Undoing NAFTA's unintended effect

MEXICO CITY -- The North American Free Trade Agreement doesn't deserve all the credit for the explosive growth of Mexico's auto industry, which has seen production more than triple since 1994.

Neither does it deserve all the blame for the flow of cheap, imported used cars that depressed the new-vehicle market here for much of the past decade.

Long before NAFTA, Mexican migrants regularly lobbied for legalization of the cars they brought in from the U.S. with temporary permits. The government offered waves of amnesty programs for work trucks mostly, since new pickups were too costly for poor farmers.

The 1994 trade pact promised sustained but limited relief, setting a legal mechanism for freer movement of new and used vehicles across the U.S.-Mexico border, said Guillermo Rosales, co-director of the Mexican Automobile Distributors Association. It called for a 2009 opening to used vehicles for a limited number of model years and allowed for safety and environmental regulations that would prevent importers from dumping substandard "junkers" on the newly opened market.

But it was the Mexican government -- in the run-up to a presidential election won by the ruling party -- that unilaterally moved up the timetable and expanded the range of model years that could be brought in, causing a tidal wave of imported used cars.

The government had "no requirement whatsoever to do so under NAFTA," Rosales said. "This was a totally unilateral decision."

Vicente Fox, who as Mexico's president signed the 2005 decree, defended the move as positive for consumers who couldn't afford a car and said it would make them more productive.

The next year, imports of used vehicles hit a record of 1.58 million, predominantly from the U.S., and soon new-car sales began to erode. "At that time, we did not get sufficient comprehension from the federal government as to what was happening," Rosales said. "That was hard on us because it did not give us time to react more quickly."

The Mexican Automotive Industry Association estimates that nearly 8 million used cars poured into Mexico from 2005 through 2015. It's not that new-car buyers suddenly shifted their tastes toward high-mileage junkers with flood damage or worse coming over the border, Rosales said. They just kept their own cars longer, as depressed used-car values made trading up to a new car less affordable.

"What happened was [that] a saturation of the used-car market was transmitted to the new-car market," Rosales said. "That's because a new-car client has to sell their used car first."

The industry group and dealer association pleaded for relief as many new-car dealers went out of business or were forced to consolidate.

Eventually, the government tightened the rules. It also cracked down on judges who were issuing injunctions against safety and environmental inspections ordered by the government. Rosales and others suggest that corruption played a role in the judges' decisions.

The case eventually went to Mexico's Supreme Court, which ruled the inspections were constitutional, ending the injunctions. With the new regulations in effect, used-car imports fell to about 180,000 last year.

Rosales credits the used-car crackdown for generating about 250,000 new-car sales a year; expanded credit was good for another 250,000 sales. Through May of this year, used-car imports were running about 10 percent ahead of last year's levels.

Rosales said a moderate number of used-car imports -- as NAFTA originally intended -- can be complementary to the Mexican used-car market and absorbed without negative consequences. He puts that threshold at about 200,000 a year.