Used Vehicle Imports Impact on New Vehicle Sales: The Mexican Case

Abstract

This paper analyzes the potential impact of used vehicle trade liberalization on Mexico's new vehicle market with the full implementation of the NAFTA agreement. Although the legal environment has been unfavorable toward the importation of used vehicles into Mexico, used vehicles primarily from the U.S. have entered the market as gray or illegal goods. In recent years Mexico may have already become a dumping ground for U.S. used vehicles. Beginning in 2009, Mexico is set to progressively open the market for used vehicle imports according to NAFTA regulations, fully liberalizing it by 2019. To quantify the potential impact of legal used vehicle imports, this paper develops a new analytical model. Given the lack of historical data, the methodology combines econometric estimation with a comparative analysis using the Polish used vehicle case as foundation. Through various scenarios, our research suggests that the medium-to-long term impact on new vehicle sales could be severe. The auto industry could reach a low 0.6 million units by the time the market is fully liberalized. And even under the most optimistic scenario, the industry only reaches 1.3 million units by 2019, not much higher than the 1.15 million units in 2007. While some academic literature indicates that there are social and economic benefits of free trade in used vehicles, at least in the case of a lower income market opening itself up to a much larger and higher income mature market, the net impact seems to be negative. Industry generated revenue losses for both automakers and the Mexican government could reach as high as $100 billion in the 2009-2019 period.