Mexico has agreed this week to cut future vehicle exports to Brazil following a threat to the future of the ten-year old trade deal between the two countries that gives them preferential access to each other's car markets.

The latest development follows a request by the Brazilian government that Mexico set a $1.4 billion annual limit on the value of vehicles it exports to the country, equivalent to around 147,000 vehicles. Brazil had said without this it would be forced to introduce tariffs on imports from its Mercosur partner.

Mexico has now agreed to reduce annual exports of vehicles to Brazil to $1.5 billion for three years.

The demand was made in light of figures for 2011 that showed a rise in vehicle imports from Mexico worth more than $2 billion while Brazil exported $372m worth of vehicles in the other direction. The discrepancy contributed to a trade deficit of $9.5 billion and has drawn complaints from Brazilian carmakers.

According to ANFAVEA, which represents local carmakers in Brazil, vehicle imports have risen from 90,000 vehicles in 2005, equalling a 5% share of the domestic market, to 24% in 2011, with 948,000 vehicles imported.

The imbalance in trade was compounded by the fact that since the economic downturn of 2008, the Brazilian real has increased in value by 40% in comparison to other currencies, making imports increasingly attractive despite the local taxes imposed on imported models.

According to ANFAVEA imports had increased by 35% last year while local production has increased by only 5%. Exports from the country dropped by nearly 30%. The Association had said that the local sector was at risk if the industry couldn't shift to more local manufacturing and sourcing. For 2012, the Association foresees a similar growth of 5% in the market, which might reach 3.8m vehicles sold in the country this year.


Despite that the expectations are bright for the Brazilian automotive market, according to ANFAVEA's director of international relations, Ademar Cantero, who told Automotive Logistics that there is potential to for the sector to grow into a 6m-vehicle annual market by 2020. "The motorization rate is still low in the country (one vehicle per 6.5 people) and the economy poses favourable prospects for the years to come, which might increase general consumption and the demand for automobiles and commercial vehicles as well," he said.

Cantero said that it was in order to maximise this growth potential that certain measures had to be taken. "Considering the market's potential, Brazil must strengthen its industry and keep it competitive in both domestic and exportation markets. This is the goal of the Brazilian automotive industry."

"The renegotiation of the automotive agreement with Mexico and the tax rise for imported vehicles are just occasional cases," he added. "What we look for are structural policies that secure competitiveness for the automotive industry in Brazil."

Brazil is suffering from an overvaluation of its currency and local industries, including vehicle makers, are being hit by increasing business costs. Last year the economy expanded by just 2.7%, a substantial slowdown from growth in recent years in what is now the fourth largest vehicle market globally.