Brazil and Mexico Look to Rewrite Auto Trade Pact

| Feb. 6, 2012 |

Published by Minyanville

A Mexican delegation is on its way to Brazil later this week in an attempt to put a stop to plans to impose taxes of 35% on auto imports, putting to bed a 2002 free trade pact between the two countries.

The decade-old pact swings in favor of Mexico, given the rise in Brazil’s currency and weakening of Mexico’s. Brazil is keen to either rewrite the treaty or exit altogether.

Brazil’s manufacturing sector has been hit hard by the value of the country’s soaring currency, stifling competition when exporting. This is coupled with high inflation which has pushed up labor costs. Mexico’s weak peso—and so reduced labor costs—has made Mexico’s exports even more attractive, exacerbating the problem for Brazil.

Brazilian imports of Mexican vehicles shot up 40% last year, compared to 2010, to $2 billion; this left Brazil with a trade deficit of $1.6 billion, according to the Financial Times.

In order to redress the balance, President Dilma Rousseff spoke with outgoing Mexican President Felipe Calderón on Friday, according to Brazilian Trade Minister Fernando Pimentel. “The agreement as it stands cannot continue,” said Rousseff, according to a Foreign Ministry source speaking to Reuters.

Both countries are major markets for some of the world’s largest carmakers, including US giants General Motors (GM) and Ford (F) as well as Fiat (FIATY.PK), Nissan (NSANY.PK) and Volkswagen (VLKAY.PK), many of whom take advantage of the free trade pact in shipping their products from Mexico into Brazil, reaching its ever growing middle class.

To top off the antagonism, figures released this morning reveal that Brazil’s January auto production was down 19.2% with sales also falling 23% from the previous month, according to industry body Anfavea.

A seasonal drop is to be expected, however, these figures are much worse than usual for Brazil and will add weight to this week’s talks.

More Corruption Worries for Rousseff

A seventh minister has resigned from Roussef’s now 14-month-old government under allegations of corruption.

Cities Minister Mario Negromonte has been dodging allegations that he had awarded public works contracts to companies which helped finance his political party for months but Folha de São Paulo offered the coup de grace last week with reports that his secretary had met with the relevant businessman.

Negromonte follows Sports Minister Orlando Silva, accused of embezzling around $23 million from ministry coffers over eight years, Transport Minister Alfredo Nascimento and Chief of Staff Antonio Palocci.

Rousseff is seen by supporters as having taken a tough line on corruption with the resignations—averaging two ministers a month. Critics, however, point at the abundant dishonesty as indicative of her “political naivety.”

Hector Velasco, writing for AFP, suggests that the timing of the allegations will be detrimental to huge investments in Brazil in time for the World Cup in 2014, the Copa America in 2015 and finally the Olympics in 2016.

The government is also investigating Luiz Felipe Denucci Martins, the head of Brazil’s National Mint, on allegations of taking kickbacks from suppliers.

According to the São Paulo-based Federation of Industries, corruption costs Brazil around $146 billion annually, roughly 2% of GDP.

Despite this, Rousseff’s approval ratings are in the 70s, firmly deflecting criticisms that she was simply a placeholder for the return of her popular predecessor Luiz Inácio Lula da Silva.

Rousseff visited an old hero last week, Fidel Castro in Cuba, in order to strengthen ties with the communist island. The two countries already share warm relations, with $642 million in trade last year—though $550 million of this is accounted for by Brazilian exports.

Brazil is already contributing $640 million toward a commercial port as well as $400 million in credits for Cuba to purchase Brazilian food and another $200 million to improve Cuban agriculture, reports Reuters.

Brazil then spent the latter half of last week in Haiti, for talks both on economic links and also immigration after last January’s earthquake. More than 4,000 Haitian immigrants are being granted permanent residency thanks to investment of $500,000 by Brazilian authorities.