Japanese Investment in Mexico

Honda is building a full-sized assembly plant (200K units per year) as is Mazda; Nissan is adding a 3rd plant. Part of that is driven by the strength of the yen, at ¥81.3 per US$ on 17 November; the US is the biggest source of profits for the auto industry, so sourcing vehicles for the US market from a non-yen location is important. [The Euro is also strong, to which anyone who has traveled there on a dollar budget can attest.]

But why Mexico? Logistics costs are high, because most vehicles will likely be exported and because the local supplier base is not as deep as in the US midwest (hence parts must be imported). So while quality is high and wages are competitive, it’s not a natural a priori.

The answer lies in free trade agreements: Mexico has been more aggressive on that front than the US (and Japan). As a result not only can vehicles be shipped tariff-free to the US–0% from Mexico versus 2.5% on cars and 25% on trucks shipped from Japan. Ditto Europe–tariffs are 0% from Mexico versus 10% on vehicles shipped from the US or Japan. (I have not researched whether Mexico has similar aggreements in Latin America.)

Now Japan could offset some of this were it to negotiate more free trade agreements. (It has one with Mexico.) But that’s an awkward process, and has yet to join the biggest pending agreement (TPP, Trans Pacific Partnership). The reason: farmers, whose political clout is disproportionate to their share of the economy, and whose clout over time has led to subsidies and tariffs that allow rice farmers to remain in business despite costs that are multiples of those in other large producers. So removing protection for rice would drive most farmers out of business. In Japan, it’s the “3rd rail” of electoral politics.

One thought on “Japanese Investment in Mexico

  1. kuveke

    If big firms can build firms in other countries to gain trade advantages the real people hurt by Japan’s lack of more free trade agreements are small businesses and consumers. What we discussed in class a while back was how the average farmer in Japan is an elderly woman. Allowing free trade rights would undoubtably leave these women without a way to supplement their income. However, it is still unclear how much money can be made by selling rice that is grown on such small plots of land. The main question I have is what the economic consequences to these women would be and how much government assistance would they need to adjust to displacement by foreign farmers? Furthermore, what will the reduction on prices of Mazda and Honda cars and trucks be on American consumption?

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