesser extent, of light commercialvehicles. The entire industry is responsible forabout 3 percent of the country’s gross domesticproduct (GDP) and 14 percent of its overall indus-trial production. In 1999, Argentine-based manu-facturers were able to produce just over 300,000vehicles. For the year 2000, Argentine-based auto-mobile manufacturers aimed to reach a total out-put of 320,000 units. Had it not been for the three

phases of the Plan Canje,first introduced in May1999, which created afinancial incentive fortrading in older vehiclesfor newer models, mostof that output wouldhave sat unwanted ondealer lots.52

Unlike the simpleassembly plants that existin Chile and Uruguay,the 10 automobile pro-ducers left in Argentina(as with those in Brazil)are engaged in full-scalemanufacturing activities.53

Although Argentine ter-minals, or productioncenters, have a capacityto produce about 700,000vehicles per year (that is,double the current pro-duction), that amounts toonly one-quarter ofBrazil’s manufacturing

potential. Production in Argentina tends to be lim-ited to a few, higher-quality models that are solddomestically or exported mostly to Brazil inexchange for a wider variety of models, oftenmade by the same firm’s Brazilian subsidiary. Mostof the high-end, luxury-type vehicles sold inArgentina, however, are imported from Asia,Europe or North America and are limited by quo-tas that until recently were based on an Argentinesubsidiary’s export performance.

Despite its higher overall production costs,Argentina still is said to enjoy a number of com-petitive advantages over Brazil in vehicle produc-tion. For one thing, Argentine-based producersclaim that the Argentine workforce is better edu-cated and presumably more productive and betterable to use newer technologies than its counter-part in Brazil. Moreover, it is reportedly easier tofind higher qualified and less costly managers inArgentina than in Brazil. The costs of logistics alsoare said to be lower in Argentina than Brazil,given the country’s longer experience with priva-tized ports and better internal transportation infra-structure system. In addition, economic policy-making predictability supposedly is greater inArgentina than in Brazil, and the legal regime forforeign direct investment is reputed to be moretransparent.


Brazil

Despite periodic downturns, the 1990s can becharacterized for the most part as a decade of

dynamic growth and development for Brazil’sautomobile industry (see Figure 3). The Brazilianautomotive market more than doubled from 1990to 1997 (from 663,084 vehicles to 1,677,858).54

However, from 1998 until the first half of 2000,the auto industry fell into a slump. The Asianfinancial crisis in late 1997, the January 1999devaluation of the real, and the continuing andsevere economic recession in neighboringArgentina, Brazil’s principal trading partner, ham-pered Brazilian auto sales. Nevertheless, a turn-around is in sight, although the previously forecastproduction goal of 2.5 million units by year-end2001 will not be achieved.

Brazilian automotive output expanded bymore than 24 percent during the first half of 2000,as compared to the same period in 1999. Invest-ments are expected to increase by $8.8 billion inthe coming three years, with the goal of increas-ing production capacity by 30 percent.55 Table 1

graphically portrays new automobile plants inBrazil from 1997 to 2000.

Brazil’s automotive sector, the tenth-largest inthe world, is a significant contributor to theBrazilian economy, accounting for nearly 12 per-cent of GDP. According to the NationalAssociation of Automotive Vehicle Manufacturers(Associação Nacional dos Fabricantes de VeículosAutomotores — Anfavea), the Brazilian automo-tive industry generated $25 billion in annual sales,produced 1,585,630 vehicles, and generated morethan 93,135 direct jobs in 1998. From 1991 to1998, vehicle production in Brazil increased by 62percent, and domestic car sales expanded by 65percent. The tremendous expansion in theBrazilian vehicle-manufacturing base is inresponse to two primary market trends: 1) the significant pent-up demand for vehicles inthe Brazilian market and 2) Brazil’s increased posi-tion as a global sourcing location for world modelvehicles. Nevertheless, the vehicle-per-capita ratioin Brazil still is low, with one car for every 9.4inhabitants. It will take years for local production


Table 1. New Automobile Plants in Brazil, 1997-2000

Production Capacity Investment

Manufacturer Location Model(s) (per year) (US$ million)

BMW/Rover S. Bernardo Campos/SP Defender 5,000 148

Chrysler/BMW Campo Largo/PR Motors 400,000 500

Chrysler Campo Largo/PR Dakota 15,000 120

Fiat Belo Horizonte/MG Pickup 100,000 200

Fiat Betim/MG Motors 500,000 500

Ford Camacarí/BA Amazon 250,000 1,700

GM Santa Catarina Mini-cars 200,000 500Gravataí/RS Motors 100,000 600

Iveco Sete Lagoas/MG Daily/Ducato 20,000 300

Mercedes Juiz de Fora/MG Classe A 80,000 820

Mitsubishi Catalão/GO L200 8,000 35

Navistar Caxias do Sul/RS Trucks 5,000 120

Peugeot-Citroën Porto Real/RJ Citroën Xsara Peugeot 205 100,000 600

Renault S. José dos Pinhais/PR Mégane/ScénicClio 240,000 1,000

Toyota Indaiatuba/SP Corolla 15,000 150

Volkswagen/Audi S. José dos Pinhais/PR Audi A3Volkswagen Golf 170,000 700

Source: SINDIMETAL and SEBRAE/PR 1997-2000.

and imports to meet thisrepressed demand.

Brazil’s automobileindustry during the lastdecade and a half hasfollowed an erraticcourse (with fits andstarts from protectionismto liberalization andperiodic reversals). Fromthe late 1980s until thepresent time, however,market-opening policieshave been the rule forthe most part. Economicopening was one of theplanks of the campaignplatform of PresidentFernando Collor deMello. Upon assumingthe presidency, hereduced domestic con-tent requirements in theauto industry from 90percent to 70 percentand loosened regulationsfor protecting suppliers. Tariff reduction schedulesalso were hastened. In addition, the governmentalso embarked upon tax reduction policies andincentive mechanisms to produce popular modelautomobiles. The result was a surge in demandfor popular cars and a 69-percent increase inexports to Argentina. However, the implementa-tion of the Real Plan tightened credit and caused adecline in auto production and sales.56 The 1994Mexican peso crisis subsequently caused a conta-gion effect in Brazil, much as the Asian financialcrisis did three years later. President FernandoHenrique Cardoso unilaterally increased tariffs (byas much as 70 per cent in the auto sector) as atemporary measure to protect Brazil from negativefinancial impact of the external crisis. In March1997, an automotive regime was approved thatregulated the importation of cars, capital goods,and components; this regulation links importswith regional and export incentives.57

The successful economic stabilization plan ini-tiated in June 1994, the Real Plan, has allowed anestimated 13 million new consumers to enter thedomestic market. According to the Instituto dePesquisa Econômica Aplicada (IPEA), a Braziliangovernment economic research institute, 80 per-cent of poor families saw their incomes rise dur-

ing the first year of the Real Plan, as did 55 per-cent of non-poor families. The impact of thesenew consumers on the market has been dramatic.Vehicle sales increased 12 percent, from 1.4 mil-lion in 1995 to 1.5 million in 1996 alone. An esti-mate from the dealers’ association is that today 60percent of their clients have an annual income of$24,000, including a new tier of clients who previ-ously had never purchased a car. Vehicle produc-ers are responding to this expanding consumerbase and now offer 30 brands and 400 vehiclemodels produced locally, compared with only fourbrands and 80 models 10 years ago. For the firsttime, consumers also have access to financing forvehicle purchases. Today, around 85 percent ofthe vehicles sold in Brazil are financed, generallyon terms of one to three years with an interestrate of about 3 percent a month. In contrast, 70percent of vehicle sales during the 1980s werepaid in cash.

Another significant trend affecting the Brazilianautomotive sector is Brazil’s increasing position asa global sourcing location. Brazil’s market liberal-ization and participation in MERCOSUR is encour-aging vehicle manufacturers to adjust their strategyfrom focusing on the formally protected domesticmarket to manufacturing vehicles that compete inan open local market as well as in export markets


such as South America, Asia, and Europe. TheBrazilian government has contributed to the fuel-ing of this manufacturing growth by establishing a“new automotive regime” that gives fiscal prefer-ences to vehicle assemblers and auto parts pro-ducers with manufacturing operations in Brazil.

Given the size of its internal market, exportpotential, and geographic location, Brazil is a pri-ority locale for all automakers. The Brazilian mar-ket is dominated by four major manufacturers, list-ed by market share: Volkswagen, Fiat, GeneralMotors, and Ford. These firms account for 95 per-cent of the market. Brazil is attracting more newautomotive investment than any other country inMERCOSUR, approaching $18.3 billion to beinvested through the year 2000 and involvingalmost all i n t e rnational vehicle assemblers.5 8

S o u t h e rn Brazil (mainly São Paulo, Paraná, and RioGrande do Sul) is the dominant locale for automo-bile pro d u c t i o n .

Despite the ongoing recession in the MERCO-SUR automobile industry (Brazil’s auto sector isoperating at less than 60-percent capacity),automakers are maintaining a long-term perspec-tive. Volkswagen plans on spending $650 millionto upgrade its plants, Fiat will inject $1.5 billioninto its three facilities, Ford has invested $3.5 bil-lion to date, and GM has plans to invest $3 bil-lion.59 New automobile factories under construc-tion in Brazil, such as the $600-million GeneralMotors facility in Gravataí, Rio Grande do Sul, andFord’s $1.9-billion plant in Camaçari, Bahia, aim tomeet headquarters’ goal of producing a “worldcar” — a model for manufacturing that utilizesinnovative production processes, such as modularassembly and lean manufacturing, and clusterssuppliers close to the production facility (con -domínio industrial ).60

Brazil’s relatively well-developed technologicalbase has spurred automakers to invest in researchand development in-country. Fiat’s Palio subcom-pact was developed jointly by Brazilian and Italianengineers. Taking into consideration Brazil’s tropi-cal climate and rough road conditions, the engi-neers successfully designed shock absorbers, cus-tomized dust filters, and added other features thatnow are standard in Palios worldwide. Addition-ally, automakers continue to invest heavily in edu-cation, grooming local talent, and promoting localengineers and managers. German automakers leadthe way in workforce development, sending 100Brazilian engineers per year to Germany to

observe production processes and interact closelywith their counterparts.61

As to the sales outlook for automakers inBrazil, companies aimed to break even by the endof 2000. According to data compiled from Anfavea,sales in the first nine months of the year 2000 rose9.4 percent from the same period in 1999, to 1.08million units, and production was up 23 percent,to nearly 1.3 million vehicles. Approximately 75percent of all cars sold in Brazil are inexpensive,one-liter vehicles like Volkswagen’s Gol, a “peo-ple’s car” produced 20 years ago (the least expen-sive model sells for about $7,500). Again, growthpotential is huge: Brazil has only 112 cars forevery 1,000 people; in the United States, the figureis 918 cars per 1,000 people.62

Foreign markets will remain vitally importantto automakers in Brazil. Exports are expected togrow by 280 percent in 2001, and most automak-ers are investing in production lines aimed atexport markets. Tritec, a joint venture betweenDaimlerChrysler and BMW, will target the UnitedKingdom and the United States exclusively. Ford’sBrazilian subsidiary will supply motors for theFocus and Ikon, produced in Argentina andMexico.63 Nevertheless, exports will not be able tomake up for the fall in the domestic market, whenBrazil already accounts for 6 of every 10 cars soldin South America and Mexico. While Fiat Brazilhas had success in selling its Palio Weekend inItaly and General Motors in exporting pickuptrucks and compacts to the Middle East and ChevyBlazer assembly kits to China, automakers will notbe able to get into the black until the domesticmarket recovers.64 Clearly, economic recovery inneighboring Argentina, continued economicgrowth in the United States, and greater accelera-tion of consumer demand in Europe would leadto significantly revitalized growth and strongdemand in Brazil’s home market.

The automotive sector has been highly attrac-tive for investors, in light of Brazil’s increasingeconomic role in South America and the size of itseconomy. New investments in the Brazilian auto-motive industry demonstrate a strong trend infavor of regional decentralization. As the industrialpole of São Paulo becomes congested, transna-tional automobile manufacturers look to otherstates in Brazil. One of the primary recipients ofthese new investments has been the state ofParaná. In 2000, Paraná was expected to receiveone-third of the total investment directed to theBrazilian automotive sector and to have the ca-


pacity to produce a total of 235,000 vehicles peryear, or almost 10 percent of the total productioncapacity in Brazil. In addition, these investmentswere expected to generate revenue of roughly $7billion by the year 2000.65 The case of Paraná isp resented below to illustrate the decentralizationt rend within the Brazilian automobile industry.

Decentralization of Production: The Case of Paraná

New investments in Paraná are primarily theresult of decisions made by three automobile

manufacturers: Audi/Volkswagen, DaimlerChrysler,and Renault.66 These manufacturers have joinedVolvo, which has been producing vehicles inParaná since the late 1970s. As a result of theseinvestments, Paraná is now the second-largestautomotive center in Brazil, after the state of SãoPaulo. The decision to invest in Paraná was theresult of a number of factors, including an aggres-sive state government program begun in 1995 toattract foreign direct investment by postponingpayment of the state-imposed ICMS value-addedtax and by embarking on major transportationinfrastructure improvements. In addition, the portof Paranaguá, which serves the entire state ofParaná, was one of the earliest in Brazil to be pri-vatized, thereby contributing to a sharp drop inthe handling costs for containers and other portservices. Car company production in Paraná hasbeen dramatic, as shown by the table below.

Table 2. Automobile Manufacturers in Paraná

Automobile Production M a n u f a c t u r e r P r o d u c t Capacity by 2000

Audi/Volkswagen A3, Golf 110,000

DaimlerChrysler Dakota 15,000

Renault Megane Scenic, Clio 100,000

Volvo Trucks and Buses 10,000

Source: SINDIMETAL and SEBRAE/PR 1999.

Audi/Volkswagen

The new plant in Paraná represents a greateremphasis by the VW Group on obtaining higheraggregate value by focusing on the production ofvehicles with greater luxury and sophistication.The Audi/VW plant in Paraná produces Audi’s A3and VW’s new Golf. The production of these two

vehicles under one roof represents a new relation-ship within the VW Group.67

Planned to be one of the 10 most productiveplants in the world, the VW Group’s investment inParaná equals $700 million and has the capacity toproduce between 160,00 and 170,000 vehicles peryear. Although the primary focus of the Paranáfactory is to serve the Brazilian and SouthAmerican markets, the VW Group emphasizes thatit also has other export markets in mind, namelyEurope and North America.

DaimlerChrysler

In June 1998, Chrysler inaugurated a newplant in Campo Largo, Paraná, to build the firm’sDakota pickup truck model. The new facilityincorporated the company’s new production andlogistics philosophy, called the “ChryslerOperations Systems,” a version of Toyota’s“Production System.” The new philosophy moreclosely integrates suppliers into the productionprocess by ensuring that they are located on siteand available to supply needed auto parts or com-ponents within a short time. For example,Chrysler’s traditional chassis supplier, Dana, alsohas a facility in Campo Largo. Chrysler is thereforeable to inform Dana via computer of the type ofchassis needed as the upper portion of the vehicleleaves the painting section. As a result of this sys-tem, Chrysler is able to keep production costs atCampo Largo to a minimum and can respondquickly to market demand without keeping largestocks of vehicles on hand in storage lots.

Renault

Renault was the first of the new automobilemanufacturers to confirm the installation of a newfactory in Paraná. The $1 billion plant, namedAyrton Senna, was inaugurated in December 1998and is the company’s largest and most modernfacility in the world, with a potential capacity toproduce 120,000 vehicles per year.68 After operat-ing in Brazil for a little over one year, Renaultalready has become the fifth-largest producer inthe country, following VW, Fiat, GM, and Ford, allof which have a longer tradition of manufacturingin the country.69

After one year in operation in Paraná, Renaultinaugurated the first stage of its $220 million pro-ject called Mecânica Mercosul, a motor factory atAyrton Senna that builds motors for the Megane


Scenic and Clio models.The new motor factory willhave the capacity to pro-duce 280,000 motors peryear when it comes intofull operation. The motorswill be used locally and beexported to all of Renault’splants in South America. Inaddition, beginning in2001, Renault’s Paraná fac-tory will produce enginesfor the Peugeot 206 model,which will be produced atPSA Peugeot-Citröen’s newplant in Resende, in thestate of Rio de Janeiro.70

The second stage of theMecânica Mercosul project,due to come on-line in2001, involves makingcomponents that that arecurrently imported fromRenault’s plants in Franceand Spain.71

Chile

At one time during the 1960s, Chile had 20automobile companies assembling vehicles

primarily for the domestic market. In fact, by theearly 1970s, almost all passenger cars sold in Chilewere produced locally.72 Beginning in 1976, themilitary dictatorship of General Augusto Pinochetadopted free market-oriented economic policiesthat opened the local automotive sector to intenseoutside competition. Chilean auto production hasdecreased dramatically (see Figure 4). Today onlytwo automobile assemblers remain in Chile. Oneof those companies is General Motors, which pro-duces the LUV pickup truck in northern Aricaunder license for Isuzu. The other assembler isPSA Peugeot-Citröen, based in Los Andes (aboutone hour north of Santiago and on the main roadto Argentina). Although GM traditionally has soldabout 60 percent of its LUV vehicles in Chile, thevast majority of Peugeot’s output is exported toMexico and the Andean countries. The fact thatPeugeot is still producing anything in Chile is atestament to the niche opportunities that Chile’sfree trade agreements have produced for Chilean-based manufacturers over the past decade. ThePeugeot case also provides evidence that an auto-

motive industry can continue to survive in a coun-try despite an otherwise very liberal import regimeand no overt government subsidy program. TheChilean import duty on small- and medium-sizedpassenger cars is currently 9 percent and will bereduced gradually to 6 percent by 2003.

Executives at both GM and Peugeot are anx-ious to see Chile reach an agreement with MER-COSUR that would speed up the current tariffreduction schedule for the automotive sectorunder Chile’s free trade agreement with MERCO-SUR. Under the current agreement, the tariffreduction schedule does not come into effect until2006. That means that as of January 1, 2001,Chilean-made cars were subject to a 35-percentduty when imported into MERCOSUR. GM andPSA Peugeot-Citroën also want to see the adop-tion of more liberal rule-of-origin requirementsthan the current 60-percent regional contentrequirement found in the Chile-MERCOSUR freetrade agreement.

Uruguay

As recently as the early 1980s, Uruguay washome to at least seven small car assembly

plants. Today only two major plants are still


assembling vehicles in Montevideo.73 One facilityis owned by Oferol, which has the license toassemble Peugeot passenger cars and a Citroëndelivery van in Uruguay, while the second compa-ny is Nordex, which assembles automobiles underlicense for Renault. Assembly operations inUruguay are quite small — the industry directlyemploys only about 650 people — and about 90percent of what is made in Uruguay today isexported to Argentina and Brazil. The governmentdoes not offer and is, in fact, unable to offer anyspecial fiscal incentives for the industry. In addi-tion, the ability of the Uruguayan assembly indus-try to grow significantly is limited by an annualcap of approximately 30,000 vehicles thatArgentina and Brazil together currently impose onimports from Uruguay in an attempt to preventthe country from becoming a major regionalassembly center for Asian manufacturers.74

In 1997, Uruguay produced a total of 5,645vehicles, which increased to 13,000 in 1998, butthen dropped to about 11,000 units in 1999. TheUruguayan assemblers survive by focusing on theproduction of just-in-time specialized models withextra features that require a high level of qualifiedmanual labor. The country’s lower labor costs,especially in comparison with neighboringArgentina, make this type of niche productionregionally competitive. The import duty inUruguay for finished vehicles is currently 23 per-cent, but CKD kits and auto parts enter the coun-try upon payment of only a 2-percent duty.Despite the tariff preference that domesticallyassembled vehicles may enjoy, little local demandexists for Uruguayan-made cars at this time. Thereason is that Uruguayan tastes in automobiles aresaid to be very simple and highly sensitive toprice, so that the type of specialized, high-endvehicle produced in the country is unaffordablefor most local consumers. Accordingly, were it notfor the market opening provided by otherwisehighly protected markets in neighboring Argentinaand Brazil, the Uruguayan automotive sector couldnot survive.

The most distinctive characteristic of theSouthern Cone automobile industry during the1990s is the extent to which external economicforces, country-specific macroeconomic policies,the microeconomics of production, and domesticmarket characteristics interact to shape the organi-zation and operation of individual car companies.Each MERCOSUR member has inherent strengthsand weaknesses that determine the competitive-

ness of automobile firms and product lines.Argentina has high production costs and limitedproduction scale compared with Brazil; in con-trast, Argentina has a better educated workforceand higher levels of productivity. Neither Chilenor Uruguay has an internal market sufficientlylarge to justify in-country manufacturing opera-tions, yet both have special strengths (for exam-ple, highly qualified workers and just-in-timeassembly system for specialized models) andstrong niches — via their export focus. This isespecially advantageous to Chile, a nation that hasnumerous free trade agreements in the hemi-sphere.

Table 3 provides country-by-country highlightsof the operations of the leading automobile com-panies in the MERCOSUR countries.

Devising a Common MERCOSURAutomobile Regime

The 1991 Treaty of Asunción, which establishedthe guidelines for gradual achievement of a

subregional free trade area among Argentina,Brazil, Paraguay, and Uruguay, excluded theentire automotive sector. The importation of for-eign-made vehicles and auto parts was left to thedomestic law of each MERCOSUR member state.Intra-MERCOSUR trade in automobiles and autoparts produced in the subregion remained subjectto a managed trade program implemented in 1991by Argentina and Brazil under the 1986 Argentine-Brazilian Program for Cooperation and Integration(Programa de Integración y CooperaciónArgentino-Brasileño — PICAB) and even earlierArgentine-Uruguayan and Brazilian-Uruguayanbilateral accords.

In December 1994, the Common MarketCouncil (MERCOSUR’s highest institutional body)issued Decision 29/94, which called for the imple-mentation of a common automobile regimeamong the four MERCOSUR countries no laterthan January 1, 2000. The new regime would, at aminimum, permit complete intra-regional freetrade for all products in the automotive sector,establish a common external tariff (CET) withrespect to similar products imported from outsidethe subregion, and eliminate all types of nationalincentives that might distort genuine free tradecompetition. A special technical committee (No. 9:Automotive Sector) [the MERCOSUR automotivecommittee] also was created under the auspices ofthe MERCOSUR Trade Commission. The technical


committee was given the task of devising defini-tive rules on regional content, environmental regu-lations on emissions and standard safety require-ments, and a special transition program thatwould run from December 31, 1997, until January1, 2000. Decision 29/94 also mandated that thefour MERCOSUR states not adopt unilateral restric-tive measures, instead encouraging them to liber-alize their existing bilateral automobile agreementsin order to increase trade flows from June 1, 1995,forward.

Following the issuance of Decision 29/94,Argentina and Brazil entered into a new bilateralmanaged trade arrangement, wherein the quotason duty-free imports of finished vehicles originallyestablished under the 1986 PICAB were increased.Duty-free importation of Brazilian auto parts intoArgentina also was limited to an amount thatcould not exceed the total amount of auto partsthat Argentina had exported globally. Brazilianreplacement parts, however, could enter Argentinaduty-free in unlimited numbers. In addition,Argentina agreed to recognize Brazilian auto partsas Argentine products in calculating its 60-percentdomestic content requirement. Brazil, for its part,agreed to import Argentine auto parts duty-free ata level not to exceed its own global exports of thesame products and would recognize Argentineauto parts as Brazilian in terms of meetingBrazilian content requirements for cars intendedfor mass consumption (the so-called carros popu -lares). In addition, Argentine-made vehicles thatmet the technical specifications of a Braziliancarro popular would be granted the same favor-able domestic tax treatment within Brazil as wasaccorded to domestic manufacturers. Furthermore,intracompany trade of finished cars, buses, andtrucks between Argentina and Brazil would befree of all tariff and quota restrictions.

In terms of Argentina and Uruguay, bothcountries agreed in December 1994 to continue tobe bound by the export quotas established in theCAUCE (that is, the ALADI economic complemen-tation agreement signed by the two countries in1974). Some minor modifications were made,however, which increased to 20,000 the numberof vehicles Uruguayans could export annually toArgentina and expanded the 50-percent nationalcontent requirement to include regional MERCO-SUR-sourced inputs. For their part, Brazil andUruguay agreed in 1994 to expand the automobilequotas established in their 1975 trade agreement(the Protocolo de Expansión Comercial de

Uruguay con Brasil — PEC). Beginning in 1995,up to 10,000 Uruguayan automobiles could enterBrazil duty-free, while Uruguay would give 3,000Brazilian cars similar treatment in its market.These quotas would increase gradually on anannual basis thereafter. In addition, new rules oforigin were established, which decreased thenational content requirement to 55 percent (asopposed to 60 percent). There would also becomplete bilateral free trade in auto parts made ineither country (except for a number of productsUruguay placed on a list of exceptions, such astires, glass windshields, batteries, radiators, floormats, axles, and seat belts).

On January 22, 1996, Argentina and Brazilsigned a new temporary automobile agreementthat was expected to remain in effect through theend of 1999. Under this new agreement, vehiclesmade in either Argentina or Brazil could beexported to the other country duty-free as long asthe amount exported did not exceed each coun-try’s respective global vehicle exports (regardlessof destination). In recognition of the fact thatArgentina had fallen short in meeting its pastexport quotas to Brazil, the Argentines wereallowed to exceed the strict import-to-export ratiofor a two-year period (subsequently extended tothree years). Argentina and Brazil also agreed to a60-percent national content requirement, whichcould be sourced in either country, for purposesof determining what vehicles qualified for duty-free treatment, although Argentina measured thisnational content requirement in a different wayfrom Brazil. For new models, the national contentrequirement would only be 50 percent for a three-year period. Each country permitted the duty-freeimportation of auto parts from the other in anamount that did not exceed each country’s globalexports of auto parts (regardless of destination).Finally, both Argentina and Brazil agreed not tomake unilateral changes to their domestic automo-bile regimes before 1999 that might provide anunfair competitive advantage in attracting foreigndirect investment.

The squabbles that erupted between Argentinaand Brazil over unilateral Brazilian measuresissued in the late 1990s to encourage new foreigninvestment in Brazil’s automotive sector hinderedthe efforts of the special MERCOSUR technicalcommittee to devise a transitional regime effectiveJanuary 1, 1998, through December 31, 1999. As aresult, the Common Market Council issuedDecision 21/97, which extended the deadline for


achieving a transitional automotive regime untilApril 30, 1998. Unfortunately, this delay did noth-ing to resolve the impasse, and, by the end of1998, Argentina and Brazil agreed to postponeimplementation of a definitive common MERCO-SUR automobile regime until at least 2004.Reasons for the postponement included theBrazilian federal government’s offer to Ford toprovide fiscal incentives good through 2010 toentice the company to invest in the region ofBahia, as well as the federal government’s inability(or unwillingness) to curb fiscal incentives beingoffered by state and municipal governments totransnational automobile manufacturers.

Although the 2000 deadline for achieving acommon MERCOSUR automobile policy waspushed back by four years, the individual MER-COSUR countries were still under an obligation toimplement the Trade Related Investment Measures(TRIMs) of the World Trade Organization (WTO)no later than January 1, 2000. TRIMs prohibit theuse of investment incentives tied to export perfor-mance requirements, restricting imports to thelevel of exports within a specific sector or indus-try, and/or setting minimal content requirementsfor the production of goods. Accordingly, compli-ance with TRIMs mandated that Argentina andBrazil replace their national automobile regimesby January 1, 2000, or be found in violation oftheir commitments to the WTO.75

The January 1999 maxi-devaluation of theBrazilian real had a particularly negative impacton Argentine-Brazilian negotiations to come upwith a WTO-consistent automobile regime toreplace their national automobile policies. Whilegovernment negotiators sought to iron out a bilat-eral automobile pact, firms with plants in bothArgentina and Brazil began shifting whole produc-tion lines to Brazil. The actions of the terminalswere followed by auto parts suppliers such asDelphi, which began closing plants in Argentinaand shifting production to Brazil.76 As 1999 drewto a close and the January 1, 2000, deadline forTRIMs compliance was fast approaching with noagreement in sight, the Argentine negotiators sug-gested to their Brazilian counterparts that theircurrent national auto regimes and bilateral tradingarrangements be respectively extended for another60 days. The big fear among manufacturers inboth countries was that absent such an extension,their intra-regional exports would be levied thestandard high import duties charged by Argentinaand Brazil on foreign vehicles or auto parts. The

Brazilians acceded to this request (although theydropped their standard import duty on automo-biles to 35 percent effective January 1, 2000), aswell as to a number of subsequent postpone-ments.

On March 23, 2000, Argentine and Braziliannegotiators announced that they had finallyreached agreement on a transitional “commonMERCOSUR automobile policy” that would remainin effect through December 31, 2005. One majorproblem with this announcement, however, wasthat Paraguay and Uruguay had not participated inthe negotiations, and there was no guarantee thatboth those countries would ratify it. Within days,the Paraguayans and the Uruguayans made theirobjections to the proposed “common MERCOSURautomobile policy” manifestly clear. Both countriesrejected the proposed 35-percent CET on import-ed cars, trucks, and buses as too high. Uruguayalso continued to express opposition to raising theregional content requirement to 60 percent fromthe 50-percent rule found in the older bilateralCAUCE and PEC trade agreements it had withArgentina and Brazil, respectively. In Paraguay, acountry with no automobile industry, the importduty on new vehicles was only 12 percent, andthe government wanted to retain the right toimport used cars from outside the MERCOSURregion (something that the new agreement wouldnot permit). The proposed Argentine-Brazilianagreement also would undermine a 1998Paraguayan law designed to encourage new autoassembly plants in Paraguay; the law offered 10-year exemptions from the payment of importduties on capital goods, raw materials, and autoparts, plus a 50-percent tariff preference on vehi-cles imported by companies with a local produc-tion presence.

Strong opposition to the Argentine-Brazilianagreement from Paraguay and Uruguay eventuallyscuttled plans to have the March 23 accord takeeffect on July 1, 2000, as originally agreed. Effortsby Argentina and Brazil to secure the acquies-cence of the two smaller MERCOSUR countriescontinued without success throughout the monthof July. Finally, on August 1, 2000, Argentina pro-ceeded to issue Executive Decree No. 660, whichcontained the new Argentine-Brazilian bilateralagreement for the automotive sector. Brazildeclared the bilateral agreement suspended, how-ever, when government officials in Brasilia readthat the Argentine implementing decree calculatedthe regional content requirement differently from


the way Brazil interpreted it. Automobile manufac-turers based in Argentina, who argued that theArgentine government’s interpretation would leadto huge cost overruns and/or compromises onquality, also opposed the Argentine interpretation.

MERCOSUR’s New TransitionalUniform Automobile Regime

At the meeting of the MERCOSUR CommonMarket Council in Florianópolis, Brazil, on

December 14-15, 2000, three of the four MERCO-SUR countries finally agreed to enact a transitionaluniform MERCOSUR automobile regime. The oneholdout was Paraguay, which continued to rejectthe proposed MERCOSUR CET on automobiles astoo high, although it did commit to continuenegotiating its eventual inclusion. The new regimeentered into effect on January 1, 2001, and it gov-erns the trade of new vehicles and auto parts trad-ed among Argentina, Brazil, and Uruguay andimported from outside the MERCOSUR regionthrough 2006. After that time, a definitive commonautomotive regime is supposed to come into effectthat presumably will permit complete duty-freetrade of vehicles and auto parts originating withinMERCOSUR.77

The new MERCOSUR automotive regime ismost notable for retaining a managed trade pro-gram similar in spirit to the old PICAB agreementthrough February 1, 2006. Under the new agree-ment, the value amount of every vehicle or autopart exported from Argentina to Brazil must becompensated with a similar value amount import-ed from Brazil, or vice versa, if it is to enjoy duty-free treatment.78 The two countries are allowed todigress from this strict export-import balance ratioby 5 percent in 2000, 7.5 percent in 2002, and 10percent in 2003. In 2004, the newly created MER-COSUR Automotive Committee is supposed to setthe new percentage rates for the last two years;these cannot, in any case, be lower than 10 per-cent. Any vehicles exported beyond the permittedannual digressions will be subjected to paymentsof 70 percent of the import duty prevailing at thetime in either Argentina or Brazil on non-MERCO-SUR products. Those who export auto parts inexcess of the agreed-upon levels will have to pay75 percent of whatever the relevant import duty ison auto parts originating from outside MERCOSUR.

In the specific case of Uruguayan-assembledpassenger vehicles, an annual quota is set at18,000 vehicles for duty-free export to Argentina

in 2001, increasing to 20,000 vehicles thereafterthrough December 31, 2006. The annual quota ofUruguayan-assembled vehicles for duty-free exportto Brazil is set at 16,000 units in 2001; 17,000 in2002; 18,000 in 2003; and then 20,000 thereafterthrough December 31, 2006. An annual quota of800 Uruguayan-made trucks was set by bothArgentina and Brazil. Argentina and Brazil alsoimpose a value-amount quota on the number ofauto parts Uruguay can export to them duty-freeevery year. For its part, Uruguay imposes a quotaon passenger vehicles that can be imported duty-free annually from either Argentina or Brazil. Inthe case of Argentine cars, the quota begins at6,000 units in 2001 and reaches 8,000 vehicles by2006; while for Brazil the cap begins at 4,000 unitsin 2001 and reaches 6,500 cars by 2006.Interestingly, the Uruguayans also imposed anannual 800-unit ceiling on the number ofArgentine-made trucks that could be importedduty-free every year but placed no such limits onBrazilian-made trucks or buses.

In order for vehicles and auto parts to be trad-ed between Argentina and Brazil duty-free, theymust comply with certain rule-of-origin require-ments. The MERCOSUR automotive agreementcalls for a 60-percent regional content requirementfor passenger cars, trucks, trailers, and buses.79 Inthe specific case of auto parts, the regional con-tent is calculated according to MERCOSUR’s gener-al rule-of-origin requirements. In addition, newmodels have to comply with only a 40-percentregional content during the first year the vehicle ison the market, rising to 50 percent in the secondyear, and culminating at 60 percent in the thirdyear. The Argentines managed to secure an impor-tant concession from Brazil in that at least half ofthe 60-percent regional content for passengervehicles produced within Argentina has to origi-nate within Argentina. The Brazilians eventuallyalso acquiesced to the Argentine interpretationthat the local content requirement could be calcu-lated based on the value of each input or subcom-ponent in an auto part and not just on its value asa finished product (which would permit a highernon-Argentine content). Accordingly, use of thismethod of calculation means that the local contentrequirement can reach a maximum of 44 percent.For all other vehicles, including trucks and buses,at least 25 percent of the content of an Argentine-produced vehicle has to be sourced withinArgentina, or 37 percent if the content is based onthe value of each input or subcomponent in anauto part.


In order to respond to the complaints ofArgentine-based automobile manufacturers that its“super-local” content requirement would drive upcosts and reduce quality, the Argentine govern-ment agreed to allow local producers of passengercars up to two years to develop a program ofgradual compliance with the new content require-ments and to allow up to three years for othervehicle manufacturers. In addition, cross-bordertrade in passenger cars and light commercial vehi-cles among related companies has until July 31,2003, to comply fully with the Argentine “super-local” content requirement.80

Vehicles assembled in Uruguay need complywith only a 50-percent regional content require-ment. New models have an even more liberalregional content requirement, set at 33 percent inthe first year, 42 percent in the second, and 50percent by the third year.

In the case of vehicles and auto parts import-ed from outside MERCOSUR, the new MERCOSURautomobile regime calls for a 35-percent CET onall imported passenger cars and small commercialvehicles, buses, trucks, and trailers, as well as a14-percent CET on imported tractors and otherfarm equipment and on certain highway construc-tion machinery. In the specific case of buses andnon-passenger vehicles weighing less than fivetons, the Argentines agreed to a convergenceschedule that will result in a gradual increase intheir national duty rate, from 26.7 percent in 2001to the 35-percent MERCOSUR CET rate by 2006.The import duty on those same types of vehiclesin excess of five tons will increase gradually from20.8 percent in 2001 to the 35-percent CET by2006. The Uruguayans retained their 23-percentimport duty on passenger cars through December31, 2006. With other vehicles, for which theUruguayan import duties were considerably lowerthan those in either Argentina or Brazil, theUruguayans are under an obligation to raise themgradually to 20 percent by 2006 (18 percent in thespecific case of trailers).

An important provision included in the newMERCOSUR transitional automobile regimerequires that any product made by a companythat received any type of investment incentivefrom a federal, state, provincial, and/or municipalgovernment entity after January 1, 2001, would bedeemed to be non-MERCOSUR in origin andtherefore subject to the corresponding CET if trad-ed within the subregion. This provision does notaffect automobile manufacturers that received

such benefits before the cutoff date and continuedto use them afterward (a significant Argentine con-cession to Brazil). The new agreement also con-tains specific prohibitions (with an exception forUruguay) on the use of tax exemptions or rebatesto encourage intra-MERCOSUR automotiveexports, and it abolishes temporary admission andduty-drawback programs on inputs used in auto-motive products that are eventually traded withinMERCOSUR.

MERCOSUR’s new transitional automobileregime has been criticized because it represents aretreat from the original promise of complete freetrade in the automotive sector within MERCOSURby January 1, 2000. It is important to recognize,however, that the new regime provides an impor-tant political boost to the MERCOSUR project at atime when many have questioned its continuedviability. By acceding to the continuation of amanaged trade regime through 2006, Brazil madean important concession to Argentina. By notinsisting on complete free trade in the automotivesector, something that would undoubtedly be inBrazil’s favor, given its current comparative advan-tages as an export platform for the entire SouthernCone, Brazil avoided putting the whole MERCO-SUR project at risk. Insistence on complete freetrade by Brazil would have meant — under pre-sent conditions — an even more serious contrac-tion of the Argentine automobile industry. If thiswere to occur, Brazil could find itself isolated andwithout any support for the relatively high 35-per-cent MERCOSUR CET on imported automobiles.

From the Argentine perspective, the continua-tion of a managed trade regime in the automobilesector is designed to reinforce the complementarynature of the regional automobile industry, where-by more specialized niche vehicles are manufac-tured in Argentina while mass-consumption mod-els are produced in Brazil.81 This also should buyadditional time for the MERCOSUR member statesto set up a system for coordinating macroeconom-ic policies, so that the current conflicting monetarypolicies pursued by each country do not negative-ly impact on their ability to attract and retain newforeign investment in the automotive sector. Incontrast, more cynical observers argue that bycontinuing the managed trade regime, an other-wise obsolete Argentine industrial sector that can-not compete internationally, particularly under thecountry’s current monetary policies, has beengranted a six-year reprieve. Except for some autoparts such as tires, which can take advantage of


Argentina’s much cheaper energy and petrochemi-cal costs, these critics claim that it does not makesense to perpetuate an industrial sector that everyday employs fewer people and forces Argentineconsumers to pay unnecessarily high prices forcars.82

Despite the last-minute changes made toaccommodate their concerns, many Argentine-based automobile manufacturers are still unhappythat the new automotive regime requires that atleast one-half of the regional content of Argentine-made cars must be sourced domestically. Autoexecutives argue that this measure, althoughdesigned to save Argentina’s struggling auto partsproducers, will drive vehicle production costs upand may eventually force manufacturers out ofArgentina as well. By placating one sector of theautomobile industry, they insist that the Argentinegovernment now runs the risk of losing the coun-try’s entire automotive sector.

Conclusion

Between 1995 and 2000, multinational automo-bile companies invested an estimated $15 bil-

lion in the MERCOSUR region. This massive influxof capital transformed the automotive sector inSouth America’s Southern Cone “from an obsoleteand inefficient production base — surviving onoutmoded model lines with a poor reputation forquality and competitiveness — into a modern pro-duction base, manufacturing contemporary modelsand, in a growing number of cases, world-qualityproducts.”83 In Argentina, local consumers in 1991had only 21 different models to chose from,among them 30-year-old models; by 1997, theycould choose from 60 distinct products, includingthe most modern cars sold on the world market.84

The variety of vehicles now available to con-sumers in the Southern Cone responds to thegrowth of the local market throughout most of the1990s as a result of the adoption of liberal, mar-ket-oriented policies;85 the competitive need offoreign automobile companies (particularlyEuropean firms) to find new emerging markets tocompensate for stagnant home markets; and theselective use by national governments of highertariffs to promote new investment. For example,by doubling import duties on vehicles producedby companies with no presence in the country in1995, Brazil was able to induce almost all theworld’s major automobile manufacturers to set upa Brazilian factory in order to respond to the

surge in domestic consumer demand for newautomobiles. Intense competition at the time tosell automobiles within the MERCOSUR regionalso forced these manufacturers to offer a widerange of their highest quality vehicles, whetherproduced within the region or imported fromabroad. Accordingly, the fear expressed by WorldBank economist Alexander Yeats in 1996, thatMERCOSUR was creating a protective cocoon forautomobile manufacturers producing technologi-cally obsolete vehicles, proved to be groundless.Ironically, the same protectionist tariffs that Yeatscondemned (albeit erroneously ascribing them toMERCOSUR when, in reality, they responded tonational policies) forced the multinational automo-bile manufacturers to build new, state-of-the-artfactories in the Southern Cone.

Although automobile manufacturers based inthe MERCOSUR region have managed to becomeremarkably more productive during the 1990s,they still have not been able to reduce manufac-turing costs to international levels.86 Much of theexplanation for this phenomenon lies in a host ofnational administrative barriers and inordinatelyhigh and regressive local tax rates. Argentina’s cur-rent monetary policy, which ties its currency one-to-one with the U.S. dollar, is also partially toblame for that country’s high production costs.Accordingly, most manufacturers based in theSouthern Cone are producing automobiles that arecompetitively priced only in the protected regionalmarket. Some notable exceptions are to be found,however, particularly among Brazilian-based man-ufacturers such as Fiat and Volkswagen, whichexport locally made cars back to Europe andNorth America. Certain auto parts manufactured inArgentina and Brazil also remain competitive inthe international market.

The current inability of many multinationalautomobile companies to use the MERCOSURregion as an export platform for global sales hasmeant that most plants in Argentina and Brazil areoperating at less than optimal capacity, in view ofcurrent stagnant economic conditions gripping theregion. This overcapacity may soon lead to ashakeout in the industry that may result in merg-ers, joint production agreements, the eliminationof duplicative factories, and/or some manufactur-ers’ being driven completely out of the market. Asa result of its managed trade features, the newtransitional MERCOSUR automobile accord ensuresthat — at least through 2006 — any plant closureswill not be confined to Argentina. However, high


local-content requirements under that same agree-ment also endanger Argentina’s automobile indus-try by preventing it from becoming truly competi-tive in the regional as well as the internationalarena. Accordingly, when and if the MERCOSURautomobile industry ever becomes subject to com-plete intra-regional free trade, Argentina couldwell see many of its plants shut down. TheChilean and Uruguayan examples give somehope, however, that the Argentine auto industrywill never entirely disappear and that it can carveout certain competitive niches for itself.

The additional lesson that the Chilean andUruguayan examples provide is that some level oftariff protection still is needed in markets wherecountries must export the bulk of their productionto compete successfully while selling domestically.The tariff that MERCOSUR countries (exceptParaguay) have chosen in order to provide thisprotective environment for their automotive indus-try is 35 percent for passenger cars, trucks, andbuses. Although it hurts the pocketbooks of localconsumers, it should be emphasized that this CETis quite low compared with historical tariffscharged by South American countries on importedautomobiles. The burden to consumers also maybe outweighed by the incentive provided for auto-mobile companies to keep producing in theregion, thereby maintaining thousands of well-paid jobs in an industry that has extensive back-

ward linkages as well. In any event, the tariffcould prove to be a short-lived measure if thenegotiations for a Free Trade Area of the Americasare concluded successfully by 2005 and if aEuropean Union-MERCOSUR free trade agreementis ever signed.

One positive change that could result from thecurrent slowdown in regional automobile sales isthat MERCOSUR-based manufacturers now maypressure governments to eliminate administrativebarriers and high taxes that increase local produc-tion costs. The need of many MERCOSUR-basedautomobile manufacturers to compensate for localovercapacity by seeking out new export marketscreates a strong incentive for them to pressureSouthern Cone governments to implement thesemuch needed reforms. Federal governments (par-ticularly the Brazilian government) also have astrong incentive to respond to these entreaties,given the large “investment” they have made inthe sector by granting generous fiscal incentives. Ifreforms are not forthcoming, the danger is that theautomobile manufacturers that survive the comingshake-out could simply revert to the policies pur-sued by the industry in the 1980s, when no newinvestment took place and the remaining compa-nies tried to squeeze out profits by producing thesame, increasingly obsolete models for a protectedlocal MERCOSUR market.


1. María Beatriz Nofal, 1989, AbsenteeEntrepreneurship and the Dynamics of the MotorVehicle Industry in Argentina (New York: PraegerPublishers), 13.

2. See, for example, Wall Street Journal, 1996,“South American Trade Pact Is under Fire,” October 26;Journal of Commerce, 1996, “MERCOSUR under Siege,”October 30.

3. Alexander J. Yeats, 1996, “Does Mercosur’sTrade Performance Justify Concerns about the GlobalWelfare-Reducing Effects of Regional TradingArrangement? Yes!” (unpublished manuscript, WorldBank, Washington, D.C.), 13, 15.

4. Yeats 1996, 25.

5. Paulo Paiva, 2000, “El Cronograma del ALCAAvanza a Buen Ritmo,” Gaceta MercantilLatinoamericana, November 6-12.

6. Encyclopedia of Global Industries: Motor Vehicles,SIC 37111, 2000 [cited in July], available at<http://www.onesource.com>.

7. Efraim Levy, 2000, “Autos & Auto Parts,”Standard and Poor’s Industry Surveys , June 1.

8. Levy 2000.

9. Council on Competitiveness, 1998, Going Global:The New Shape of American Innovation(Washington,D.C.: Council on Competitiveness), 127.

10. Council on Global Competitiveness 1998, 27.

11. Keith Bradsher, 2000b, “Gentlemen, MergeYour Manufacturers,” New York Times, March 23; JohnTagliabue, 2000, “Renault Pins Its Survival on GlobalGamble,” New York Times, July 2. GM and Fiat alsohave reached an agreement with Daewoo MotorCompany of South Korea and its creditors to negotiatethe acquisition of the passenger vehicle operations ofthe insolvent carmaker. See Michael Schulman, 2000,“GM, Fiat Agree to Set Up Talks with Daewoo forAcquisition,” Wall Street Journal , October 9.

12. Bradsher 2000b, 25.

13. Economist, 2000, “Merger Brief: TheDaimlerChrysler Emulsion,” July 20; Jeffrey Ball andScott Miller, 2000, “How DaimlerChrysler Misfired,”Wall Street Journal , July 26.

14. Keith Bradsher, 2000a, “Efficiency on Wheels,”New York Times, June 16.

15 . Also noteworthy is Canada’s booming autoindustry. Spurred by low production costs, rising pro-ductivity, and major new investments, Canadian vehicleproduction soared 18.7 percent last year, more thandouble the U.S. rate. Proportionate to population,Canada is the world’s leading vehicle productionlocale. DaimlerChrysler, GM, and Toyota all are increas-ing their investments in production and automotiveresearch in Canada. See Mark Heinzl and Joel Baglole,2000, “Canada Vehicle Production Increased 18.6% LastYear,” Wall Street Journal , October 9.

16. Levy 2000, 4.

17. Weekly Report, 2001, “Brazil Focus,” May 5-11.

18. Bloomberg Latin America , 2000, “AutomakersInvest More in Eastern Europe at Expense of Latam,”June 6. Investments from European carmakers in LatinAmerica could slow as automakers such as Volkswagenfocus on plant building in Eastern Europe, wheresalaries are lower and production is closer to home.Poland, the Czech Republic, and Hungary are attractingauto plants because qualified workers can be hired athalf the wages of Mexican workers.

19. John P. Tuman and John T. Morris, eds., 1998,Transforming the Latin American Automobile Industry(Armonk, N.Y.: M.E. Sharpe).

20. Micheline Maynard, 1998, The Global Manu -facturing Vanguard: New Rules from the Industry Elite(New York: John Wiley & Sons), 205.

21. Rhys Owen Jenkins, 1977, DependentIndustrialization in Latin America: The AutomotiveSector in Argentina, Chile, and Mexico (New York:Praeger Publishers), 48.

22. Rhys Owen Jenkins, 1987, TransnationalCorporations and the Latin American AutomobileIndustry (Pittsburgh, Pa.: University of PittsburghPress), 18.

23. Jenkins 1987, 18.

24. Jenkins 1987, 49.

25. Jenkins 1987, 19.

26. Nofal 1989, 9. By 1923, the assets of Ford’sBuenos Aires plant were valued at $8.8 million, makingit the company’s second most important plant outsideNorth America (Jenkins 1987, 19).

27. Nofal 1989, 9.


NOTES

28. Jenkins 1977, 49.

29. Jenkins 1977, 49.

30. Helen Shapiro, 1994, Engines For Growth: TheState and Transnational Auto Companies in Brazil(New York: Cambridge University Press), 75.

31. Nofal 1989, 13.

32. Jenkins 1977, 227.

33. Jenkins 1987, 71.

34. Nofal 1989, 17. Unlike Latin America, Japanrelied on indigenous producers, and its government ini-tially banned foreign direct investment to avoid controlof the industry by foreign manufacturers. A prime con-sideration was the acquisition of national technologicalcapacity and the closing of the international technologygap by initially licensing foreign technical know-how,then subsidizing local adaptation and development(Nofal 1989, 202). Through local entrepreneurialsearches, the indigenous motor vehicle industry inJapan combined foreign technical specifications withdomestic knowledge and inputs and produced multiplecreative breakthroughs in product and process tech-nologies as well as in patterns of industrial and workorganization (Nofal 1989, 17). The end result was aninternationally competitive industry, and export perfor-mance was a crucial means to achieve this end (Nofal1989, 202).

35. Jenkins 1987, 107.

36. Jenkins 1977, 258-259.

37. Nofal 1989, 37.

38. Nofal 1989, 38.

39. Asociación de Fábricas de Automotores(ADEFA), 1999, Industria Automotriz Argentina:Anuario Estadístico 1998 (Buenos Aires: ADEFA), 24.

40. Nofal 1989, 55.

41. Nofal 1989, 159.

42. Nofal 1989, 183.

43. Shapiro 1994, 223.

44. Nofal 1989, 167.

45. Shapiro 1994, 226.

46. In the mid-1980s, one firm in Brazil found thecountry internationally competitive in machined cast-ings and forgings because of their high labor contentand lower wage rates, which offset productivity differ-

entials. It identified Brazil’s greatest cost advantages inengines and transmissions (Shapiro 1994, 230).

47. Nofal 1989, 164-165.

48. Jenkins 1987, 92.

49. Shapiro 1994, 226.

50. Jenkins 1987, 216.

51. Abel R. Viglione, 2000, interview by Thomas A.O’Keefe on June 9 in Buenos Aires, Argentina; Viglioneis the Senior Economist for the Fundación deInvestigaciones Económicas Latinoamericanas (FIEL).

52. Data compiled from the Asociación de Fábricasde Automotores (ADEFA). Phase I of the Plan Canje, ineffect for 120 days, allowed Argentine consumers totrade in passenger cars older than 10 years in exchangefor brand new models made in Argentina, which couldbe obtained for a $4,000 discount over the car’s pre-taxsticker price. During the subsequent Phase II, in effectfrom October 20, 1999, through January 31, 2000, thecash discount was more limited than in Phase I, butolder vehicles could be exchanged for new modelsmade anywhere in the MERCOSUR area, not just inArgentina. Finally, under Phase III of the Plan Canje,which came into effect on February 1, 2000, andexpired on October 31, 2000, the discount for purchas-ing a new model made anywhere in MERCOSUR inexchange for trading in a model older than 10 yearswas limited to 20 percent off the pre-tax value of thenew car.

53. Two other Argentine firms, A.y L. Decaroli,S.A., and El Detalle, S.A., also produce urban busesunder license for foreign manufacturers, but both haveseen their production idled since 1999. Accordingly, thefuture of both firms is uncertain.

54. Associação Nacional dos Fabricantes deVeículos Automotores (National Association ofAutomotive Vehicle Manufacturers — Anfavea), 1998,Anuário Estatístico (São Paulo: Anfavea).

55. The upside potential in Brazil is huge, giventhe fact that Brazil has one car per 9 inhabitants, whileMexico has 7 and Argentina has 5.

56. Marcelo Lacombe, 1999, “Partners in Protection:The New Role of States in the Politics of AutomotiveSector Policies” (working paper, Institute of LatinAmerican Studies, Columbia University).

57. Among its key features are a 35-percent import-tariff reduction for firms already operating in Brazil anda reduction to zero tariff for capital and intermediarygoods used in setting up new plants in the North,


Northeast, and other priority regions in the country.Incentive policies — fiscal, tax, and regulatory —unquestionably have helped decentralize and diversifyindustrial development. However, at the same time,these policies have resulted in state-versus-state biddingwars (guerras fiscais ) to attract automotive plants andhave produced tax revenue shortfalls among statesalready under huge strains to balance their books. Inthe case of Ford’s planned car plant in Bahia, federaltax breaks could exceed $100 million over 10 years,cheap loans were obtained from Brazil’s NationalDevelopment Bank, and the state government of Bahiaprovided tax breaks and free land and infrastructure. Itis arguable, as well, that geographical vicinity andworkforce quality are even more important factors inattracting investment. See Adriana Fernandes de Britoand Regis Bonelli, 1996, “Políticas IndustriaisDecentralizadas: As Experiências Européias e asIniciativas Subnacionais no Brasil” (paper for discus-sion, Instituto de Pesquisa Econômica Aplicada —IPEA, No. 492, June).

58. Other investors include Asia Motors, Chrysler,Honda, Hyundai, Iveco, Kia, Mercedes-Benz,Mitsubishi, Peugeot, Renault, Scania, Toyota, andVolvo.

59. Other investments during the last two yearsinclude a new Mercedes-Benz plant to produce mid-priced sedans and produce Class C sedans at its exist-ing plant; a pickup truck line by Chrysler; a ToyotaCorolla plant; and Honda and Renault vehicles, includ-ing compact cars and vans. See Latin Trade, 1999,“Seller Beware,” May.

60. Estado de São Paulo, 2000, “Novas fábricasbrasileiras vão servir de modelo mundial para asmatrizes,” September 27. Consolidation in the autoparts sector, through mergers and acquisitions, has cre-ated a multi-tiered system of suppliers. Large firms suchas Delphi, Visteon, Lear, Bosch, Denso, Aisin Seiki, andTRW are positioned as “systems” suppliers, providinghighly technological content. Smaller suppliers, manynow supplying larger ones, are struggling to maintain aniche in the market by reducing internal costs, boostingproductivity, and living with smaller revenues and slim-mer profit margins. Getting close to the buyer/assem-bler is paramount in this increasingly competitive envi-ronment. The Volkswagen-Audi facility in São José dosPinhais, Paraná, is supplied by 13 auto parts firmsworking near or inside the plant. Major supplier Learhas invested $15 million in a 63,000-square-foot facilityemploying 120 workers, adjacent to GM’s GravataíAutomotive Complex. Lear supplies GM on a “just-in-time” basis for immediate installation in vehicles, andall of the material handling for the GM assembly plantis coordinated by a logistics company also located on-site. See Angela Maria Medeiros Martins Santos andCaio Márcio Avila Pinhão, 1999, Overview of theAutoparts Sector (Brasília: Banco Nacional de

Desenvolvimento), May; Estado de São Paulo, 1999,“Fabricantes de autopeças lideram a onda de fusões,”September 23; Lear Corporation, 2000, “LearCorporation Inaugurates New Brazilian Plant to SupplyGeneral Motors Corp.’s Gravataí Automotive Complex,”(company press release), July 20.

61. Business Week, 2000, “Car Power,” October 23.

62. Bloomberg Latin America , 2000, “BrazilCarmakers Seek Profits in Land Where Small CarsReign,” October 12.

63. Estado de São Paulo, 2000, September 16.

64. Latin Trade , 2000, “Seller Beware,” May. Brazilexported nearly 400,000 vehicles in 1998, including273,000 to South America, 23,000 to North America,75,000 to Europe, and 22,000 to Africa (mainly SouthAfrica and Morocco). If one takes into account enginesand components, the dollar amounts equal $4.3 billionin total, of which products valued at $2.38 billion wentto South America, $652.5 million to North America,$900 million to Europe, $151 million to Africa, and$108 million to Asia. (See Associação Nacional dosFabricantes de Veículos Automotores 1998.)

65. Sindicato das Indústrias Metalúrgicas Mecânicase de Material Elétrico (SINDIMETAL) and ServiçoBrasileiro de Apoio às Micro e Pequenas Empresas(SEBRAE/PR), 1997, Paraná Automotivo: Desafios ePerspectivas (Curitiba, Paraná, Brazil: SINDIMETAL andSEBRAE/PR), 12.

66. Except for Volkswagen, these manufacturers arenew to Brazil. The case of Audi is special because ithas no history of producing in Brazil, even though it ispart of the VW Group.

67. Sindicato das Indústrias Metalúrgicas Mecânicase de Material Elétrico (SINDIMETAL) and ServiçoBrasileiro de Apoio às Micro e Pequenas Empresas(SEBRAE/PR), 1997, Paraná Automotivo: Desafios ePerspectivas (Curitiba, Paraná, Brazil: SINDIMETAL andSEBRAE/PR), 9-10.

68. Ayrton Senna was a famous Brazilian FormulaOne driver who died in a car race in the 1990s.

69. Sindicato das Indústrias Metalúrgicas Mecânicase de Material Elétrico (SINDIMETAL) and ServiçoBrasileiro de Apoio às Micro e Pequenas Empresas(SEBRAE/PR), 1998, Paraná Automotivo: Desafios ePerspectivas, (Curitiba, Paraná, Brazil: SINDIMETAL andSEBRAE/PR), 12.

70. Newton Chagas, 1999, “Renault Scenic temmotor de alta tecnologia,” Indústria e Comércio 2,Special Edition (December), 6.


71. Chagas 1999, 1.

72. Jenkins 1977, 137. By the early 1970s, abouthalf the commercial vehicles sold in Chile also wereproduced domestically.

73. A Chinese-Uruguayan joint venture calledFerrolland also has been assembling trucks in Uruguaysince 1998, but the level of production has, to date,been insignificant.

74. Under a subsequent revision to the ConvenioArgentino Uruguayo de Cooperación Económica(CAUCE), the quantity of vehicles that Uruguay couldexport to Argentina was limited to an amount that doesnot exceed 5 percent of Argentine vehicle productionfor the previous year. In view of the fact that Argentineproduction fell to about 300,000 units in 1999, theUruguayan quota for 2000 dropped to approximately15,000 vehicles.

75. Interestingly, the Argentines were less in a bindthan the Brazilians, as the Argentines had reported theirdomestic automobile regime to the WTO, while theBrazilians failed to report their program. Accordingly,the Argentines conceivably could have sought from theWTO an extension to comply with TRIMs, while theBrazilians had no such option.

76. See J. Goodman, 1999, “Argentine Auto PartsSector Fears Imports from Brazil Will Mean Closures,Job Losses,” Journal of Commerce, February 25, 2A. InFebruary 1999, Horacio Larre Orno, the president ofthe Association of Argentine Component Manufacturers(AFAC) warned that a prolonged currency imbalancewith Brazil threatened to close the majority of Argen-tina’s auto parts plants and force mass layoffs. Heclaimed that the Argentine auto parts industry alreadyhad furloughed or laid off more than 10,000 of its38,000 workers since exports to Brazil began to declinein the second half of 1998.

77. It is important to note that the CommonAutomobile Policy has no legal effect until it is incor-porated into the ALADI framework. However,Argentina and Brazil follow its broad outlines, to agreater or lesser degree, since they adhere to ArgentineDecree No. 660/00, which was issued in August 2000and contains the basic rules later included in the finalversion of the Common Automobile Policy approvedby the Common Market Council in December 2000.

78. The fact that the regime covers all vehicles,including farm equipment and trailers, represented avictory of sorts for the Argentine negotiators, given thatthe Brazilians wanted to limit the covered vehicles topassenger cars and trucks so that they would not face

restrictions on the number of these other types of vehi-cles they could export to Argentina.

79. The formula for determining regional content isas follows:

100 X [1-(The CIF Value of the Imported Auto Parts)] > 60%F.O.B. Price of Vehicle Minus Taxes

80. Prior to that time, a certain level of flexibility ispermitted. For the first year, beginning retroactively onJuly 1, 2000, intra-firm trade of vehicles may digressfrom the Argentine content requirement by up to 9 per-centage points; that requirement goes to 6 percentagepoints in the second year and to 3 percentage pointsduring the third year.

81. J.J. Tacone and U. Nogueira, eds., 1999, MER -COSUR Report 1998-99, Vol. 5 (Buenos Aires: BID-INTAL, 1999), 29.

82. The latest statistics indicate that the Argentineterminals currently employ about 21,000 people. Oneof the interesting trends accompanying the importantgrowth of the automotive sector throughout theSouthern Cone during the 1990s is that employmentrates in the sector remained static. Through the use ofnew technologies and organizational techniques, automanufacturers managed to increase productivity with-out needing to hire new employees. See P. BastosTigre, M. Laplane, G. Lugones, and F. Porta, “CambioTecnológico y Modernización en la IndustriaAutomotriz del MERCOSUR,” Integración y Comercio7/8 (July-August), 140.

83. E.I.U. Motor Business International , 1998,Second Quarter (London: The Economist IntelligenceUnit Ltd., 1998), 87.

84. E.I.U. Motor Business International 1998, 106.

85. This economic growth, in turn, contributed to acertain level of macroeconomic stability that facilitatedthe use of new consumer credit and financing arrange-ments that had long been used in North America andEurope to induce purchases of consumer durables butwere alien to the MERCOSUR countries prior to the1990s.

86. The increases in productivity actually werequite spectacular. Between 1990 and 1997, productivitylevels in automobile manufacturing plants grew by 157percent in Argentina and 127 percent in Brazil. SeeBastos Tigre et al. 1999, 140.


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Ball, Jeffrey, and Scott Miller. 2000. “HowDaimlerChrysler Misfired.” Wall Street Journal,July 26.

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