For decades, the southern states of the United States have maintained economic appeal for foreign auto manufacturers.
Firms such as Toyota, Honda, Nissan, BMW, and Volkswagen AG have chosen to locate assembly plants in states such as Tennessee, Alabama, Georgia, and South Carolina. Among the advantages of these states are the so-called right-to-work laws that do not require employees to join unions: Wages tend to be lower than in unionized, northern states. Also, southern states have good transportation and energy infrastructures, which enhance the efficiency of auto manufacturing and distribution.
However, by 2015, the southern states realized that they had a new competitor, namely Mexico. Consider the case of Volkswagen AG whose Audi division was considering where it might build a North American assembly plant to manufacture its Q5 SUV. The firm decided to locate production in Mexico. Why? Mexico's low wages and improved logistics were part of its attractiveness. Also, the government of Mexico sweetened the deal by agreeing to donate land and finance a training center for Audi's Mexican workers. Yet for Audi, which produces vehicles for shipment throughout the world, the key attraction was Mexico's 40 different free trade agreements with auto-importing nations throughout Europe, Latin America, and the Asian Pacific region. The agreements provide exporters from Mexico duty-free access to markets that contain about three-fifths of the world's economic output.

The cost advantage resulting from a free trade agreement can be substantial. For example, when Audi’s rival BMW AG produces autos in its South Carolina plant and then ships them to Europe, the import tariff on each auto is 10 percent. For a $50,000 auto, this duty amounts to $5,000. This is a more significant factor than differences in labor costs. As a result, in 2015, BMW announced that it would establish a factory in Mexico, which would become a platform for selling autos throughout the world. Simply put, free trade agreements have bolstered the competitiveness of Mexico’s auto industry.

What do you think? How have free trade agreements bolstered the competitiveness of Mexico’s auto industry?