Identifier
Created
Classification
Origin
09CIUDADJUAREZ21
2009-01-23 00:11:00
UNCLASSIFIED
Consulate Ciudad Juarez
Cable title:  

NAFTA, ELECTORAL POLITICS AND ALLEGATIONS OF PROTECTIONISM:

Tags:  ECON ETRD PGOV MX 
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P R 230011Z JAN 09
FM AMCONSUL CIUDAD JUAREZ
TO SECSTATE WASHDC 5807
AMEMBASSY MEXICO PRIORITY 
INFO ALL US CONSULATES IN MEXICO COLLECTIVE
USDOC WASHDC 0003
AMCONSUL CIUDAD JUAREZ
UNCLAS CIUDAD JUAREZ 000021 


DEPARTMENT FOR EEB:ANU PRATTIPATI;DEPARTMENT OF COMMERCE FOR DAVID
OLSON;DEPARTMENT PLEASE PASS TO USTR JOHN MELLE

E.O. 12958: N/A
TAGS: ECON ETRD PGOV MX
SUBJECT: NAFTA, ELECTORAL POLITICS AND ALLEGATIONS OF PROTECTIONISM:
THE ELIMINATION OF USED CAR TARIFFS AND ITS IMPACT ON THE BORDER

UNCLAS CIUDAD JUAREZ 000021


DEPARTMENT FOR EEB:ANU PRATTIPATI;DEPARTMENT OF COMMERCE FOR DAVID
OLSON;DEPARTMENT PLEASE PASS TO USTR JOHN MELLE

E.O. 12958: N/A
TAGS: ECON ETRD PGOV MX
SUBJECT: NAFTA, ELECTORAL POLITICS AND ALLEGATIONS OF PROTECTIONISM:
THE ELIMINATION OF USED CAR TARIFFS AND ITS IMPACT ON THE BORDER


1. Summary: On January 1, 2009, Mexico eliminated tariffs for
imports of used cars ten years and older from the United States
and Canada. The implementation of the new tariff structure
brings Mexico into technical compliance with North American Free
Trade Agreement (NAFTA) rules that went into effect on that
date. President Calderon's decision, however, to require that
imported used vehicles obtain a certificate of origin, a
document that manufacturers are reluctant to issue, has
effectively blocked all used car imports at the border.
Calderon's political opponents and used car dealers in Chihuahua
claim that the President's motive for issuing this requirement
is to protect Mexican automakers. They argue that the new
measure will hurt the border economy and disrupt the fight
against organized crime by impeding the process for citizens to
legally register used vehicles. Despite the announcement on
January 21 by the President of the Mexican Senate, Gustavo
Madero Munoz, that the GoM will lower the reference prices on
imported used vehicles by 50 percent, there is still no
agreement on the certificate of origin requirement.

Background - Turmoil in the Auto Industry


2. The North American Free Trade Agreement (NAFTA) has changed
the institutional framework of the Mexican economy and radically
liberalized its highly protected domestic automotive market.
Since NAFTA took effect in 1994, the Mexican auto industry has
thrived, becoming a critical driver of economic growth and job
creation in Mexico. For instance, in the first ten years of
NAFTA, the Mexican auto industry created over 200,000 new jobs.
Industry analysts estimate that the average salary associated
with the new jobs created in this sector is 30 percent higher
than the national average. This gap can largely be attributed
to the higher skill premium required for workers in this sector,
which has been supported by greater international competition
and an infusion of auto-related foreign direct investment (FDI).
Mexico's auto sector currently accounts for approximately 4
percent of Mexican GDP and around 20 percent of total
manufacturing output.


3. The recent turmoil surrounding the global economic crisis

has hit Mexican auto manufacturers hard. The industry, which
exports over 70 percent of its total production to the United
States, experienced significant declines in both overall
production and domestic sales in 2008. According to the website
for the Mexican Auto Industry Association (AMIA),sales of
domestically produced automobiles fell 6.8 percent in 2008.
Moreover, Mexico's National Institute for Statistics (INEGI)
projects that production in the manufacturing sector, of which
the auto industry is an important component, will decline 3.6
percent in 2009. Other industry experts, such as Eduardo Solis,
the President of AMIA, forecast worse domestic market conditions
for the auto sector. He claims that domestic vehicle production
could fall by 20 percent in 2009.

NAFTA Eliminates Tariffs on Used Car Imports


4. Beginning on January 1, 2009, NAFTA regulations require that
Mexico begin a ten-year process of phasing out restrictions on
used cars imported from Canada and the United States. The first
phase, which will last until December 30, 2010, requires Mexico
to eliminate all tariffs on used vehicles originating from a
NAFTA country that are at least 10 years old.


5. In response to the tariff elimination requirements, the GoM
has chosen to invoke Article 501 of NAFTA, which allows it to
require that imported used vehicles obtain a certificate of
origin from the manufacturer to claim preferential tariff
treatment. According to USG sources close to the trade
negotiation process with the GoM, "the USG tried to impress upon
them the impossibility of producers providing a certificate of
origin." The source explained that auto manufacturers are
reluctant to provide certificates of origin to exporters of used
vehicles largely due to the difficulty in verifying that the
vehicles, after ten or more years of repair and maintenance,
still meet the 62.5 percent rule of origin requirement
stipulated by NAFTA.

Mexico's Decree on Used Car Imports


6. Under NAFTA, Annex 300-A-2, paragraph 24(a),Mexico may
adopt or maintain prohibitions or restrictions on imports of
used vehicles, unless otherwise stipulated in NAFTA text. As
such, the GoM chose to issue a presidential decree to establish
the conditions for the importation of used vehicles into Mexico.
The new decree governs Mexico's auto imports from January 1,
2009 until December 31, 2010.

Salient Elements of the Auto Decree


7. The decree, inter alia, establishes Mexico's legal
requirement for all imported used vehicles, ten years and older,
to present the previously discussed certificate of origin. For
vehicles that do not have a certificate of origin, the GoM will
levy a 10 percent tariff, provided that the Vehicle
Identification Number (VIN) verifies that the vehicle was
manufactured in the United States or Canada. However, if the
vehicle lacks a certificate of origin and a valid VIN, the
importer will be required to pay a 50 percent Most Favored
Nation (MFN) duty.


8. The decree also abolishes President Vicente Fox's decree of
August 22, 2005, and the subsequent injunction (amparo) from
April 26, 2006, which provided the northern border region with a
preferential import duty structure for used car imports. The
Mexican Automotive Distributors Association (AMIA) contends that
from January 2006 to March 2008 (and this figure is supported by
U.S. Department of Commerce statistics),Mexico imported over
2.5 million used automobiles under this preferential agreement.
Many of these vehicles were transported out of the border area
and into other regions of Mexico where the preferential duty
structure did not apply.

Charges of Protectionism


9. During periods of reduced economic growth, consumers tend to
purchase cheaper, used vehicles rather than new, more expensive
vehicles. Through government intervention, the GoM has
distorted the market incentives for Mexican consumers. By
requiring importers to obtain a certificate of origin that
manufacturers are reluctant to issue, the GoM has imposed a new
barrier on used vehicle imports. This barrier reduces the
supply of imported vehicles, thus driving up the price for all
used vehicles in Mexico. Consequently, the price difference
between used and new vehicles will shrink, making
Mexican-produced, new automobiles more competitive.


10. Among the most vocal opponents of the new decree include
members of the used car industry, the National Chamber of
Commerce (Canaco) and politicians from Mexico's PRI party. In a
recent conversation with a Consulate officer, the Secretary of
the City Council in Ciudad Juarez, Guillermo Dowell, a member of
the PRI, commented that the decree issued under PAN leadership
is undoubtedly designed to protect Mexico's automakers. Other
groups, such as the American Salvage Pool Association (ASPA),an
exporter of used vehicles to Mexico, agree. Representatives
from ASPA contend that the decree is not an appropriate response
to address the slowdown in the auto sector. In their estimate
there is a positive correlation between used and new car sales.
(Note: Other analysts respond that while a positive correlation
may exist, the demand elasticity for new car sales is higher
than used car sales.)

Environmental Argument


11. Despite legal requirements in previous decrees that used
vehicle imports meet U.S. environmental standards, in practice,
Mexico has minimal enforcement capacity at its ports of entry.
Consequently, many proponents of the current auto decree argue
that a large percentage of the 2.5 million used vehicles
imported from 2006 to 2008 emit dangerous levels of
contaminants. As previously mentioned, despite being required
to remain in the border region to receive preferential
treatment, many of these vehicles were transported to the
interior of Mexico, leading to greater pollution in urban
centers.


12. Article 5 of the current auto decree reiterates the
emissions standards requirement. Nonetheless, the Mexican
Customs Administrator at the Cordova International Bridge in
Ciudad Juarez, Ricardo Hernandez, told a Consulate officer in
early January that the Customs Administration currently has no
mechanism to verify the compliance of environmental standards
for used vehicle imports.

Decree's Impact on Chihuahua


13. On January 1, 2009, the Chihuahua state government
implemented a "Zero Tolerance" program for unregistered vehicles
operating without a license plate. The government will
implement the new program within the framework of the Operacion
Conjunta Chihuahua - a security program designed to combat
organized crime. The "Zero Tolerance" program coincides with
the State's triennial requirement for all vehicles to renew
their license plates. The Secretary of the City Council in
Ciudad Juarez, Dowell, explained that "the program seeks to
address the security problem posed by the thousands of
unregistered vehicles circulating in the streets of Chihuahua."
Many of these unregistered vehicles, known locally as "carros
chocolates," entered Mexico legally on temporary import permits
- often with Texas license plates - and overstayed. Organized
criminal organizations frequently use these vehicles to commit
crimes, thus complicating Mexican law enforcement's efforts to
identify and apprehend criminals.


14. According to Dowell, the new Certificate of Origin
requirements work against the "Zero Tolerance" program by making
it harder to register vehicles that were already imported but
not yet registered. The President of the Juarez Customs Brokers
Association, Fernando Avila, says that the decree makes the cost
of legally importing used vehicles prohibitive. He added that
only three vehicles were registered for importation in Ciudad
Juarez from January 1 to January 15 of this year. This compares
with over 150 vehicles registered during this same period in

2007. If these conditions continue, Mr. Avila estimates that
20,000 - 30,000 jobs related to the used car industry in Ciudad
Juarez will be at risk. Meanwhile, Dowell says that authorities
will not impound unregistered vehicles until the import duty
issue is resolved.

Next Steps


15. In mid-January, the Governor of Chihuahua, Jose Reyes Baeza
Terrazas, and the Mayor of Ciudad Juarez, Jose Reyes Ferriz,
both from the PRI, met separately with federal authorities in
Mexico City to request changes to the auto decree. They
requested a 50 percent reduction in the reference prices for
imported vehicles, which they claim are inflated and arbitrarily
determined by federal authorities. On January 21, the President
of the Mexican Senate, Gustavo Madero Munoz, announced that
Hacienda had agreed to lower the reference prices on imported
used vehicles by 50 percent. However, there is still no
agreement on the certificate of origin requirement. Guillermo
Dowell claimed that if the federal government does not change
its position, local authorities will file "amparos" - or
injunctions - allowing importers to continue operations.
Moreover, he said that the Mayor has not ruled out the
possibility of filing a formal dispute against the Mexican
Government in the NAFTA Disputes Resolution Forum.


16. Comment: Given the importance of Mexico's auto sector to
the domestic economy, combined with the somber industrial
production forecast for 2009, there is extensive pressure on
Mexican politicians to protect the industry. Responding to this
challenge has been complicated by election-year politics. (On
July 5, Mexico will hold congressional elections, as well as
gubernatorial elections for six states). In this recent debate,
the PAN has supported the domestic auto manufacturers, while the
PRI has rallied behind used car dealers, especially along the
northern border. In Chihuahua, politicians from the PRI have
tried to use the auto decree to portray President Calderon and
the PAN as "out of touch" with the economic and security
challenges along the border. Moreover, this plays into a
narrative propagated by local PRI politicians that federal
authorities are not effectively responding to the threat of
organized crime. If the local and federal authorities are
unable to reach an agreement on the import requirements for used
vehicles, used auto car unions, the National Chamber of
Commerce, politicians, and others have vowed to protest,
possibly blocking international commercial traffic from Ciudad
Juarez into El Paso.


MCGRATH