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Regional Trade Deals And The Mexican Auto Industry (Essay Sample)


The Assignment:

Use the following guiding questions to write about the following:

“Car Manufacturing in Mexico: The Benefits and Challenges of Operating in a Free Trade Area”                 

Guiding Questions

  1. Why has Mexico become a manufacturing hub for cars? Use trade theory and other concepts to answer this question.
  2. Given the information in the case, should the United States impose a tariff on cars imported from Mexico? Why or why not?
  3. What lessons can BMW learn from operating in Mexico, a NAFTA country?
  4. What are two alternatives to producing BMWs in South Carolina, and Mexico?

Search the current web site of BMW or do a Google search and provide an update on BMW’s operation within NAFTA. Does the new information address any aspect of trade theory and/Foreign Direct Investment (FDI)?




Course: International Trade and Investment SPING 2018: Business Written Case 2


Regional Trade Deals and the Mexican Auto Industry


Demand for vehicles in the US has grown since the country’s economy rebounded after the global financial crisis. Increasingly, American and foreign companies have set up facilities in Mexico and have targeted vehicle sales to the US. Such vehicles are allowed duty-free access when many vehicle components are from the US, Canada, and Mexico after the adoption of the North American Free Trade Agreement (NAFTA). BMW, the German automaker has a facility in South Carolina and is set to open a new one in Mexico, but President’s Trump calls for renegotiation of NAFTA and imposing tariffs on vehicle imports. Mexico has become an ideal location for car manufacturers like BMW and has advantages because of low labor costs, free trade pacts with the US and other countries and an integrated North American supplier network.

Mexico’s growing automotive industry

Mexico’s integration with the US resulted in many of the manufacturing industries moving beyond Mexico City and nearer the US border. There was growing demand for manufactured products including vehicles at a time when Mexico was embracing trade liberalization policies. Furthermore, the new areas of manufacturing were cheaper for manufacturers and were incentivized to move away from congested hubs to places where the cost of trade was lower. The automotive industry in Mexico is primarily targeted at exporting cars especially to the US and Mexico has provided tax incentives that have made the country ideal as a manufacturing hub for cars.

Mexico’s more open economy has reduced barriers to trade that there are more foreign investors who have made Mexico their manufacturing base rather than the US. Additionally, the linkages among various supportive industries have grown stronger because they are supported by the thriving car manufacturing industry including the auto part supplies market. In any case, as the automotive industry in Mexico has grown there are more opportunities for new entrants into the country including American automakers who seek to shift manufacturing some car models in Mexico. American automobiles primarily operating in the US increasingly focus on the trucks and SUVs as they have higher margins than the smaller cars sold in the domestic market.

Tariffs and vehicle imports from Mexico

While President Trump has imposed a tax on steel and aluminum ad shown willingness to remove the tariffs for Canada and Mexico, he may target automakers that shift from the US to Mexican production. However, tariffs should not be imposed on cars imported from Mexico as this would result in an indirect tax to American consumers since they will pay more for imported products. Even as tariffs are meant to protect the domestic industries this would not necessarily make them more competitive in the long run as the cost of production is higher in the U.S. imposing tariffs would result in lower demand for Mexican made cars, but there is no extra money raised from the import tariffs. In any case, the price would rise that the US may reduce and stop car imports, meaning that Americans would pay more for domestic manufactured cars.

While Mexico’s automotive industry has grown with automakers and suppliers preferring the lower cost of production, the supply chain is well integrated with the US and Canada. There are many vehicle components that originate from the U.S indicating higher sales car also benefit some US manufacturers who operate in the US and Mexico. Levying taxes on aluminum and steel imports will also affect the US automakers where the global competitors would be unaffected by higher prices in th...

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