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TRADE SIA OF THE ASSOCIATION AGREEMENT UNDER NEGOTIATION BETWEEN THE EUROPEAN COMMUNITY AND MERCOSUR AUTOMOBILE

TRADE SIA OF THE ASSOCIATION AGREEMENT UNDER NEGOTIATION BETWEEN THE EUROPEAN COMMUNITY AND MERCOSUR

AUTOMOBILE SECTOR STUDY

MID TERM REPORT

5 th APRIL 2007

This Report was commissioned and financed by the Commission of the European Communities. The views

This Report was commissioned and financed by the Commission of the European Communities. The views expressed herein are those of the Consultant, and do not represent any official view of the Commission.

This Report has been prepared for the European Commission under Contract No: Trade 05-G3-01 - Specific Contract No 1

Trade SIA EU-Mercosur Partners

IARC, Institute for Development Policy and Management (IDPM), University of Manchester Chaire Mercosur Copenhagen Economics ECOSTRAT Consultants, Brazil GRET (Groupe de Recherche et d’Echanges Technologiques) Land Use Consultants Natural Resources Institute, University of Greenwich WISE Development (Women in Sustainable Enterprise Development)

Project website: http://www.sia-trade.org/mercosur

Project email address: sia-trade@man.ac.uk

CONTENTS

ABBREVIATIONS ……………………………………………………………

vi

EXECUTIVE SUMMARY…………………………………………………….

ix

INTRODUCTION……………………………………………………………

2

1.1

THE AUTOMOBILE SECTOR SIA…………………………………

2

1.2

CONTEXT……………………………………………………………

2

1.3

THE EUROPEAN COMMISSION’S TRADE SIA PROGRAMME….

2

1.4

THE SIA STUDIES OF EU-MERCOSUR ASSOCIATION AGREEMENT TRADE NEGOTIATIONS……………………………

3

2.0

METHODOLOGY…………………………………………………… 5

2.1

TRADE SIA FRAMEWORK………………………………………….

5

2.2

CAUSAL CHAIN ANALYSIS………………………………………

5

2.3

SCENARIOS…………………………………………………………

6

2.4

SUSTAINABILITY INDICATORS AND IMPACT SIGNIFICANCE

6

2.5

PREVENTATIVE, MITIGATION AND ENHANCEMENT

9

MEASURES6…………………………………………………………

3.0

AUTOMOBILE SECTOR IN EU AND MERCOSUR:

10

CHARACTERISTICS AND TRENDS………………………………

3.1

INTRODUCTION……………………………………………………

10

3.2

DEFINING THE AUTOMOBILE SECTOR…………………………

10

3.3

THE GLOBAL AUTOMOBILE MARKET…………………………

13

3.4

THE EUROPEAN AUTOMOBILE SECTOR…………………………

14

3.5

THE MERCOSUR AUTOMOBILE SECTOR………………………

18

3.6

EU – MERCOSUR TRADE AND INVESTMENT IN AUTOMOBILES SECTOR……………………………………………

28

4.0

SUSTAINABILITY IMPACT ASSESSMENT (SIA) FOR THE AUTOMOBILE SECTOR IN MERCOSUR………………………

32

4.1

INTRODUCTION……………………………………………………

32

4.2

TRADE LIBERALISATION IN THE AUTOMOBILE SECTOR…….

32

4.3

QUANTITATIVE ANALYSIS OF TRADE LIBERALISATION…….

36

4.4

ECONOMIC IMPACT ASSESSMENT………………………………

44

4.5

SOCIAL IMPACT ASSESSMENT……………………………………

59

4.6

ENVIRONMENTAL IMPACT ASSESSMENT………………………

60

5.1

QUANTITATIVE AND QUALITATIVE EVEDENCE………………

74

5.2

SUSTAINABILITY IMPACT ASSESSMENT………………………

75

6.0

CONSULTATION AND DISSEMINATION ACTIVITIES……….

78

6.1

CONSULTATION PROCESS…………………………………………

78

7.0

WAY FORWARD AND CONTENTS OF FINAL REPORT……

84

I

GLOBAL CONTEXT………………………………………………….

95

II

THE ARGENTINE AUTOMOTIVE INDUSTRY…………………….

99

III

THE BRAZILIAN AUTOMOTIVE INDUSTRY……………………

109

IV

URUGUAYAN AND PARAGUAYAN AUTOMOTIVE SECTORS

119

V

MERCOSUR AUTOMOTIVE POLICY………………………………

121

VI

EU-MERCOSUR AUTOMOTIVE INDUSTRY TRADE RELATIONS…………………………………………………………

124

List of Figures

Figure

Basic Principles of the Casual Chain analysis……………………

6

1

Figure

Net FDI Outflows from the EU and US to Mercosure, 1990-2002

30

2

Figure

Automotive industry in Argentina and Brazil: Production,

3

domestic sales exports and imports (192-2004) in thousands of units…………………………………………………………………

Figure

Potential changes in sustainability linked to the automotive sector

4

resulting from trade liberalisation between the EU and Mercosur

List of Tables

Table 1

Sustainability Indicators………………………………………….

7

Table 2

Format of impact summary tables………………………………

8

Table 3

Global automobile market segmentation…………………………

13

Table 4

Worldwide Vehicle Fleet Advanced and Emerging Markets…….

14

Table 5

Motor vehicle production in the EU (2003-2005)………………

15

Table 6

Trends in EU automotive production (2003-2005)………………

15

Table 7

Trends in EU employment in the automobile sector……….…….

17

Table 8

Inhabitants per vehicle……………………………………………

18

Table 9

World Production (Thousands)…………………………………

19

Table 10

MERCOSUR Automotive Industry Overview (2004)……………

19

Table 11

Intra-Mersosur Automotive Industry Trade (Millions $US)……

27

Table 12

Automobile Sector Output and Employment…………………….

27

Table 13

EU Mercosur Automotive Industry Trade (US$ Millions US)…

27

Table 14

South America Net FI Inflows, 1991-2005 ($million)…………

28

Table 15

Main Sectors and Ownership of Top 500 Companies, 2000-2004

29

Table 16

EU FDI Stock in Latin America, 2001…………………………

31

Table 17

Mercosur Trade with the EU 1996-2002 (US$bn)………………

32

Table 18

Argentina’s Automotive Industry Imports by Destination as Share of Total automotive Imports (%) ….………………………

33

Table 19

Brazil’s Automotive Industry Imports by Destination as Share of Total Automotive Imports (%)……………………………………

33

Table 20

Argentina’s automotive industry exports by destination as share of total automotive exports (%)…………………………………

33

Table 21

Brazil’s automotive industry exports by destination as share of total automotive exports (%)…………………………………….

34

Table 22

Mercosur Import Tariffs – 2006…………………………………

34

Table 23

European Union Import Tariffs – 2006………………………….

35

Table 24

Mercosur Non Tariff Barriers affecting EU Automotive Industry Exports…………………………………………………………

35

Table 25

CETM Results for Automobile Sector for Full Liberalisation Scenario (%)change)……………………………………………

38

Table 26

Tariff Revenue Effects, millions of dollars……………………

39

Table 27

Changes in Motor Vehicle Output and Employment……………

40

Table 28

Trade flow changes for Mercosur (%)…………………………

42

Table 29

Output changes for Mercosure (%)……………………………

42

Table 30

Domestic output, sales, imports and exports (Brazil) (thousands of units)…………………………………………………………

45

Table 31

Vehicle Manufacturing in Argentina (1992-2005) (thousand units)……………………………………………………………

46

Table 32

Argentina – Trade in Vehicles (US$m)…………………………

47

Table 33

Argentina – Trace in Auto Parts (US$m)……………………….

47

Table 34

Total FDI stock in host economy (Millions $US)………………

52

Table 35

Vehicle Manufacturers Investments in Brazil ($US Millions)…

53

Table 36

Largest Affiliates of foreign TNCs Investing in Motor Vehicles

53

Table 37

Total employment in Brazilian Automotive and Auto Parts Industries: 1996 to 2005 (thousands)……………………………

57

Table 38

Average Emissions of New Light Vehicles………………………

65

Table 39

Sustainable Development Principles relevant to Trade Liberalisation Automobiles Sector ………………………………

68

Table 40

Criteria for Effective National Sustainable Development Strategies:

69

Table 41

Automobile Sector……………………………………………… SIA Impacts for Automotive Sector in Mercosur………………

71

Table 42

EU Automobile Sector Output Changes (%)……………………

74

Table 43

Change in Automobile Imports in Mercosure (%)……………….

75

Table 44

SIA Impacts for Automotive Sector in EU……………………….

76

Table 45

Comments and Responses on Mid-term Reports………………

78

Table 46

Numbers of visits to the Mercosur website (May06 – October

80

2006)…………………………………………………………….

Table 47

Number of times that online reports have been accessed from May 06 – October 06……………………………………………

80

Table 1

Worldwide Vehicle fleet…………………………………….…

95

Table 2

Inhabitants per Vehicle……………………………………….…

96

Table 3

Key Advanced & Emerging Markets……………………………

97

Table 4

Worldwide Vehicle Exports…………………………………….

98

Table 5

MERCOSUR Automotive Industry Overview – 2004………….

98

Table 6

Argentina – Vehicle Manufacturing in the 1990s………………

101

Table 7

Argentina – Automotive Industry Exports in 1990s……………

101

Table 8

Vehicle Manufacturing in Argentina……………………………

104

Table 9

Argentina – Vehicles Manufactured – 2004…………………….

105

Table 10

Argentina – Domestic Market Sales……………………………

105

Table 11

Argentina – Trade in Vehicles……………………………………

106

Table 12

Argentina – Trade in Auto Parts………………………………….

107

Table 13

Argentina – Vehicle Manufacturers………………………………

108

Table 14

Argentina – Auto Parts Industry………………………………….

109

Table 15

Brazil – Vehicle Manufacturing in the 1990s…………………….

111

Table 16

Brazil – Vehicle Manufacturers in 2004………………………….

113

Table 17

Brazil – Vehicle Manufacturing in the 21 st Century……………

114

Table 18

Brazilian Vehicle Exports and Imports…………………………

116

Table 19

Brazil – Automotive Trade Balance………………………………

116

Table 20

Brazil – Vehicle Exports in 2004…………………………………

117

Table 21

Average Emissions of New Light Vehicles………………………

118

Table 22

Uruguay – Passenger Vehicle Production and Sales……………

120

Table 23

Brazilian Domestic Sales of Mercosur Imports…………………

122

Table 24

EU-Mercosur Automotive Industry Trade………………………

124

Table 25

EU-15 Vehicle Exports – 2002…………………………………

125

Table 26

Mercosur Import Tariffs – 2006………………………………….

125

Table 27

European Union Import Tariffs – 2006………………………….

125

Table 28

Brazil Trade Balance with the European union………………….

126

Table 29

Mercosur Non-Tariff Barriers affecting EU Automotive industry Exports……………………………………………………………

126

Table 1

Policy Measures that affected the automotive sector 1990 – 2000

134

Table 2

Import of Auto Parts for production – 2000/2006………………

135

Table 3

Forseen Investments in the automotive industry in Brazil under incentives of the automotive regime – 1996/99………………….

139

Table 4

Estimate of consumer’s loss and the cost of generated employment by the automotive regime………………………….

142

Table 5

Total revenue of Brazilian Automotive and Auto parts Industry:

146

1996

to 2005……………………………………………………

Table 6

Investment in Brazilian Automotive and Auto parts industries:

147

1996

to 2005……………………………………………………

Table 7

Trade balance of Brazilian Automotive and Auto parts sectors:

148

1996

to 2005)…………………………………………………….

Table 8

Main countries of destination/origin of Brazilian Auto parts exports/imports 2005…………………………………………….

149

Table 9

Total employment in Brazilian automotive and autoparts industries: 1996 to 2005………………………………………….

152

List of Boxes

Box 1:

Capability requirements in the global auto industry……………………

11

Box 2:

New EU Members Attract International Car Manufactures…………

16

Box 3:

Brazilian vehicle manufacturers and international division of labour

22

Box 4:

Ford’s ‘Global’ Car Strategy………………………………………

24

Box 5:

The auto parts sector in Brazil 1

49

Box 6

The impact of NAFTA on Mexico’s Automotive Industry………….

50

Box 7

Unsustainable Incentives in Brazil’s Automotive Industry

54

Box 8

Mercosur: FDI in the automobile industry is targeting broader export markets………………………………………………………………

55

Box 9

General Motors in Brazil: from tropicalization to global innovative R&D…………………………………………………………………

56

Box 10

The Impact of Trade Opening on Employment in Argentina and Brazil

57

ANNEXES

Annex 1

The Automotive Sector in Brazil, Argentina, Paraguay and

92

Annex 2

Uruguay…………………………………………………………

Impact of the Agreement between Mercosul and the European Union on the Auto Parts Sector in Brazil………………………….

131

ABBREVIATIONS

ACEA

European Vehicle Manufacturers’ Association

ADEFA

Argentine Vehicle Manufacturers’ Association

AFAC

Argentine Automotive Components Association

AMS

Aggregate Measure of Support

ANFAVEA

Brazilian Vehicle Manufacturers’ Association

CAP

Common Agricultural Policy

CCA

Causal chain analysis

CEP

Centre for Production Studies, Ministry of Economy

CET

Common External Tariff

CGE

Computable General Equilibrium

CIFOR

Center for International Forestry Research

CKD

Completely Knocked Down

CoC

Chain of Custody

CSR

Corporate Social Responsibility

CTA

Technical Centre for Agricultural and Rural Cooperation ACP-EU

DDA

Doha Development Agenda

DFID

UK Department for International Development

DG

Directorate General

EBA

Everything But Arms

EC

European Commission

ECLAC

Economic Commission for Latin America and the Caribbean

EFTA

European Free Trade Area

ERRT

European Retail Round Table

EU

European Union

FAO

Food and Agricultural Organization of the United Nations

FDA

Food and Drugs Administration

FDI

Foreign Direct Investment

FERN

Forests and the European Union Resource Network

FLEGT

Forest law Enforcement, Governance and Trade

FOB

Free On Board

GATS

General Agreement on Trade in Services

GATT

General Agreement on Tariffs and Trade

GDP

Gross Domestic Product

GFT

Government Financial Transfers

GFW

Global Forest Watch

GM

General Motors

GNP

Gross National Product

GTAP

Global Trade and Protection

HACCP

Hazard Analysis Critical Control Point

HPDC

Highly Protected Developing Country

IARC

Impact Assessment Research Centre

ICTSD

International Centre for Trade and Sustainable Development

IDPM

Institute for Development Policy and Management

IEEP

Institute for European Environmental Policy

IFF

Intergovernmental Forum on Forests

IFPRI

International Food Policy Research Institute

IISD

International Institute for Sustainable Development

IMF

International Monetary Fund

IMV

Innovative Multipurpose Vehicles

IPEA IPF ISI ITC ITTA ITTO LDC LIDC M and E MAP MEAs MEDC MENA MERCOPARTS MERCOSUR MFA MFN MNE MOU NAFTA NAMA NGOs NSDS NTB NTM ODC ODI OECD OICA PPP PROCONVE R&D RA ROO S & D SADC SCM SD

Institute of Applied Economic Research, Ministry of Planning, Budget and Public Management, Brazil Intergovernmental Panel on Forests Import Substitution Industrialisation International Trade Commission International Tropical Timber Agreement International Tropical Timber Organisation Least Developed Country Low Income Developing Country Mitigation and Enhancement Mercosur Automotive Policy Multilateral Environmental Agreements Major Exporting Developing Country Middle East and North Africa Mercosur Auto Parts Manufacturers Council Common Market of the Southern Cone Multifibre Arrangement Most-favoured-nation Multinational Enterprise Memorandum of Understanding North American Free Trade Agreement Non-agricultural Market Access Non-governmental Organizations National Sustainable Development Strategies Non-Tariff Barriers Non-Tariff Measure Other Developed Country Overseas Development Institute Organisation of Economic Co-operation and Development International Organisation of Vehicle Manufacturers Public Private Partnerships Programme for the Control of Automotive Emissions Research and Development Representative Agent Rules of Origin Special and Differential Southern African Development Community Subsidies and Countervailing Measures Sustainable Development

Secex, MDIC

External Trade secretariat, Ministry of Development, Industry and Commerce, Brazil

SIA

Sustainability Impact Assessment

SINDIPEÇAS

Brazilian Association of Auto Parts Manufacturers

SME

Small and Medium-sized Enterprises

SOBEET

Brazilian Society for Study of Transnational Enterprise and Economic Globalisation

SPS

Sanitary and Phytosanitary Measures

SSA

Sub-Saharan Africa

TBT

Technical Barriers to Trade

TD/BU

Top Down/Bottom Up

TOR

Terms of Reference

TRIPS

Trade-Related Aspects of Intellectual Property Rights

UN

United Nations

UNCED

United Nations Conference on Environment and Development

UNCTAD

United Nations Conference on Trade and Development

UNDESA

UN Department of Economic and Social Affairs

UNDP

United Nations Development Programme

UNEP

United Nations Environment Programme

US

United States of America

US$

Dollars (United States of America)

USAID

United States Agency for International Development

USDA

United States Department of Agriculture

VAT

Value Added Tax

WHO

World Health Organization

WTO

World Trade Organization

WWF

World Wide Fund for Nature

EXECUTIVE SUMMARY

This report presents the interim mid-term results of a project being undertaken for the European Commission to provide a sustainability impact assessment (SIA) of the automobile sector, as part of the Association Agreement under negotiation between the European Union and the Mercosur countries. The automobile sector SIA is being carried out in parallel with two other detailed SIAs, for agriculture and the forestry sector. The interim results of these sectoral SIAs are also incorporated into an overall SIA of the EU - Mercosur Association Agreement, along with a wider analysis of other components of the proposed trade agreement.

The methodology used is as described in the inception report. The current report provides the results of the sustainability impact assessment, and incorporates the comments received on an earlier draft report which was circulated widely to stakeholders and discussed at consultation meeting in Brussels with civil society. It also provides a preliminary assessment of potential flanking measures. The final report will update these findings, and undertake a more detailed evaluation of alternative flanking measures for prevention or mitigation of potentially adverse impacts and enhancement of beneficial ones.

Principal Findings

The SIA analyses the impacts of a postulated trade liberalisation scenario for the automobile sector in the EU and Mercosur, in comparison with a baseline situation without such an agreement. The assessment is based on a liberalisation scenario where tariff and non tariff barriers relating to the automobile sector in Mercosur and the EU are gradually removed over a transition period of up to ten years.

Impacts within the EU

The economic impacts for the EU are expected to be beneficial in terms of output and employment. Foreign investment flows from Europe to the Mercosur automobile sector will be encouraged by the liberalisation of trade and investment, and any accompanying reduction in trade facilitation costs. The distribution of gains from increased output and employment are likely to favour the EU10 countries with automobile production capacity. The investment benefits will accrue to those EU15 countries that have made significant investments in the Mercosur automobile sector over several decades.

Economic benefits may increase over time, as trade liberalisation increases the competitiveness and export potential of the automobile sector in Mercosur and increases the returns from European investments. Over time, exports of more expensive and specialist vehicles from Europe may increase as consumer preferences in Mercosur shift towards higher specification models,

The liberalisation of automobile sector trade is not expected to have significant social impacts in the EU 15 and EU10 countries.

The potential environmental impacts in the EU would be related to any change in production that results from the liberalisation of trade with Mercosur. but given the enforcement of environmental standards and controls within the EU, any additional environmental pressures are unlikely to be significant.

Impacts within Mercosur

The economic impacts of trade liberalisation in the automobile sector are expected to be positive, as increased openness improves the international competitiveness of automobile manufacturing and parts production in Brazil and Argentina. There may be short term pressure on domestic producers, particularly in the parts sector, as they adjust product-design and productivity to the challenge of competing against imported parts for use in domestic assembly plants. However, with the continued inflow of FDI, the share of exports in total production is expected to increase. Export growth and growth in the domestic market are expected to allow for the continued expansion of output and employment, although this is partly dependent on the continuation of a stable and predictable macroeconomic environment and investment climate.

The pace of liberalisation is likely to affect the scale of any costs associated with the adjustment to increased global competitive pressures. If liberalisation outpaces the rate at which domestic firms can adjust, there could be a negative impact on employment and production as imports replace domestic production and uncompetitive firms retrench or close. On the other hand, exposure to competition should induce efficiency and productivity gains, and the opportunities for new investment and prospects of higher rates of return can be expected to attract new investment in the sector.

The potential social impacts of automobile sector liberalisation are not expected to be significant. Both gender and income inequality are greater in the automobile sector than in many other manufacturing sectors, but trade liberalisation is not expected to result in a significant change in the existing inequalities. The labour employed in the automobile sector is relatively skilled, so any increase in employment is unlikely to create new jobs for the unemployed poor. Any decline in tax revenue from the lowering of tariffs could have budgetary implications and might lead to a reduction in social expenditure on education and health. However, the incremental impact of automobile sector liberalisation on total tax revenues will be insignificant. The process of product redesign and upgrading induced by trade liberalisation may contribute positively in terms of increasing the skills endowment of the labour force.

will be related to the changes in production levels, changes in

vehicle use, changes in trade, and changes in technology that result from trade liberalisation. Environmental quality can be expected to decline with increased production and vehicle use increasing air pollution. Over time, the magnitude of this scale effect is likely to be reduced as cleaner technology is incorporated into production methods and vehicle design and as the share of imported vehicles from Europe increases. The impact on natural resources, including land conversation and water, can be linked to the increase in production of soya and sugar for use in production of bio-fuels. Biodiversity could also be adversely affected by changing agricultural patterns induced by the growing domestic and foreign demand for ethanol. As is the case of social impacts, the incremental environmental impacts attributable to trade liberalisation in the automobile sector is unlikely to be significant. However, considered in the wider context of economy-level trade liberalisation, the cumulative environmental (and social) impacts are expected to become more significant.

The environmental impacts

The Next Stage

The Final Report for the automobile sector study will assess potential policy measures to mitigate adverse impacts or enhance beneficial ones. Based on the assessment of potential flanking measures, recommendations will be developed for actions that may be taken within the proposed trade agreement, by national policy-makers in the EU and Mercosur, and in EU development assistance to Mercosur countries.

The results of the automobile SIA will contribute to refining the EU’s position in ongoing negotiations, and to the design of its development assistance programmes and other parallel policy measures. In order to contribute to this process and assist with the preparation of the final report, comments and suggestions are invited on the questions identified below. The list is not intended to be exhaustive, and observations relating to other aspects of the study are also welcomed.

Is there any important evidence of which you are aware that has not been taken into account, such that the assessment of impacts is misleading or incorrect?

Are there faults in the analysis which may have led to incorrect conclusions?

Do you have any suggestions for the analysis of prevention, mitigation and enhancing measures?

Do you have any suggestions for further development of communication with experts and other stakeholders?

Do you have any additional suggestions or issues for consideration in the Final Report?

Comments and suggestions may be sent to the project email address:

sia-trade@man.ac.uk

INTRODUCTION

1.1 THE AUTOMOBILE SECTOR SIA

The Impact Assessment Research Centre (IARC), as a member of the consortium that has been contracted to undertake a Trade Sustainability Impact Assessment of the Association Agreement under negotiation between the European Community and Mercosur, is undertaking a sectoral SIA of the automobiles sector.

This mid term report for automobiles provides a detailed sectoral level assessment of the potential sustainability impacts of trade liberalisation in the automobile sector in Mercosur and the EU, as part of a EU-Mercosur Association Agreement.

In accordance with the Terms of Reference, the mid term report:

Builds on the findings of the analysis relating to EU- Mercosur automobile trade presented in the Inception Report (September 2006);

Provides a clear analysis of the underlying sustainability context;

Specifies the scenarios for analysis;

Provides a quantitative and qualitative assessment of the potential impacts, using appropriate techniques of economic, environmental and social analysis;

Utilises case study evidence, including a study of the automobile sector in Brazil, Argentina, Uruguay and Paraguay, and the automotive parts sector in Brazil;

Provides

process by which the methodology has been

a

summary

of

the

implemented;

Provides a preliminary assessment of flanking measures;

Provides information on communication activities;

Indicates the way ahead to complete the study.

1.2 CONTEXT

The negotiations for an Association Agreement between the EU and Mercosur (comprising Brazil, Argentina, Paraguay and Uruguay) began in June 2000 with the ultimate objective of achieving a greater level of political and economic cooperation and integration within the Mercosur group itself, and with the EU. In 2004, the EU and Mercosur held intensive negotiations aimed at concluding trade talks by the end of October 2004. However, at a ministerial meeting held in Lisbon on 31 st October 2004, both parties agreed that the negotiations required more time. Although the parties met several times in 2005, they have been unable to re-launch successfully the bi-regional discussions.

1.3 THE EUROPEAN COMMISSION’S TRADE SIA PROGRAMME

The European Commission has been engaged in conducting Trade SIAs as part of its trade policy-making process since 1999. The European Union’s approach to the impact assessment of trade policy goes beyond assessment of the effects in Europe, to assessing the impacts of proposed trade agreements on all aspects of sustainable development for its trading partners. The approach aims to make a significant contribution to regional and global governance, although to achieve this many challenges have to be overcome. As well as the general methodological difficulties of undertaking ex ante impact assessment at the policy level, the

assessment has to evaluate the significance of economic impacts as well as social and environmental ones, and find appropriate entry points into complex decision-making processes. 1

The initial methodology for SIA of trade agreements was developed in early 1999 (Kirkpatrick, Lee and Morrissey 1999), building on earlier North American experience of assessing the environmental impacts of trade policy. The methodology was subsequently refined and developed further for more detailed assessments (Kirkpatrick and Lee 2002), and the European Commission has issued a handbook describing its current status (European Commission 2006). With further refinements for each of the studies undertaken, the extended methodology has been applied to the WTO negotiations mandated by the WTO Ministerial Meeting in Doha, and to regional trade negotiations and agreements to which the EU is a party. 2

The European Commission has defined the objective of its SIA studies (European Commission 2002) as a means of integrating sustainability into European trade policy:

1. By analysing the issues of a trade negotiation with respect to sustainable development;

2. By informing negotiators of the possible social, environmental, and economic consequences of a trade agreement;

3. By providing guidelines to help in the design of possible flanking measures, the sphere of activity of which can exceed the commercial field (internal policy, capacity building, international regulation), and which makes it possible to maximise the positive impact and to reduce the negative impact of the trade negotiations in question.

1.4 THE SIA STUDIES OF EU-MERCOSUR ASSOCIATION AGREEMENT TRADE

NEGOTIATIONS

In 2006, DG Trade awarded a contract to a consortium led by the Impact Assessment Research Centre at Manchester University to undertake a Trade SIA of the Association Agreement under negotiation between the European Community and Mercosur. The first phase of the programme provides for an update of the initial preliminary overview SIA of the proposed EU-Mercosur trade agreement that was undertaken for DG Trade in 2003 (Planistat, 2003). The overall EU Mercosur SIA updates the previous study and takes account developments in the negotiations and in the pattern of EU-Mercosur trade that have occurred since 2003. The Inception Report for the overall SIA was presented in September 2006 (IARC, 2006).

In addition to the Preliminary Overview SIA, the current phase includes three detailed sectoral SIA studies:

Automobile Sector (IARC)

Forestry Sector (Land Use Consultants)

Agricultural Sector (GRET).

The aim of the studies is to inform the negotiations by providing an assessment of the potential economic, social and environmental impacts of trade liberalisation measures agreed to as part of an Association Agreement between the European Union and Mercosur.

1 See Kirkpatrick and George (2006) for a detailed discussion of these issues.

2 Details of the Trade SIA work programme and completed reports are provided on the DG Trade website.

Each of the three studies is being carried out within a standard methodological framework. This framework has two complementary elements:

- Trade sustainability impact assessment, comprising a balanced and integrated assessment of potential economic, social and environmental impacts.

- Consultation process, whereby consultation with, and dissemination of results to, partners

and key stakeholders in the EU and its Mercosur trading partners is an integral part of the assessment process. Consultation and transparency are essential processes for ensuring the credibility and legitimacy of the Trade SIA.

2. METHODOLOGY

2.1 TRADE SIA FRAMEWORK

The purpose of the (ex ante) SIA is to support better policy making, by providing decision makers with an evidence-based assessment of the potential positive and negative consequences of their policy choices. To achieve this, the analysis needs to be credible, evidence-based, and transparent. The results of the assessment also need to be provided to decision-makers at an early stage in the policy cycle, if they are to inform the decision- making process.

The main components of the SIA methodology are:

Screening and scoping

Scenarios

Assessment of impacts

Evaluation of alternative preventative, mitigation and enhancement measures

Consultation and stakeholder engagement

The methodological framework for undertaking sustainability impact assessments (SIA) of trade negotiations was originally developed in 1999, and has subsequently been refined on the basis of experience in its application (George and Kirkpatrick, 2004; EC, 2006). This ongoing process of refinement and development has been maintained in the current study by incorporating economic modelling as one of the analytical tools that is used to inform the assessment of potentially significant sustainability impacts.

2.2 CAUSAL CHAIN ANALYSIS

Causal chain analysis (CCA) is the fundamental building block for the SIA methodology, and is used to identify the significant cause-effect links between the proposed trade measure (scenario) and its final economic, social and environmental impacts. CCA aims first at (i) linking changes in a trade measure to changes in the incentives (prices) and opportunities (expanded market access), which can influence the production system and trade flows; and then at (ii) linking changes in the production system to sustainability impacts. The CCA draws on a range of sources for the evidence that informs the analysis, including:

Theory, including international trade theory

Quantitative data analysis

Evidence from earlier studies

Qualitative analysis based on the analysis of anticipated changes in the production system and trade flows;

Case studies;

Consultations and expert opinions.

Successful application of the causal chain method requires separating the trade-related causes from other causes, which implies adopting a “systems model” of all the main factors affecting sustainability. A conceptual framework for the SIA is presented in Figure 1.

Figure 1: Basic Principles of the Casual Chain analysis

Trade measure or scenario:

changes in tariffs and NTMs

Trade measure or scenario: changes in tariffs and NTMs Initial economic impacts influencing relative prices,

Initial economic impacts influencing relative prices, incentives and opportunities

CCA
CCA
Changes in the production system CCA CCA CCA CCA Economic Process impacts Env. impacts Social
Changes in the production
system
CCA
CCA
CCA
CCA
Economic
Process impacts
Env. impacts
Social impacts
impacts

SUSTAINABILITY

2.3 SCENARIOS

Two scenarios are used in assessing the potential impacts of the EU-Mercosur negotiations on sustainable development:

Base scenario: no change in the current negotiated trade measures affecting EU and Mercosur trade, including no agreement on the trade liberalisation measures being discussed within the WTO Doha Development Agenda negotiations. The baseline scenario assumes, therefore, a continuation of existing trends in trade flows and current levels of tariff and non-tariff measures for the automobile sector.

Further Liberalisation scenario: this represents the strongest probable implementation of the EU –Mercosur trade negotiations.

2.4 SUSTAINABILITY INDICATORS AND IMPACT SIGNIFICANCE

The SIA uses the general sustainability definition comprising the economic, environmental and social dimensions similar to the previous SIA studies. Also, the same set of nine core indicators for sustainability impacts is retained (Table 1). For each of the core indicators second tier indicators can be used to specify the core indicators in more detail.

Table 1: Sustainability Indicators

Sustainability

Core indicator

Second tier indicator

dimension

Economic

Real income Fixed capital formation Employment

Sector specific

Environmental

Biodiversity Environmental quality Natural resource stocks

Sector specific

Social

Poverty Equity Health and education

Sector specific

In addition to the nine core sustainability indicators, the methodology allows for two process indicators. Long term economic, social and environmental impacts may arise from the impact of the EU-Mercosur Association Agreement on underlying economic, social or environmental processes. Any effect that the trade agreement may have on accelerating, decelerating or otherwise altering any of these processes may have significant long term cumulative impacts on the economic, social or environmental aspects of sustainable development. The SIA methodology identifies two aggregative process indicators for such potential effects:

Consistency with sustainable development principles

Institutional capacity for effective sustainable development strategies

The sections of the report which follow apply this framework to the automobile sector in Mercosur and EU, and assess the potential sustainability impacts of trade liberalisation within the EU - Mercosur Association Agreement. They describe the analysis of economic, social and environmental impacts, followed by an analysis of process impacts under the headings of each of the impact indicators defined in the SIA methodology. The impacts are summarised at the end of each section, in tables of the form shown in Table 2.

The following symbols are used in the tables to show impact significance

positive greater significant impact negative greater significant impact

positive lesser significant impact

negative lesser significant impact

positive and negative impacts likely to be experienced according to context (may be lesser or greater as above)

- impact has been evaluated as non-significant compared with the base situation

Column 2

This shows the types of likely significant impacts by country or sector that have been identified in the analysis, grouped under the nine core indicators and two process indicators defined in the methodology.

Column 3

Entries in this column summarise the main factors in the causal chain.

Column 4

An entry in this column indicates potential for either a mitigating or an enhancing measure, or a combination of the two

Column 5

Significance of short and long term impacts.

Table 2: Format of impact summary tables

Potential Impact Countries / Causal factors sectors affected Factors affecting significance significance Economic
Potential
Impact
Countries /
Causal factors
sectors affected
Factors affecting
significance
significance
Economic
Real income
Fixed capital
formation
Employment
Social
Poverty
Health and education
Equity
Environmental
Biodiversity
Environmental
quality
Natural resources
Process
SD principles
SD strategies
short
term
long
term

Greater and lesser significance are defined in the SIA methodology as:

- lesser significant impact – marginally significant to the negotiation decision, and if negative, a potential candidate for mitigation

- greater significant impact – significant to the negotiation decision, and if negative, merits serious consideration for mitigation.

Distinctions between greater and lesser significance are based on the importance of an impact for the particular economic, social or environmental factor concerned. They give no indication of relative importance of different impacts. The following factors are taken into account in evaluating significance:

The extent of existing economic, social and environmental stress in affected areas;

The direction of changes to base-line conditions;

The nature, order of magnitude, geographic extent, duration and reversibility of changes;

The regulatory and institutional capacity to implement mitigation and

enhancement measures. The main focus of the SIA is on the potential impacts in the EU and Mercosur as a whole. However, the SIA will also provide information on potential impacts at the individual country

level, where it appears that a particular country may be disproportionately affected (positively or negatively), in economic, social or environmental terms.

2.5 PREVENTATIVE, MITIGATION AND ENHANCEMENT MEASURES

The SIA methodology allows for evaluation of possible preventative, mitigation or enhancement measures, subsequent to the assessment of potential impacts. These measures can be categorised as follows:

Trade-related measures, which can be integrated into the trade agreement

International and regional measures to improve the policy environment and strengthen national regulatory capacity

National sectoral policy measures to remedy or regulate market imperfections

National policy measures to mitigate adjustment costs.

The Mid Term Report focuses on the significant potential economic, social and environmental impacts of trade liberalisation in the automobile sector in Mercosur and the EU. It also provides a preliminary assessment of possible flanking measures. However, the detailed analysis of the potential preventative, mitigation and enhancement measures that might be introduced will be undertaken in the Final Report.

3. AUTOMOBILE SECTOR IN EU AND MERCOSUR:

CHARACTERISTICS AND TRENDS

3.1 INTRODUCTION

This sustainability impact assessment study is focused on the economic, social and environmental implications arising from changes in the automobile sector in the EU and Mercosur that might occur as a result of any new trade agreement that may be reached between Mercosur and the European Union.

In order to provide a robust and credible analysis of the potential impacts of trade liberalisation in the automobile sector, it is necessary to define the sector itself, and to understand the underlying drivers of change within the automobile industry as a whole. The aim of this section of the report is to provide background information which will then be used

to inform the assessment of potential economic, social and environmental impacts.

3.2 DEFINING THE AUTOMOBILE SECTOR

A range of definitions is used in the literature to describe the automobile sector. The most

common definition is in terms of the final product. In the International Standard Industrial

Classification (ISIC) the sector includes vehicle production and parts and accessories production, and is defined at the 2-digit level under heading 34 as ‘manufacture of motor vehicles, trailers and semi-trailers’.

The division is divided at the three digit level into:

341 manufacture of motor vehicles

342

manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers

and semi-trailers

343 manufacture of parts and accessories for motor vehicles and their engines

Code 341 is classified at the 4 digit level to include:

3410 passenger cars, commercial vehicles (lorries, vans), buses and coaches, engines, chasses. This classification excludes agriculture tractors (2921), electrical parts used in vehicles (3190).

ISIC 35 covers ‘manufacture of other transport equipment’ and covers:

351 building and repair of ships and boats

352 manufacture of railway and tramway locomotives and rolling stock

353 manufacture of aircraft and spaceship

359 manufacture of transport equipment nec

ISIC 359 includes the manufacture of motorcycles (3591). The sale, maintenance and repair

of motor vehicles and motor cycles and parts and accessories are classified under ISIC 50.

For analytical purposes, it is helpful to define the sector in terms of its main characteristics. There are three distinguishing characteristics of the automobile sector:

Stages of production

Global production chains

Ownership pattern

Stages of Production

Production in the automobile sector is characterised by a high degree of segmentation between different stages in production, often involving different ownership and geographical location. Box 1 identifies six different types of production activity within the automobile sector: assemblers; system suppliers; first, second and third tier suppliers; and aftermarket product suppliers

Box 1: Capability requirements in the global auto industry

Assemblers: Increasing scale required to spread costs of vehicle design and branding. Innovation and design capabilities remain critical as first movers in new market sections can gain important rents while other companies catch up. Some companies, such as Ford, appear to believe that core competences lie more in branding and finance, and they therefore outsource parts of manufacturing. Others, such as Toyota, maintain an emphasis on manufacturing excellence and competence.

Global mega-suppliers: These firms supply major systems to the assemblers. They are sometimes referred to as "Tier 0.5" suppliers, because they are closer to the assemblers than the first-tier suppliers (see below). These companies need to have global coverage in order to follow their customers to various locations around the world. They need design and innovation capabilities in order to provide “black-box” solutions for the requirements of their customers. Black-box solutions are solutions created by the suppliers using their own technology to meet the performance and interface requirements set by assemblers.

First-tier suppliers: These are firms which supply direct to the assemblers. Some of these suppliers have evolved into global mega-suppliers. First-tier suppliers require design and innovation capabilities, but their global reach may be more limited.

Second-tier suppliers: These firms will often work on designs provided by assemblers or global mega-suppliers. They require process-engineering skills in order to meet cost and flexibility requirements. In addition, the ability to meet quality requirements and obtain quality certification (ISO9000 and increasingly QS9000) is essential for remaining in the market. These firms may supply just one market, but there is some evidence of increasing internationalization.

Third-tier suppliers: These firms supply basic products. In most cases, only rudimentary engineering skills are required. A study by Leite (1997) of skills and training at different parts of the automobile value chain in Brazil showed that in the third-tier of the component chain, skill levels and investments in training were limited. At this point in the chain, firms compete predominantly on price.

Aftermarket: A further important segment of the automobile value chain is the market for replacement parts. This is the sector many firms in developing countries first move into, even before local assembly sectors are developed. Nowadays, there is an international trade in aftermarket products. Firms in this sector compete predominantly on price. Access to cheaper raw materials and process engineering skills is important. Innovation is not required because designs are copied from the existing components, but reverse engineering capability and competence to translate designs into detailed drawings are important.

Source: Humphrey and Memedovic (2003:22).

Global Production Chains

A distinguishing feature of the automobile sector is the high degree of global integration in

production activities. The value added chain is unbundled at the global level, with different

stages in the production chain located in different countries (Dicken, 2006). With the lowering

of trade barriers and advances in globalisation, production location decisions are increasingly

determined by the international competitiveness of production in a particular location, rather

than as was the case historically, by the size and growth potential of the domestic market. As a result of this vertical disintegration of production across borders, international competitiveness is determined at the level of different tasks within the automobile sector, rather than at the level of the industry (Baldwin, 2006; Grossman and Rossi-Hansberg, 2006).

Ownership pattern

The globalisation of automobile production has occurred as part of the strategic decision making processes of the small number of multinationals that dominate the industry. At the beginning of the decade, the largest 20 firms produced more than 95 per cent of the world’s vehicles. At present, some 529 plants located in 45 countries are owned by 27 automakers (Sturgeon and Florida, 2000). As for supplier plant location, 2211 plants located in 60 countries are owned by 150 automobile suppliers. With respect to engine production, 168 plants are located in 24 countries and owned by 16 companies.

In the 1990s, the globalisation of competition, particularly the reduction and/or elimination of

trade barriers and the need to find new emerging markets to compensate for stagnant home markets in the advanced economies encouraged vehicle manufacturers to adopt internationalisation strategies suited to the changing international context. That is, they chose

to move beyond the stand-alone plant abroad to more integrated international production. This

did not necessarily imply a globalisation strategy or a global automotive market, notwithstanding the production and marketing of so-called “world cars”. Instead, the significant level of joint inputs across plants and plant-level scale economies in the industry as well as government policy incentives pointed to internationalisation occurring either within the framework of regionalisation or in a format referred to as “focused globalisation” (Freyssenet and Lung, 2000; Balcet and Enrietti, 2002).

The internationalisation strategies of multinational enterprises (MNEs) in the automotive industry prioritised reorganising their value chain so as to increase cost-effectiveness; they adapted their productive structure to the emergence of large trade blocs. These strategic priorities have encouraged the adoption of lean production on the one hand, and emphasised specialisation and defining a regional division of labour on the other. This has often led to de-

verticalisation of MNE investments within a country to allow for cross-border specialisation and global sourcing, which only becomes feasible due to the implementation of complementary government policies such as trade liberalisation, de-regulation and other market-oriented reforms. 3

3.3 THE GLOBAL AUTOMOBILE MARKET

The automobile sector has a historically international nature, with its products spread around the world and relative dominance by a small number of companies. Nonetheless, despite globalising trends, in certain respects the industry is more regional than global. Table 3 gives the size of each of the main markets.

Table 3: Global automobilemarket segmentation

Region

(% Share, by value, 2003)

United States of America

42.1

Europe

28.3

Asia-Pacific

15.2

Rest of the World

14.3

Total

100.0

Source: Datamonitor (2004)

During the 1990s, production in the industry grew by 4.2 per cent overall

wealthy economies of North America, Japan and Western Europe (the Triad), the automobile industry is mature and characterised by overcapacity, cost pressures and low profitability. In contrast, in other countries the industry has expanded both in terms of production and sales. While vehicle sales in the Triad regions rose by 230,000 units in the period 1990-97, in the rest of the world sales increased by 3.8 million units. For vehicle production, the respective figures were 1.7 million and 5.1 million units (Humphrey and Memedovic, 2003).

In the traditionally

This rapid growth in non-Triad regions has been concentrated in a small number of developing countries, namely the Republic of Korea, Mexico, Brazil, China, India, the ASEAN countries and Eastern Europe) (Table 4). The trend observed in the last 15 years has been accompanied by large scale foreign direct investment flows to the regional markets where long term growth in demand is expected as the emerging economies continue to sustain long term economic growth. In the short term, this has led to over investment in some markets where capacity increases have exceeded realistic short term sales expectations. The geographical spread of vehicle output and growing sales in developing countries has not been accompanied by a spread of ownership in the assembly sector. Instead, driven by oligopolistic competition between global auto companies, increased competition at a global scale has led to further concentration.

3 Doctor, 2003.

Table 4: Worldwide Vehicle fleet: Advanced and Emerging Markets

Country

1997

2000

2003

USA

207,754

221,475

229,620

Japan

70,003

72,649

74,214

Germany

44,501

47,307

48,564

Italy

33,995

36,165

38,476

France

31,267

33,813

35,628

UK

29,635

31,423

33,590

China

12,191

16,089

24,200

Brazil

17,635

19,310

21,357

Mexico

13,296

15,487

20,551

South Korea

10,413

12,060

14,587

Argentina

6,278

6,953

6,930

South Africa

5,506

5,713

6,061

Source: ANFAVEA

3.4 THE EUROPEAN AUTOMOBILE SECTOR

The European automotive industry is the largest automotive producing region in the world. The industry comprises nearly 34% of the world’s production of automobiles and approximately 7% of the manufacturing sector in the EU, totalling over €114bn in 2002 (ECR, 2004). Automotive output in the EU includes cars, light trucks and vans, buses, coaches, medium and heavy trucks, motorcycles and agricultural and forestry tractors. Over 209 million passenger cars were in use in 2002 in the EU-25, making it the largest single market for cars in the world, accounting for 38% of all cars on major international markets, followed by the US and Japan. Unlike in the United States, there is no automotive centre in the EU, although the industry is highly concentrated, with Germany and France dominating the sector among the 25 EU nations as of 2005 (Table 5).

There are six major automobile producers in the EU: Volkswagen, BMW, General Motors Europe, Renault, Fiat and DiamlerChrysler. Within the EU, production of motor vehicles as a share of total manufacturing is dominant in Sweden, Germany, France and Spain (ECR, 2004). The growing importance of production in the new Member States is evident with an increasing share of total EU production from only 4% in 2003 to 8% by 2005 (Table 6). Since 2000, motor vehicle production decreased in the EU-15, with fewer motor vehicles, as well as trucks and buses being manufactured. During the same period, production in the New Member States has shown significant growth (Box 2).

Table 5: Motor vehicle production in the EU (2003-2005)

Share of total EU production (%)

2003

2004

2005

EU15

96

93

92

Germany

32

31

32

France

21

21

19.8

Italy

8

6.3

5.8

UK

11

10.2

10

East and Central Europe

4

7

8

Czech Republic

2.5

2.5

3.4

Hungary

.72

.68

.77

Poland

0

2.9

3

Slovak Republic

1.6

1.23

1.2

Source: ACEA

Table 6: Trends in EU automotive production (2003 – 2005)

Motor Vehicle Production (in millions of units)

2003

2004

2005

% change

2003-2005

Total EU

17.55

18.16

17.95

 

EU15 (total)

16.80

16.89

16.49

-1.82

Germany

5.51

5.57

5.76

4.56

France

3.62

3.67

3.55

-1.96

Italy

1.32

1.14

1.04

-21.43

UK

1.85

1.85

1.80

-2.35

Spain

3.03

3.01

2.75

-9.15

East and Central Europe (total)

0.75

1.27

1.46

93.44

Czech Republic

0.44

0.45

0.60

36.95

Hungary

0.13

0.12

0.14

9.99

Poland

0.00

0.52

0.54

3.31*

Slovak Republic

0.28

0.22

0.22

-22.40

Source: ACEA. Note: *change between 2004 and 2005

In the new Member States, the automotive industry is relatively small, ranking in the lower middle field of European automobile producers; however, the industry at the national level is a major contributor to the economy in the States specialising in automotive manufacturing, such as the Czech Republic, Hungary and Poland. The enlargement of the EU has brought about integration of the auto sector in the accession countries, which consists primarily of local operations of trans-national companies. Various tariff reduction agreements have meant that integration of the East Central European motor industry with Western operations pre- dated the current formal enlargement of the EU (Rhys, 2004). The countries that have done particularly well in attracting automotive investment have been Poland, the Czech Republic and Slovakia—all showing a strong specialisation in the automotive industry. Consequently, inward foreign direct investment has played a far bigger role for the automotive sector in the new Member States than in the EU-15 countries, originating predominately in European manufacturers. With EU enlargement, however, overseas investors are becoming interested

in the region, due to location within the EU and comparatively lower labour costs with a highly-skilled labour force.

Enlargement is important for the future of the European automotive industry as it is a dynamic area with great export potential, as well as lower cost locations and a significant potential for growth in the potential customer base as incomes rise in the new Member States (Jenkins, 2004). At the same time, competition between Member States will rise with increasing pressure on existing locations in the EU-15. A key area of competitive advantage of the new Member States is low wages and high productivity.

Box 2: New EU Members Attract International Car Manufactures

The new EU member States have become new hubs of manufacturing or automobile production in Europe. In 2005, passenger car production in the new EU members exceeded 1.6 million cars, equivalent to 9.5% of the total production in the EU-25. Foreign affiliates in this industry are concentrated in four countries: the Czech Republic, Poland, Hungary and Slovakia. In the past 15 years, TNCs have invested heavily in the automobile industry in East European countries. About one tenth of inward FDI stocks in Hungary, Poland and the Czech Republic are in the automobile industry.

Foreign firms dominate the automobile industry in the new EU member States. They account for an estimated 70% of total employment in the industry. The bulk of inward FDI originates from European manufacturers. Since investing in these countries allows overseas investors to jump over EU tariff barriers, other investors (particularly in Japan, the Republic of Korea and the United States) are becoming increasingly interested in the region. 1 As large component suppliers have followed car producers, a dynamic manufacturing cluster with high output and export potential has developed.

Further investments in the new EU member states are expected from large car-makers and component suppliers in the coming years because of several encouraging factors, including expected strong economic growth, low labour costs, a skilled workforce, a low tax environment, as well as several investment incentives. For example, in 2005, the average effective top statutory tax rate on corporate income in the Czech Republic, Hungary and Poland was 20.1%, compared to an average tax rate of 36.6% in France, Germany and Italy. Wages in the new EU member States in 2005 are about 70% lower than those in the EU-15 countries and they can be expected to remain at this level for some time. Therefore, automobile production in the new EU member States is expected to double within the next five years, from 1.6 million to 3.2 million vehicles, increasing the share of the new Eu-10 countries in total EU production to 16.5%.

Source: UNCTAD, 2006

The automotive sector, including the production of both vehicles and components, provides 6% of total European manufacturing employment (ECR, 2004), accounting for more than two million employees. As seen in Table 7, the largest number of people working within the industry is in Germany, followed by France, the UK, Italy and Spain. These five countries

accounted for nearly 90% of employment in 2002 in the sector. The overall trend is a decrease in direct employment in vehicle manufacturing and an increase among the major suppliers.

Table 7: Trends in EU employment in the automobile sector

(Millions)

2000

2001

2002

2003

2004

EU15 (total)

1.99

1.99

1.98

1.97

1.97

Germany

.86

.86

.88

.89

.87

France

.31

.32

.31

.31

.31

Italy

.18

.17

.17

.16

.17

UK

.24

.22

.22

.22

.21

Spain

.17

.16

.16

.17

.17

East and Central Europe (total)

.24

.25

.26

.27

.28

Czech Republic

.079

.085

.089

.089

.089

Hungary

.033

.037

.037

.040

.041

Poland

.088

.088

.080

.084

.094

Slovak Republic

.036

.045

.050

.055

.057

Source: Eurostat and National Automobile Associations

The automotive industry is characterised by increasing competition on a world-wide scale, prompting all leading automotive manufacturers to operate in all major regions of the world. Competition in such a diverse market requires high productivity, competitive pricing, product reliability and diversification, as well as technological innovation. Exchange rates play a key role in profit rates in such a global market. The EU automotive industry has been under significant pressure in recent years with respect to price competitiveness as compared to the US, where labour costs have decreased, relative to productivity.

The automotive industry is of significant importance for the competitiveness of the EU and plays a key role in satisfying the EU’s commitment to the Lisbon Agenda with respect to jobs and growth (CARS21, 2005). The EU market is highly competitive with around 40 manufacturers offering products. The industry has maintained a key international position both in exports, where it has increased in recent years, and in global sales. The home market in the EU is large and sophisticated and European brands dominate, giving the automotive industry a competitive “home” advantage within the EU. The German and French brands dominate market share and have expanded between 1998 and 2002, while the Italian and UK market presence declined over the same period (ECR, 2004). One significant advantage the EU has over the US and Japan is its competitiveness in terms of R&D investment, including widespread innovation with both leading car producers as well as suppliers within the industry. Nearly 20% of all R&D in manufacturing is undertaken by automotive manufacturers and due to the cross-sectoral nature of the automotive industry, there is significant diffusion of new technologies, making the industry an important demand source of innovation (ECR, 2004).

The EU automotive industry lags behind the US and Japan in terms of productivity, with recent trends indicating a widening in the EU’s productivity gap since the turn of the millennium (ECR, 2004). This decline is due in part to high labour costs, low productivity compared to the other major manufacturing regions. Relatively high labour costs in particular have a negative impact on price competitiveness and are a significant threat when combined

with structural overcapacity in the global automotive industry. Labour productivity in the EU-15 automotive industry shows a significant gap compared to the US and Japan and the new Member States. Within the EU-15, however, there has been heterogeneity in productivity, with France showing high rates of growth in the 1990’s and Germany declining rates; this trend has reversed for both countries in recent years. As of 2004, France was leading in labour productivity within Europe and against the US and Japan; this is due in large part to the French producing more standardised automobiles, while also having a strategic advantage with regard to outsourcing (ECR, 2004).

The EU automobile sector has an overall trade surplus with the rest of the world due mainly to its exports to the US and the Central and Eastern European countries; the European Union holds a trade deficit in this sector towards Japan and South Korea. The automotive sector is characterised by a relatively low trade/sales ratio and market-oriented FDI is a dominant feature of the sector. The German automotive industry is the most active in Europe, due mainly to the increasing importance of foreign markets for German brands, followed by France, Italy and the UK.

3.5 THE MERCOSUR AUTOMOBILE SECTOR 4

In 2003, Mercosur had the seventh largest vehicle fleet in the world, and the largest among developing countries. Moreover, there was a high potential for growth in vehicle sales, since density of ownership was relatively low (5.5 inhabitants per vehicle in Argentina; 8.4 inhabitants per vehicle in Brazil; 11.6 in Paraguay; and 4.9 in Uruguay) compared to the more mature markets (Table 8). In 2004, Mercosur’s combined vehicle production of just less than 2.6 million units was ranked seventh in the world and third highest among developing countries with only China and South Korea producing more (Table 9). In 2004, it exported just over 900 thousand units, making it the ninth largest exporter of vehicles in the world.

Table 8: Inhabitants per vehicle

Country

1997

2000

2003

USA

1.3

1.2

1.3

Japan

1.8

1.7

1.7

Germany

1.8

1.7

1.7

Italy

1.7

1.6

1.5

France

1.8

1.7

1.7

UK

2.0

1.9

1.8

Brazil

9.1

8.8

8.4

Mexico

7.4

6.6

5.5

South Korea

4.3

4.2

3.3

Argentina

5.7

5.3

5.5

Source: ANFAVEA

4 See Annex 1 for a case study of the Automobile Sector in Mercosur.

Table 9: World Production (Thousands)

Country

1997

2000

2004

USA

12,158

12,800

11.989

Japan

10,975

10,141

10,512

Germany

5,023

5,527

5,570

France

2,580

3,348

3,666

UK

1,936

1,814

1,856

Italy

1,828

1,738

1,142

China

1,580

2,069

5,071

South Korea

2,818

3,115

3,469

Brazil

2,070

1,691

2,317

Mexico

1,360

1,935

1,568

India

596

801

1,511

South Africa

362

357

455

Argentina

446

340

260

India

596

801

1,511

South Africa

362

357

455

Argentina

446

340

260

Source: ANFAVEA

The automobile sector in Mercosur is dominated by Brazil and Argentina (Table 10)

Table 10: MERCOSUR Automotive Industry Overview (2004)

 

Argentina

Brazil

Paraguay

Uruguay

Production

       

-

Cars

171,400

1,862,780

--

Na

-

Light Commercials

72,943

318,351

--

Na

-

Trucks

15,518

107,338

--

--

-

Buses

541

28,758

--

--

Total

260,402

2,317,227

--

78

Exports

146,236

758,787

--

na

Domestic Sales

       
 

- Cars & Light Commercials

295,146

1,478,118

4,732

4,807

 

-

Trucks & Buses

16,815

100,657

323

183

Total

311,961

1,578,775

5,055

4,990

Inhabitants per Vehicle

5.5

8.4

11.6

4.9

Source: ANFAVEA, ADEFA

In Uruguay, there were seven small car assembly plants in operation in the 1980s, established as part of the high protection import substitution strategy. But by the 1990s only two assemblers remained assembling kits imported from France (Oferol was licensed to produce

Peugeot passenger cars and a Citroen van; Nordex was licensed to assemble Renault). Production peaked at 13,000 vehicles in 1998, and steadily declined thereafter. The Paraguayan automobile sector has focused primarily on assembling motorbikes and auto parts for the replacement market.

Automobiles are produced in Mercosur by subsidiaries of multinational corporations, in association with local investors. There is significant foreign involvement in the Mercosur automobile sector, with the presence of all the main European, American and Japanese vehicle manufacturers as well as many of the most important Tier 1 and 2 automotive parts and components suppliers.

Production is mainly for the domestic or Mercosur markets. In the early 2000s, in Argentina, approximately 70 percent of sales were produced domestically, 15 percent were from Brazil and the remaining 15 percent were imported from other countries. In Brazil, 83 percent were produced domestically, and 14 percent were from Argentina; imports from other countries accounted for less than 4 percent (Brambilla, 2005). There are a small number of car manufacturers that do not have production facilities in the region and whose cars are only available through imports; these account for a small share of domestic sales in Brazil and Argentina and are subject to a more restrictive trade regime. Cars produced in Argentina and Brazil are mostly compact, small and medium cars, while models imported from other countries include larger vehicles and SUVs.

Historically, the industry has been heavily protected, with few imports during the 1970s and 1980s. Integration of the two auto industries began officially with the signing of the Economic Complementation Agreement in Buenos Aires in 1990. This agreement allowed for tariff-free trade in automotive products between the two countries, subject to trade balancing and quotas. Quotas were also used to balance bilateral trade in units, and assigned to individual firms. Due to a combination of the signing of the Mercosur agreement, the reversal of trade liberalisation for vehicles adopted in Brazil in the early 1990’s and the development of similar auto industry sectoral policies in both Argentina and Brazil, regional trade in the industry increased significantly during this period. The automobile sector was

that went into effect in 1995 and the initial

listed as an exception to the customs

timetable for free trade in the sector was set for 2000, later delayed to 2006. The first version of the Mercosur Automobile Policy (MAP) was signed by Brazil, Argentina and Uruguay in Florianopolis in December 2000, and then by Paraguay in March 2001. A revised agreement was accepted in Buenos Aires in July 2002, and formally signed on 26 September 2002 in Brasilia. 5

union
union

5 The MAP as agreed between Brazil and Argentina contained the following key provisions:

(i)Internal Tariff - zero, if local content rules were met and it was within the limits of compensated trade, that is, the managed trade arrangements allowed a margin of excess exports from Argentina to Brazil; exports beyond the ‘flex’ would be charged 70-75% of the Common External Tariff (CET). (ii)External Tariff – CET of 35% for vehicles and 3 levels (14%, 16% & 18%) for auto parts; 2% for auto parts not produced in Mercosur. (iii)Rules of Origin - minimum regional content of 60%. Argentine ‘super’ local content would gradually be scaled down during the transition (lowered to 20% in 2002 and 2003, 10% in 2004 and 5% in 2005). (vi)Flexibilisation of Trade Balance - adjusted and gradual increase in the trade “flex” under managed trade (it would be raised to 2.0 in 2002; 2.2 in 2003; 2.4 in 2004; and 2.6 in 2005). (v)Quotas on imports into Uruguay and Paraguay. (vi)Free Trade – it set a commitment to end all managed trade/market-sharing arrangements in bilateral/regional automotive sector trade by 1 st January 2006

In December 2005, representatives of the automotive industry requested their respective governments to extend the MAP so that a new agreement could be negotiated. 6 A new transition agreement was finally signed on 23 June 2006. It is valid for two years, until 31 June 2008. The main changes in the new version of the MAP are with respect to the “flex”, which on Argentina’s request was narrowed from 2.6 to 1.95 (this permitted US$ 195 worth of duty free vehicle imports for each US$ 100 exported to the other country). Brazil implicitly recognised the reserved 30% Argentine local content until a new auto parts sector agreement was signed. Brazil continued to apply a 40% discount off the CET for auto parts. Ministerial- level meetings suggested that eventually bilateral trade would be directly settled in Real and Peso terms, avoiding the use of the dollar. 7 The June 2006 agreement did not finalise a date for the end of the trade balancing arrangements, nor did it finalise provisions related to the auto parts sector. Instead, both sides agreed to evaluate the evolution of bilateral trade in vehicles and auto parts before defining a longer-term policy at the end of the transition period. 8

After 1999, the economic situation deteriorated sharply and policy uncertainties caused increasingly strained relations in the sector. Mismatched macro-economic policies (especially, exchange rates and interest rates), contracting income and falling demand for vehicles had a marked impact on the industry’s performance. Moreover, most of the new investment in the late 1990s had been predicated on the establishment of intra-regional free trade and a common external tariff (CET). However, given the economic slowdown, the former was postponed repeatedly, while the latter operated in a rather ad hoc manner, paving the way for numerous exceptions and non-reciprocal discounts. The situation was exacerbated by the lack of a single system of customs clearing in Mercosur and discord about rules for the sharing of tariff revenues. By mid 2006, two deadlines (first in January 2000, then in January 2006) for establishing intra-regional free trade in automotive industry products were missed, but Mercosur still had no new date for ending managed trade in the sector. Disagreement remains about how to best address the concerns of governments and investors as well as workers and consumers.

An important development in the automotive industry is increasing complexity of the value chain. A detailed analysis of automotive trade for Brazil shows that the leading vehicle producers are involved in a complex division of labour that stretches far beyond the region. By the late 1990’s a genuine regional automotive production system was developing in Mercosur, based on a complex division of labour in vehicle and components production between Argentina and Brazil as can be seen in Box 3 (Humphrey and Memedovic, 2003, p.13). Vehicles and components are flowing within the region in both directions, and there are important two-way flows of vehicles and components from Brazil to all of the Triad (NAFTA, Europe and Japan) economies. This shows just how complex the international division of labour has become. In case of Mercosur a process of regional integration and

6 Argentina also argued in favour of applying the “flex” on a company-by-company basis.

7 According to the Finance Ministers in Brazil and Argentina, direct settlement of trade accounts had a number of advantages, including reducing transaction costs, stimulating bilateral trade, and reducing exchange rate pressures. It would also be a first step towards creating a regional currency.

8 Representatives of the auto parts sector in Argentina and Brazil, i.e. the respective industrial associations AFAC and SINDIPEÇAS as well as the Mercosur Auto Parts Manufacturers Council (Mercoparts) were asked to prepare a joint proposal for submission to negotiators with a view to establishing a common policy for auto parts by 31 December 2006. The first steps towards a joint auto parts policy were taken in the months after signing the

transition agreement in 2006. The auto parts sector prepared a list of the 20 most important imported products of the past three years with the objective of applying a CET of 2% on these products (not the current 14-18%). Items that were not on the list would continue to face import tariffs as per the 2002 agreement.

division of labour exists alongside complex and increasing trade in vehicles and components between Mercosur and the Triad economies (Humphrey and Memedovic, 2003).

Box 3.: Brazilian vehicle manufacturers and international division of labour

Ford’s main export products from Brazil are not cars but electronic components (radios) sold mainly to the United States. Passenger cars and commercial vehicles are exported mostly to Argentina. It imports parts (mainly from Europe and the United States), electronic components and systems (mainly from the United States and Japan), cars (mainly from Argentina and Europe) and commercial vehicles (mostly from Argentina).

In 1997, more than 50 per cent of Ford’s exports value and 4.6 per cent of its imports value were related to trade with Argentina. Actually, official data underestimate car imports by Ford from Mercosur. In 1997, Ford imported 75,000 vehicles from Argentina (mostly Escort cars). Due to conflicting views between government agencies and Ford about how to register those imports, official foreign trade data do not include such figures yet. Ford’s strong dependence on foreign trade is the result of the highly specialized nature of its output in Brazil, where its plants produce only two models of small cars (Ka and Fiesta). All other car models sold in the Brazilian market have to be imported, either from Argentina (60,000 Escort units in 1997) or from Europe (Mondeo).

Fiat plants produce several car models (Uno, Palio and Marea), beside commercial vehicles. It exports parts and CKD Palio cars to subsidiaries in other developing countries, as well as light commercial vehicles and the station-wagon version of the Palio to Italy. It imports cars from Argentina (Uno and Siena, the sedan version of the Palio) as well as larger models from outside the region (Italy). In spite of having increased its local output of parts, Fiat still strongly depends on imported parts (from Italy) and engines (from Argentina).

GM is heavily dependent on imports of parts, engines and electronic components from Canada, France, Germany, Japan, Spain, the United States and the UK. Imports of vehicles are small and mostly from Argentina (light commercial vehicles). Unlike the other leading constructors, GM produces not only small cars but also medium-size models (Astra and Vectra) in Brazil.

On the export side, GM’s main market is Argentina and its main export product is passenger cars and commercial vehicles. It operates two plants in Argentina: one assembles CKD pick-ups imported from Brazil and the other produces small cars (Corsa). GM’s Brazilian subsidiary also exports engines to Europe (Belgium, Germany and the UK) and the United States.

Volkswagen is not as engaged in foreign trade as the other leading constructors. It has low export/sales and import/sales ratios. Around 74 per cent of its exports and 27 per cent of its imports are related to the regional market. Its main export products are passenger cars (43 per cent), parts (22 per cent), commercial vehicles (16 per cent) and engines (9 per cent). The low import/sales ratio is related to the fact that Volkswagen’s leading car model in sales (the Gol, not to be confused with the Golf) is built largely using locally produced parts. Imports come mainly from Germany (42

per cent, mostly parts and Passat car models), Mercosur (26 per cent, mostly parts, engines, and Gol and Polo car models), Spain and Mexico.

Source: Humphrey and Memedovic (2003) box is an edited extract from Laplane and Sarti (1999), pp. 9-11.

In the modern auto industry, economies of scale are no longer to be found predominantly in assembly, even though inefficient low-volume assembly continued in many emerging markets in the late 1990s. However, the search for economies of scale is still important in the areas of components production and vehicle design. For some components, economic production scales reach millions of units per year. As passenger vehicles become more complex, components such as engines, gearboxes and electronic systems become more sophisticated and complicated to produce. With trade liberalization in developing countries and the introduction of duty drawback schemes, the sourcing of more sophisticated components, particularly electronic products, for passenger vehicles assembled in developing countries has switched from domestic production to imports. For some items, production may be concentrated in just a few locations around the world.

In design, the pursuit of achieving economies of scale has increased in importance for global vehicle companies as vehicle models are replaced more frequently and have become more complex and sophisticated. The engineering costs of designing new vehicles are substantial. Increasing safety requirements and customer sophistication in the areas of handling and ride have meant particular emphasis is put on the design of the platform, the floor plan of the vehicle and the suspension, steering, etc. In order to contain design costs, firms have been using common platforms for a variety of vehicles with the same market and extending platform commonality across markets. Companies such as VW and PSA use the same platform for different brand names within the company. Spreading platform design across various models significantly reduces costs, which are further reduced by maximizing the number of common components between models. The logical extension of this process is to maximize the number of common models across all markets, including developing countries. This not only reduces design costs, but also increases the speed with which new models can be introduced in non-core markets.

The pursuit of global design is confronted with need for local adaptation of vehicles, and differentiation of models according to local income, customer preferences or standards and regulation. Strategies to develop a ‘global’ model have so far failed due to significant differences in the market structure between developed and emerging markets. Box 4 gives a detailed description of Ford’s recent attempt to develop a ‘global’ model that would be sold in both EU and Mercosur markets.

The situation can be summarized as follows:

Corporate strategies in regard to globalization vary depending on the starting point of individual firms, but there seems to be a large measure of convergence toward:

Building vehicles where they are sold;

Designing vehicles with common platforms while retaining the ability to adapt other characteristics to local conditions (Sturgeon and Florida, 1999)

There are limitations to the standardization of models across markets; one consequence of this is that it opens up the possibility of certain developing countries becoming global specialists in the production of both vehicles and components. For example, Brazil specializes in the production of so-called “third-world cars.” These cars are specifically designed for markets in developing countries, with regard to both cost and durability. The Fiat Palio was first launched in Brazil, and although much of the design work was carried out in Italy, designers from both Fiat and first-tier component companies in Brazil were involved. If a group of developing countries constitutes a market with distinctive characteristics, and if the tariff and logistical barriers to trade between them can be reduced, then particular countries within the group may become specialists in the production of a certain type of vehicle. A further development of this process is the location of production centres for particular component options in developing countries. For example, sales of light trucks have increased across many markets. In North America, these trucks are predominantly supplied with automatic gearboxes. In Latin America and

Box 4:

Developing common models across markets has some significant advantage: it reduces exposure to the volatility of demand in any particular market. This was a principal aim behind Ford's strategy of developing a small car replacement that would be almost identical for the markets of Europe and Mercosur. Not only would design and component manufacturing costs be reduced, but also flexible sourcing from plants in both regions would allow a more efficient response to demand fluctuations. For example, if demand increased more rapidly than expected in Mercosur, vehicles could be imported from Europe. This integration of developed- and developing country markets would address two key problems facing emerging markets: volatility of demand and inefficient scale. In the ideal scenario, the emerging markets would be integrated into a global division of labour, which would in turn provide overall scale to spread vehicle development costs, open up cheap production sites for the production of selected vehicles and components, and provide new markets for higher- end vehicles, which would still be produced in the Triad economies. In practice, this objective has proved elusive. Ford, probably the most aggressive proponent of the “global” car, was forced to abandon the objective of producing a single small car for the European and Mercosur markets. The safety, ride and handling characteristics required for success in Europe could only be achieved at a price which was too high for the requirements of the Brazilian market. There are a number of reasons why passenger vehicles still have to be adapted to meet the needs of different markets, including:

1 Income. Customer requirements vary with levels of income. Consumers in high- income countries are willing to pay for more sophisticated vehicles;

2 Standards and regulations. Countries differ with regard to regulatory matters such as safety, emission standards and recycling, even though developing countries are tending to raise their own standards. Compliance with such regulations has a big impact on price and performance.

3 Driving conditions. In developing countries roads and fuel are frequently of poorer quality than in developed countries. This requires vehicles to be adapted to local conditions, particularly with regard to strengthening the body, suspension, steering, etc.

4 Consumer preferences. These arise partly in response to the characteristics of

particular societies and also as a result of path dependence. For example, Brazilian consumers bought United States-style cars assembled from completely knocked down (CKD) kits until the mid-1950s. When Ford and GM refused to develop local car production with high local content, the market became dominated by European producers making typically European cars. By far the best-selling vehicle in the 1960s and 1970s was the VW Beetle. This created a persisting preference for European-style cars.

5 Taxation. Taxation policies can have a significant impact on vehicle demand. This was seen clearly in Brazil in the 1990s. Tax concessions on “popular” cars shifted demand towards small and cheaper vehicles.

As a result of these factors, the “world” car remains an elusive goal.

Source: This box is an edited extract from Humphrey and Memedovic, 2003

South East Asia, customers prefer manual gearboxes. This opens up the possibility that a global first- tier gearbox supplier will choose to concentrate the production of manual gearboxes in one or other of these regions (Humphrey and Memedovic 2003).

These global trends have implications for the Mercosur automobile sector. Firstly, increasing integration of the sector in the global value chain, and secondly, globalisation and specialization of production. Inward orientation of Brazilian industry can be illustrated clearly by examining domestic sales which accounted for more than three quarters of domestic output in 2003. Brazil’s automotive industry is specializing in small, low cost vehicles with high fuel economy, which are affordable to consumers with lower purchasing power. Specialization in compact automobiles has allowed the Brazilian economy to gain economies of scale and take advantage of new trade agreements. Furthermore, flexfuel cars, which run on a blend of ethanol and gasoline, are slowly replacing standard automobiles. In early 2006, about 77% of new cars sold had flexfuel engines. Inward orientation of Brazilian automobile industry and specialization in niche production of low-cost emerging market and flexfuel models protect its domestic market vis-à-vis the trade opening in the EU-Mercosur FTA, as Brazil is the biggest producer and consumer of this type of vehicle. The recent upsurge in export performance indicates increasing competitiveness of the sector in the world market but it is too early to predict whether this is a long term structural shift towards more export oriented strategies.

The Argentinean automobile industry is strongly dependent on the Brazilian market for exports as well as being protected from surges in imports from Brazil by the Mercosur Automotive Policy. The industry focuses on producing more luxurious models, midsize and four-door models which under any EU-Mercosur trade liberalisation agreement could face competition from European manufacturers which are some of the most competitive producers of such vehicles. However, Argentina’s integration in the global value chain should moderate this negative impact.

The convergence of global automobile investment trends with economic policy and sectoral developments within Mercosur resulted in a ‘wave’ of investment in the automotive industry

during the 1990s (Ozden and Parodi, 2004). 9 Originally, most investments were conceived of as market-seeking (focused on the wider regional market), but subsequently, after a series of economic and financial crises hit the region, there was a sharp shift towards more export- oriented and efficiency-seeking strategies. During the 1990s, vehicle manufacturers often found that their priorities tied in with the policy inclinations of Mercosur members. Together, this resulted in industrial restructuring and rationalisation, modernisation of installations and models, and entry of new competitors into the Southern Cone automotive market. These factors all led to an increase in output, exports and production facilities within Mercosur.

The investment strategies in the Mercosur automotive industry resulted in unprecedented levels of specialisation and trade in vehicles and auto parts. Vehicle manufacturers developed a new Mercosur-based production and market configuration, which sought to multiply the advantages of each country. This Mercosur automobile sector now has the following features: 10

Up-dating the models produced and sold in the region;

Producing high volume, small cars with small engines in Brazil;

Producing small/medium cars with larger engines in Argentina;

Importing large and luxury models from the USA and European Union;

Using an increasing number of auto parts imported from within and outside the region;

Placing growing emphasis on exporting beyond Mercosur.

Policy incentives and restraints, combined with favourable macro-economic conditions, reinforced corporate decisions to develop trade in the regional automotive industry. Intra- regional trade as a share of total vehicle exports grew from less than 9% in 1986 to more than 58% in 2001. Brazilian vehicle exports to Argentina increased from under 38 thousand units in 1990 to more than 105 thousand units in 2000 (representing about 30% of Brazilian vehicle exports). Brazilian imports from Argentina increased from only 3,946 units in 1991, to over 120 thousand units in 2001 (representing about 69% of vehicle imports).

Table 11 shows intra - Mercosur trade in the automotive industry. Brazil is the dominant

exporter in the region with export value rising from $1.4 billion in 1999, to 2.2$billion in

2004.

9 For example, in 1996, The Economist noted that "hardly a week goes by without the announcement of a new factory, a new model or a new entrant in Brazil." 10 Laplane & Sarti, 2000.

Table 11: Intra-Mercosur Automotive industry Trade (Million $US)

 

1999

2004

Road vehicles and Parts

   

Argentina imports from Mercosur

1,387

2,121

Argentina exports to Mercosur

1,456

962

Brazil imports from Mercosur

1,538

929

Brazil exports to Mercosur

1,426

2,191

Paraguay imports from Mercosur

48

46

Paraguay exports to Mercosur

0

0

Uruguay imports from Mercosur

138

43

Uruguay exports to Mercosur

115

99

Other transport equipment

   

Argentina imports from Mercosur

27

25

Argentina exports to Mercosur

41

9

Brazil imports from Mercosur

3

4

Brazil exports to Mercosur

39

35

Paraguay imports from Mercosur

1

2

Paraguay exports to Mercosur

0

0

Uruguay imports from Mercosur

4

1

Uruguay exports to Mercosur

11

1

Total Intra-Mercosur Trade

3,088

3,297

Source: COMTRADE

The global conditions facing the Mercosur automotive industry have shifted significantly in the past few years for multiple reasons. Firstly, there is growing competition from China, both as a location for investment to supply the Chinese market, as well as a platform for export production. Secondly, many European-based vehicle manufacturers have preferred to invest more in Eastern Europe, which is seen as an alternative location to produce vehicles in an increasingly competitive world. Thirdly, global over-capacity in the industry is forcing the automobile multinationals to re-evaluate their commitments around the world.

The automobile sector accounts for less than 1 percent of total GDP in Argentina and Brazil and accounts for about 0.5 percent of total employment (Table 12).

Table 12: Automobile Sector Output and Employment

 

Argentina

Brazil

Share of automobile sector in GDP

0.9

0.9

Share of automobile sector as % total manufacturing sector

8.7

5.8

Share in total employment

0.4

0.5

Source: GTAP database and UNIDO industrial statistics for output; ILO Key Indicators for employment

3.6

EU – MERCOSUR TRADE AND INVESTMENT IN AUTOMOBILES SECTOR

Trade flows in automotive industry products, including road vehicles and other transport equipment between the EU and Mercosur are shown in Table 13. In 2004, EU imports of road vehicles from Mercosur totalled $585 million, which represented 1.7 percent of all EU imports from Mercosur. In the same year, the EU’s exports of motor vehicles to Mercosur amounted to $2483 million, which represented 11.3 percent of total EU exports to Mercosur (Table 13).

Table 13: EU Mercosur Automotive Industry Trade (US$ Millions)

 

1999

2004

Road vehicles

   

EU imports from Mercosur

862

585

EU exports to Mercosur

2,558

2,483

Other transport equipment

   

EU imports from Mercosur

515

508

EU exports to Mercosur

1,126

868

Total trade in goods

   

EU imports from Mercosur

20,464

34,201

EU exports to Mercosur

22,027

21,895

Source: OECD

The Mercosur region is a major recipient of foreign direct investment (FDI), and accounts for almost half of all FDI inflows to South America (Table 14) In 2005, FDI inflows to Mercosur totalled $20,398.5 million ( ECLAC, 2005).

Table 14: South America: Net FI Inflows, 1991-2005 ($million)

 

1991-

1996-

2001-

2004

2005

c

1995

b

2000

b

2005

b

 

MERCOSUR

6445.2

36757.1

19883.1

22822.1

20398.5

Argentina

3781.5

11581.1

2980.6

4273.9

4662.0

Brazil

2477.4

24823.6

16480.7

18145.9

15066.3

Paraguay

103.8

185.1

53.9

69.9

69.9

Uruguay

82.5

187.2

367.9

332.4

600.3

Andean Community

3685.5

10746.37

9701.1

7674.0

16918.5

Bolivia

158.4

780 2

271.1

62.6

-279.6

Colombia

911.9

3081.1

3946.2

3117.0

10192.1

Ecuador

368.1

692.4

1370.1

1160.3

1530.2

Peru

1304.2

2000.8

1794.0

1816.0

2518.8

Venezuela

943.0

4192.2

2319.8

1518.0

2957.0

Chile

1666.2

5667.0

5087.7

7172.7

7208.5

South America

11797.0

53170.7

34671.9

37668.8

44525.4

Total (Latin America & the Caribbean)

20205.8

70638.9

58586.2

61503.2

68046.3

Source: ECLAC, 2005

a This does not include financial centres; FDI figures are equal to inflows of FDI minus capital outflows generated by foreign investors. The figures differ from those presented in the Preliminary Overview of the Economies of Latin America and the Caribbean, as the latter shows the net balance of foreign investment.

b Annual average

c Data available as of 24 April 2005

For Latin America as a whole, the automobile sector is the largest foreign private owned sector accounting for 6 percent of total sales of the top 500 companies (Table 15). Vehicle parts companies account for a further 1.6 percent.

Table 15: Main Sectors and Ownership of Top 500 Companies, 2000-2004

Sector

2000

2001

2002

2003

2004

   

State-owned

Hydrocarbons

16.9

16.0

16.1

18.1

19.1

Energy

3.0

4.0

4.2

3.8

3.5

Mining

0.4

0.5

0.6

0.5

0.8

Public services

0.3

0.2

0.3

0.3

0.7

Transport

0.1

0.3

0.4

0.4

0.3

Others

1.3

2.0

1.7

20

0.2

Total state-owned

22.1

23.0

23.3

25.0

24.7

   

Local-Private

Commerce

7.3

7.9

8.3

8.3

7.8

Telecommunications

2.8

3.8

4.0

4.1

4.4

Steel

2.6

3.3

3.8

4.2

4.4

Soft drinks/beer

3.1

3.5

3.8

3.6

3.1

Hydrocarbons

1.0

1.0

1.1

1.5

3.1

Agribusiness

3.1

3.2

3.5

3.5

3.0

Mining

1.8

1.6

1.8

2.0

2.5

Cement

1.1

1.4

1.5

1.3

1.4

Petrochemicals

1.3

1.2

1.4

1.9

1.3

Energy

0.7

0.9

0.7

0.9

1.3

Total local private

38.7

41.6

42.3

43.8

46.6

   

Foreign private

Automobile

7.3

6.7

7.3

6.5

6.0

Telecommunications

6.5

4.0

3.4

3.9

3.0

Hydrocarbons

3.6

3.2

2.9

3.2

2.7

Commerce

3.1

3.2

3.1

3.0

2.5

Electronics

4.2

3.9

4.4

2.6

2.1

Energy

2.6

2.8

1.9

2.1

2.0

Agribusiness

1.6

2.0

1.9

2.1

1.8

Autoparts

2.4

1.5

2.1

1.0

1.6

Mining

0.4

0.4

0.8

0.9

1.5

Chemicals

0.9

1.1

1.0

0.8

1.3

Others

6.6

6.7

5.6

5.0

3.6

Total foreign private

39.2

35.4

34.4

31.2

28.

Total 500 companies

100

100

100

100

100

Total 500 companies

852361

830433

734710

831772

1073755

(sales in billion $US)

(sales in billion $US)
(sales in billion $US)
(sales in billion $US)
(sales in billion $US)
(sales in billion $US)

Source: Amann and Vodusek (2004)

By the late 1990s, the European countries had become the major source of FDI flows to the Latin America and Caribbean region (Table 16). The EU is the main investor in South America, with a FDI stock of $137 billion compared to $83 billion for the United States (Figure 2).

Figure 2: Net FDI Outflows from the EU and US to Mercosure, 1990-2002

Net FDI Outflows from the EU and US to Mercosure, 1990-2002 Source: Amann and Vodusek (2004);

Source: Amann and Vodusek (2004); Note: 1990-1995 is annual average. 2002: estimate, excluding Paraguay and Uruguay for US flows

European FDI is concentrated in the Southern Cone countries, with the Mercosur countries accounting for 65% or $112 billion, of which Brazil is responsible for 38 percent ($66 billion) and Argentina for 26 percent ($44 billion). Spain is the most important European investor and Spanish assets in the region account represent around one-half of total EU FDI stock.

There are marked variations in the sectoral allocation of European FDI (Amann and Vodusek (2004). Spanish investments are concentrated in services sector, including telecommunications, financial services, public utilities, oil and gas production and distribution, while investments in manufacturing are of lesser importance. In the case of France, activities are concentrated in the public utilities sector (water, gas), telecommunications, as well as in the industrial sector (automobiles). German investments are predominantly in manufacturing – automobiles production, machinery, chemicals; Italian investment is concentrated in telecommunications, automobiles and food processing. Investments from the UK are comparatively diversified and cover general services, manufacturing activities as well as the primary sector (natural resources and agriculture).

Table 16: EU FDI Stocl in Latin America, 2001

(Outward stock, Millions Euros)

 

Latin

Argentina

Brazil

Chile

Columbia

Mexico

Venezuela

America a

European

194738

50397

74508

15064

5902

25945

7493

Union (%)

 

100

26

38

8

3

13