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Cablegate: Managed Mercosur Auto Trade

VZCZCXYZ0012
RR RUEHWEB

DE RUEHBU #1127/01 1582008
ZNR UUUUU ZZH
R 072008Z JUN 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 8359
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6226
RUEHMN/AMEMBASSY MONTEVIDEO 6503
RUEHSG/AMEMBASSY SANTIAGO 0463
RUEHBR/AMEMBASSY BRASILIA 6091
RUEHLP/AMEMBASSY LA PAZ JUN CARACAS 1288
RUEHVL/AMEMBASSY VILNIUS 0104
RUEHGT/AMEMBASSY GUATEMALA 0266
RUEHSO/AMCONSUL SAO PAULO 3322
RUEHRI/AMCONSUL RIO DE JANEIRO 2246

UNCLAS BUENOS AIRES 001127

SIPDIS

SIPDIS
SENSITIVE

PASS NSC FOR JOSE CARDENAS, ROD HUNTER
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
TREASURY FOR MATT MALLOY
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER AND SABOTTA

E.O. 12958: N/A

TAGS: ECON EINV ETRD AR BR VE

SUBJECT: Managed Mercosur Auto Trade

Ref: Buenos Aires 831

-------
Summary
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1. (U) Argentina's auto sector is roaring ahead, and 2007 is well on
track to be the best in its history. The auto industry is a crucial
pillar of the Argentine economy, bringing good jobs, technology
transfer and innovation. Given the auto industry's importance and
political sensitivity, the GOA has historically been reluctant to
leave its future entirely to market forces. An integral part of the
GOA's - and industry's - strategy has been the Mercosur managed auto
trading regime. Argentina and Brazil, the only major auto producers
in Mercosur (not including Venezuela), have a substantial managed
auto and auto parts trade under this regime. Up until the early
1990s, Argentina's auto industry, like that of Brazil, was largely
closed and protected. Since then, both nations have slowly opened
these industries, engaged in successive managed trading regimes, and
made substantial forward progress in trade and investment. The GOA
prefers managed auto trade, fearing Brazil's potential to dominate
regional production. Although there is no true free trade today in
autos, and little prospect of it in the medium term, the Mercosur
managed trade agreement has, according to many observers, played a
fundamental role in sustaining Argentina's support for Mercosur over
the years. END SUMMARY.

2. (U) HEADY TIMES FOR THE IMPORTANT ARGENTINE AUTO INDUSTRY, WHICH
THE GOA WILL CONTINUE TO PROTECT. A strong Argentine economy, and
growing and diversified exports, will likely propel the auto sector
to its best year in history in 2007. The auto industry is well on
track to produce 500,000 units and export 300,000 this year. The
Argentine auto industry is an important and dynamic sector, with
well-paying and high-skilled jobs, technology transfer, and is an
important multiplier in the industrial chain, adding value and
helping in the commercial balance (Reftel). For these reasons, the
GOA has always been reluctant to leave the industry entirely to the
market, and has engaged in varying amounts of state intervention.
In fact, the auto industry has always been one of the obstacles to
the stated liberal and integrationist goals of Mercosur.

3. (U) UNTIL EARLY 1990S, ARGENTINA AND BRAZIL PROTECTED DOMESTIC
AUTO INDUSTRIES; HAVE COME A LONG WAY SINCE. Argentina and Brazil
largely protected their domestic auto markets through the early
1990s with a mix of quotas, high tariffs and subsidies, as a part of
their import substitution industrialization schemes. With the
advent of Mercosur in the early 1990s, the major Mercosur partners
slowly began to open their auto and auto parts trade. Given the
political sensitivity that emblematic auto production holds for both
nations, progress has been uneven. However, liberalization has come
a long way: auto sector trade today constitutes about 18% of total
intra-Mercosur trade, and Argentina-Brazil auto product trade in
2006 totaled over $4 billion. Argentina and Brazil are the
principal members of Mercosur and its main auto producers. (Note:
Venezuela, still pending member state ratification of its accession
to full member status, also produces automobiles. End Note).
Argentina and Brazil have had a managed trade regime in autos and
auto parts for several years. Argentina has also enacted several
new and important auto trade agreements with Mexico, Venezuela,
Chile, Uruguay and the European Union, among others. This
extra-Brazil auto trade has been an important factor in Argentina's
auto export diversification strategy.

4. (U) ASYMMETRIES THE KEY ARGENTINE CONCERN. Disparities in
relative competitiveness are Argentina's biggest concern about free
trade in autos. These concerns relate to Brazil's larger domestic
market, scales of production, broader consumer base (and consequent
ability to sustain new car models), and longstanding policy of a
promoting industrial development with subsidies and incentives from
national, state and local governments. Current account
disequilibria following from the Brazilian devaluation of 1999 and
the Argentine devaluation of 2002, have contributed to GoA
hesitation to further liberalize its trade regime.

5. (U) FREE TRADE HELD OFF BY ARGENTINA. As originally envisioned
in earlier Argentine/Brazil auto trade agreements, the Mercosur
trade bloc would eventually move towards free trade in autos.
However, Argentina over the years has resisted moves toward full
free auto trade, fearing domination by Brazil's economy and auto
market, both about four times the size of Argentina, and with whom
it has a large auto trade deficit. Brazil's share of the Argentine
auto market also dwarfs Argentina's market share in Brazil. Over
the last decade, the two countries' successive bilateral managed and
balanced auto trade agreements were done to assuage mostly Argentina
industry concerns.

6. (U) THE HISTORY OF ARGENTINE/BRAZIL MANAGED AUTO TRADE PACTS:
The 1991 Treaty of Asuncion and the 1994 Protocol of Ouro Preto both
included "compensated trade" language that provided a basis for
later managed auto trade regimes. Other agreements in the 1990s
furthered this process, setting baselines on a common external
tariff, less distortionary incentives, import regimes for parts and
autos, and regional content indices. These agreements, although
hardly revolutionary, had remarkable impacts on the industries, with
investment, production and trade registering strong gains. For
Argentina, from 1990 to 1998, production quadrupled (as a result of
increased investment), and exports went from 1% of production to
55%.

7. (U) Under the 2000-2006 Mercosur auto agreement, Brazil was
permitted to export $265 of duty free products to Argentina for
every $100 of duty free Argentine exports to Brazil. Before this
accord expired in July 2006, the two sides agreed to an updated
agreement, to run from June 2006 to December 2008. This deal
lowered this offset, the amount of automotive products that
Brazil-based firms may export tariff-free to their Argentine
affiliates, at $195 for every $100 of automotive products it imports
from Argentina. But distinct from the previous agreement, it does
not contain any Argentine local content requirement. To be treated
as originating in Mercosur, vehicles and auto part assemblies must
incorporate at least 60 percent parts manufactured in Mercosur.
This latest 2006-2008 managed trade deal represented another
breather for Argentina's manufacturers. With a move towards more
liberalized trade, the Argentine automotive industry would have
faced acute competition due to the strength of Brazilian auto
imports. This deal gave local industry room to devise strategies to
counter any possible move towards more liberal trade after 2008.
However, most industry analysts expect that a managed trade regime,
in some form or another, will be extended for the foreseeable
future.

8. (SBU) MERCOSUR AUTO TRADE NOT TRIMS CONSISTENT. In 1995,
Argentina notified measures inconsistent with its obligations under
the WTO Agreement on Trade-Related Investment Measures (TRIMS),
dealing with local content and balancing trade flows in the
automotive industry. Proper notification allows developing country
WTO members to maintain such measures for a five-year transitional
period, which ended January 1, 2000. In November 2001, the WTO
granted an extension to the TRIMS transitional period, allowing
Argentina and several other countries to maintain TRIMS-inconsistent
measures until December 31, 2003. Article 23 of the September 2002
bilateral auto pact between Argentina and Brazil allowed Argentina
to maintain minimum domestic content requirements on vehicles
manufactured in Argentina until 2005. Article 13 of the same
agreement established trade balancing measures which expired in
2006, and were extended through 2008, including the local content
and trade balancing clauses.

9. (SBU) MULTINATIONAL AUTO COMPANIES, FORD AND GM INCLUDED, HAVE
ADAPTED WELL. Argentine auto producers have adjusted well to the
Mercosur regime. In fact, most observers here say that the accords
have provided some amount of predictability to the market, and they
can plan their Mercosur and beyond auto and parts production
strategies accordingly. GM, Ford, Toyota, VW, Renault and Peugeot
all have trade in line with this Mercosur trade regime between
Argentina and Brazil, with only Fiat manufacturing only in Brazil.
(In 2008, Fiat is set to again produce cars in Argentina.) Analysts
will note further that the proof is in the numbers: for 2007-08, the
industry plans $720 million in investments, there are new models and
plants being planned, and other players, including the Chinese, are
planning their entries as well.

10. (SBU) COMMENT: ALTHOUGH THE MERCOSUR AUTO TRADE REGIME MAY NOT
BE IDEAL, IT HAS ITS SUPPORTERS, AND HAS HELPED KEEP MERCOSUR
TOGETHER. By most Argentine accounts, the Mercosur managed auto
trade regime has fulfilled its objectives. These are good times for
the regional auto trading regime and the regional auto market in
general. Production and exports, with their corresponding
investment and employment in Argentina, are big plusses. However
TRIMS-inconsistent and contrary to classic trade theory this trade
regime may be, managed trade in autos has clearly been seen here as
politically and economically a big positive. For local auto
producers, it has been an easy adaptation. In fact, managed trade
in autos has been seen by some as a welcome relief, providing
consistent rules by which to operate -- an anchor of sorts -- in a
nation criticized for lacking clear and consistent regulatory
regimes and a difficult investment climate. This agreement has not
been good only for the auto industry proper, but its indirect
beneficiaries and providers: the dozen-odd other industries which
support the industry, providing electricity, glass, plastic, metals,
tools, machinery, rubber and upholstery. Many analysts have
commented that in some ways, what Mercosur has failed to achieve in
a larger sense (a true customs union, stability, clear rules), the
managed auto trade regime has achieved in a smaller sense. Perhaps
more importantly, in the view of many observers, managed trade, with
the ability to attenuate variations in the relative competitiveness
of the two markets, has helped ensure continued local production and
investment, and has been politically helpful for the continued
viability of Mercosur.

11. (U) To see more Buenos Aires reporting, visit our classified
website at: http://www.state.sgov.gov/p/wha/buenosaires.< /a>

MATERA

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