SAO PAULO — The government of Brazil, South America's largest economy, this month suspended a fresh auto trade pact, saying Argentina violated the agreement by increasing the percentage of local content on vehicles built in the Mercosur region.
The move comes in a year that industry insiders had been predicting to be Brazil's best, following several years of decreased production. An increase in orders at local automotive manufacturers indicated the country was on tract to produce 1.7 million units this year, 25.9% above last year and the third-best result in the country's history.
But the recent trade disagreement means Brazil, at least for the time being, has no place to export the bulk of its vehicles.
The Mercosur agreement, arrived at in late June, stipulates that 30% of car parts must be local. But a recent Argentine law increased that amount, saying all materials used to build parts — such as steel, rubber and aluminum — must be locally sourced.
The head of Brazil's automobile producers association says in published reports that Argentina's modification only would serve to help that country's struggling auto parts industry and not its partners.
The largest members of the regional trade bloc, Brazil and Argentina had officially welcomed the new 6-year accord along with Uruguay and Paraguay only a week before the disagreement. The deal, which was said to be more flexible than the one it replaced, eventually will liberalize trade among the members but increase tariffs on imports.
Without an export market, Brazil's automakers may have to temporarily scale back production plans. Paulo Butori, head of the Sindipecas Automotive Component Manufacturers Assn., said before the dispute erupted that he expected vehicle production to reach 1.7 million units and domestic sales to hit 1.6 million vehicles, including imports.