Officials: Mexico pacts hurt Tennessee

photo The new 2013 Passat offers modifications to the 2012 model.

Local Volkswagen officials say they're fighting within the giant automaker to win a second vehicle for the Chattanooga assembly plant.

But they may be sparring with one hand tied behind their backs.

A lack of free trade pacts between the United States and other nations may steer future VW production to Mexico rather than Tennessee, according to industry experts and others.

Jay Baron, chief executive of the Center for Automotive Research in Ann Arbor, Mich., said Mexico has free trade agreements with 44 countries. The U.S. has 19, he said.

As a result, cars built in Mexico can be exported to more countries without the manufacturer having to pay import duties, which can boost the price of a vehicle by up to 10 percent.

That Mexican trade advantage encouraged Volkswagen to put its Audi plant in Mexico rather than in Chattanooga; Huntsville, Ala.; or another U.S. location, Baron said.

"It's in direct competition," he told a recent conference of auto manufacturers from Tennessee, Alabama and Mississippi. The issue of free trade came up often at the Chattanooga meeting.

Audi, VW's luxury-car unit, announced in April it will build the factory in Mexico to make a sport utility vehicle, reportedly the Q5, by 2016. A site next to VW's Chattanooga plant reportedly had been eyed as a potential location for the plant.

Bill Hagerty, state economic and community development commissioner, said Tennessee competed for the project, but its efforts were hurt by trade issues beyond the control of state and local officials.

Hagerty, who is on a temporary leave of absence to volunteer for Republican presidential hopeful Mitt Romney, said this summer that a portion of the new facility's output will target certain South American markets.

A top VW official told Automotive News recently that trade among Mexico, Europe and the Mercosur bloc of nations (Brazil, Argentina, Uruguay and Paraguay) is duty-free, which helps lower the automaker's costs. A duty is a kind of tax on certain items.

By producing in Mexico, Audi can avoid a 10 percent duty that's levied on cars built in the U.S. and shipped to Europe.

"Tariff treaties between Mexico and certain countries there made a material difference," Hagerty said earlier this year. "We understand Audi had to choose the location that best fit its business needs."

photo U.S. Sen. Lamar Alexander

U.S. Sen. Lamar Alexander, R-Tenn., said that while there are some trade barriers, many of those are Europe's fault.

"Europe won't take our agricultural products, so we can't get a free trade agreement with Europe," he said. "I regret that. That would benefit us in terms of autos. We could not only make more cars here. We could make them here and sell them in Europe."

Alexander said Europeans won't take food that is genetically engineered.

He said the next president, either Barack Obama or Mitt Romney, needs to give Congress fast-track trade authority to make more free trade pacts.

"Or we'll have more examples of VW plants going to Mexico," Alexander said.

"Fast track" is the authority granted by Congress to the administration to negotiate trade agreements that cannot be amended by Congress and only can be voted up or down, as negotiated.

Jonathan Browning, Volkswagen Group of America's chief executive, cited the Audi decision in a recent speech to the Brookings Institution in Washington, D.C.

He said Mexico was chosen because 70 percent of production is expected to be exported outside the North American Free Trade Agreement region, which includes the U.S., Canada and Mexico.

"It simply doesn't make sense to build in the U.S. if exporting is central to that investment decision," Browning said.

He called for the U.S. to get its fiscal house in order as well as to look to improve radically its export-oriented infrastructure.

Baron also suggested the South improve its supply chain of parts to auto assembly plants to better compete with Mexico.

Wooing more suppliers to the region and putting those plants closer to automakers' factories will make the supply chain more appealing to car companies, he said.

Baron noted that two-thirds of a car comes from the supply chain.

"That's where the opportunity really comes from," he said.

Business Editor Dave Flessner contributed to this story.

Contact Mike Pare at or 423-757-6318.