SAO PAULO (Reuters) – Brazil and Mexico have begun talks on a free trade agreement, officials said on Monday, aiming to deepen trade relations between Latin America`s two largest economies as trade tensions threaten to undermine global growth. So why do the heads of state and government of Mexico and Brazil keep alive the dream of a possible free trade pact between the two countries? Guillén notes that Mexican President Calderon, who will end his six-year term this year, may be motivated by a desire to “do something great” before leaving office, instead of remembering first and foremost as the man who fought a long – and perhaps unsuccessful – battle with violent drug gangs in his country. “He would go down in history because he made a big deal with Brazil,” Guillén says. “On the Mexican side, it`s about Calderon and his legacy.” Prior to the NAFTA concept, U.S. companies had invested heavily in Mexico, encouraged by the liberalization of Mexico`s trade and investment regimes from the 1980s on. At the time of the negotiation and entry into force of NAFTA, a significant part of the regional integration of cross-border production had already taken place. As a result, regional integration in North America has been driven as much by investment as it is by policy. Indeed, business support has been a decisive driver in both the Canada-U.S. free trade agreement and NAFTA. This support was based on both investment opportunities and business prospects. In addition, the strong growth in trade integration between Mexico and the United States has been fuelled by foreign direct investment. Two years later, this optimism was met by a dispute over the fate of “ACE 55”, the economic complementarity agreement that already established rules in 2003 for the gradual deregulation of automobile trade between Brazil and Mexico. Under protectionist pressure from Brazil, Mexico agreed in March to review the ACE 55 agreement to limit the increase in car exports to Brazil to an average annual value of about $1.55 billion over the next three years.
Mexican auto exporters will strike a big blow: last year, Mexican car exports to Brazil reached 134,000 units, for a total of $2.1 billion, compared to only 53,000 units in Brazil in 2009. In this document, we ignore recent negative events, in particular the defeat of the fast-track authority in the United States and the threat of a financial crisis in Brazil. Instead, we focus on the long-term trade and investment prospects between Brazil and the United States, provided the free trade agreement is ratified in 2005. We base our forecasts on the NAFTA experience of the past decade. We are looking at three aspects: the possible extension of the flow of goods; the possible change in the composition of Brazilian exports; and the potential growth of foreign direct investment in the United States in Brazil. Our approach is to examine both the evolution of NAFTA over a period of about 10 years and the comparative density of trade and investment relations between the United States and Mexico, as well as the United States and Brazil in 1997. We conclude with a brief review of the trade barriers, which are the most controversial.