Brazil and Mexico, the two largest economies in Latin America, have become embroiled in a nasty trade dispute that threatens to disrupt the cordial relations that the two countries have enjoyed for the past several decades. The trade row erupted when Brazil demanded that Mexico agree to renegotiate an agreement (Acuerdo de Complementacion Economica en el sector automotriz, ACE 55) that has kept trade in motor vehicles between the two countries tariff free since 2002 (SourceMex, June 19, 2002). Brazil has proposed imposing tariffs on imports of Mexican motor vehicles and requiring that Mexico import more Brazilian-made trucks and buses. Mexican officials immediately rejected the demands but agreed to hold talks with Brazilian counterparts. The two countries were at an impasse after the first round of talks.
Brazil seeks to reinstate tariffs on Mexican imports
Some analysts say the move to require tariffs on imports of Mexican motor vehicles is an attempt by Brazil to protect its manufacturing base and narrow its trade deficit. President Dilma Rousseff has been raising tariffs and stepping up anti-dumping measures to protect manufacturers hurt by trends in the foreign-exchange market that have fueled a surge of imports in Brazil. The value of Brazil's real has increased significantly against the US dollar since the end of 2008.
At present, Brazil's trade balance in motor vehicles favors Mexico, the third-largest source of cars and trucks for the South American country after Argentina and South Korea. Conversely, Mexico's imports of Brazilian motor vehicles have not increased significantly. The motor-vehicle sector represents about 40% of the total bilateral trade of about US$8.5 billion.
Brazil's daily business newspaper Valor Economico says the Brazilian government's decision to renegotiate the agreement with Mexico might have been a reaction to trade patterns last year, when imports of Mexican vehicles rose by 40% to about US$2 billion, resulting in a trade deficit of US$1.6 billion in the motor-vehicle sector. The Asociacion Mexicana de la Industria Automotriz (AMIA) estimates that half of the nearly 322,000 units exported to Latin America in 2011 were sold in the Brazilian market.
Brazil imposed tariffs on vehicle imports from most other countries at the end of 2011, in an attempt to address the imbalance. The exceptions at that time were Mexico and Argentina, which is Brazil's partner in the Southern Cone Common Market (MERCOSUR). Brazil decided to add Mexico to the tariff regime at the beginning of this year, prompting the current dispute.
Brazil went as far as to threaten to end ACE 55, prompting high-level discussions, including a telephone consultation between President Rousseff and Mexican President Felipe Calderon. "This was a very productive discussion," said Development, Industry and Trade Minister Fernando Pimentel, who participated in the talks. The Brazilian minister said Calderon agreed to talks under which ACE-55 would be reviewed to address the imbalance in automotive trade between the two countries.
Brazil is proceeding very carefully on this dispute and is trying to avoid gaining a reputation as a protectionist country. "We're considering the use of an exit clause, not breaking the agreement," Pimentel told reporters.
The conversations between the two leaders delayed any immediate action by Brazil, allowing Mexico's Secretaria de Economia (SE) an additional two months to compile and analyze market statistics that could be presented at follow-up meetings as the two sides seek a mutually beneficial solution.
First phase of consultations yields no results
But the openness to consultations does not mean that a resolution to the dispute is imminent.
This was evident in statements from Mexican Economy Secretary Bruno Ferrari, who rejected the notion that Mexico would accept any settlement that would require the payment of tariffs on motor-vehicle exports to Brazil. …