CIAO DATE: 06/02

The Impact of MERCOSUR on the Automobile Industry

The Southern Common Market (MERCOSUR) automobile industry constitutes an important underpinning for the efforts to achieve economic integration of South America's Southern Cone region. Worldwide, the automotive sector has been a vitally important source of employment, revenue generation, and manufacturing growth. This paper analyzes the factors that have contributed to the transformation of the automotive industry of MERCOSUR, including national and regional policies, industry developments, and global economic forces. Although automobile manufacturers based in the MERCOSUR region have managed to become remarkably more productive during the 1990s, they still have been unable to reduce manufacturing costs to international levels. Much of the explanation for this problem lies in a host of national administrative barriers and inordinately high and regressive local tax rates. Most manufacturers based in the Southern Cone are producing automobiles that are competitively priced only in the protected regional market. The need of many MERCOSUR-based automobile manufacturers to compensate for local overcapacity by seeking out new export markets creates a strong incentive for those manufacturers to pressure Southern Cone governments to implement much-needed reforms.

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