BUENOS AIRES – Argentina’s protectionist economic policy and controls on imports are causing difficulties for auto makers across South America.

Vehicle production in the country is falling, in part because components are being held up at customs, and overseas auto makers are retaliating by canceling exports.

Argentina-based Socma, an affiliate of Chinese auto maker Chery, in late July threatened to close its vehicle-assembly plant in Canelones, Uruguay, because of Argentina’s tightening import restrictions. Under ACE-57, a bilateral trade agreement, Uruguay can send 20,800 vehicles duty-free annually to Argentina, where it sells 80% of its auto exports.

Of Socma’s 4,000 cars earmarked for export this year, only 1,250 units have been accepted by Argentine customs authorities. The auto maker subsequently has been forced to suspend assembly and lay off 300 of its 370 employees.

Chery Socma had lost about 18.4 million pesos ($4 million) since January, says head of logistics Daniel Villamarín, who accuses Argentina of violating trade terms. In order to maintain its commercial network, he says, Socma will export some cars at a loss – paying a 35% tariff at Argentine customs, despite the trade agreement.

In light of the restrictions, Ramón Cattáneo, executive secretary of Uruguay's Automotive Chamber of Industries, will ask his government to annul ACE-57. “Cars manufactured in Argentina are freely entering Uruguay. But (Buenos Aires) is blocking everything,” he says.

A spokesman for the Argentinadealers group notes, “There has certainly been a reduction in the number of imported cars reaching dealers.”

The restrictions are part of efforts by Argentina President Cristina Kirchner’s administration to halt a declining trade surplus across all economic sectors and prevent the depletion of the country’s dollar reserves.

“The Argentine government is trying to reverse its AP3.8 billion ($830 million) trade deficit” in the automotive sector, says Maximiliano Scarlan, an auto industry analyst at Buenos Aires consultancy Abeceb.

Last year, auto makers were required to match their imports dollar for dollar with exports, and they do not have to be cars. Porsche’s distributor, for example, agreed to export AP37 million ($8 million) worth of wine. Subaru’s and Mitsubishi’s distributors struck similar deals, exporting chicken feed and peanuts, respectively.

However, Argentina’s protectionist policy has not checked an overall slump in exports, which totaled AP32.6 billion ($7.1 billion) in June, 10% less than year-ago. The country’s trade surplus in June stood at AP6.9 billion ($1.5 billion), which is AP4.6 billion ($1 billion) less than two years ago.

In addition, the government’s protectionist measures are angering foreign auto makers while endangering domestic production.

According to the Argentina’s automobile manufacturers association, output for the year’s first six months totaled 331,798 units, a drop of 15.4% compared with year-ago. “Auto production will fall again this quarter,” analyst Scarlan tells WardsAuto.

In May, Fiat laid off 300 employees at its plant in Córdoba, where it manufactures the Siena and Palio, because parts had been blocked at customs. Last month, Renault reduced shift times at its Córdoba plant as production slowed. The result: Argentina exported 29,885 cars in June, a 36% decline from 46,737 in like-2011.

“Parts are still not entering the country,” Esteban Martín, president of CEREC, the aftermarket-parts dealer group.

Industry Minister Débora Giorgi defends the government’s strategy. Presenting PEI 2020, a government plan for the next eight years, she says, “We need automotive manufacturers to substitute imports and increase their exports.” The target for production in 2020 is 1.9 million units, more than double the 828,000 built last year.

But Argentina does not have the level of technology required to manufacture parts for new models, Martin says. “Some parts, like ignition coils, have run out. Now we have to make do with used parts, and you can’t always be confident about where they’ve come from.”

The fall in demand from neighboring Brazil, the destination of 78% of Argentina’s auto exports, also has contributed to the decline in production.

Additionally, Mexican car exports to Argentina have been hit by the restrictions: Nissan Mexico announced last month it would cease sales to Argentina, after the Kirchner administration suspended its ACE-55 trade agreement for three years. Nissan now must pay the 35% export duty from which it previously had been exempt.

“We are not prepared to pay these duties,” says José Luis Valls, president of Nissan Mexicana. The Mexican economy ministry adds the government is “deeply worried about such protectionist measures.”

Suspending ACE-55 “puts the solvency of the Argentine auto sector, which already has lost competitiveness, at risk,” Scarlan says.

According to Abeceb, Mexico has enjoyed a trade surplus with Argentina in the auto sector since 2009, and its share of Argentina’s automotive market has grown from 1.5% in 2005 to 6.7% so far this year. Argentina’s share of Mexico’s domestic market fell 3.4 percentage points to just 1.3% during the same period.

Viktor Klima, president of both ADEFA and Volkswagen Argentina, says in a statement, “We need to begin negotiations as soon as possible in order to reach a new agreement.”

Argentina's relations with Brazil, its largest trading partner, have chilled as well. In response to import controls impeding its products, the Brazilian government earlier in the year increased the authorization period at customs for Argentina-built cars to 90 days; the World Trade Organization generally allows just 60.

However, Klima says the problem has been solved. “Thousands of vehicles delayed in Brazilian ports have now been released.”

Discord stemming from Argentina’s protectionism likely won’t go away anytime soon, despite claims by government officials such as Foreign Minister Héctor Timerman, who says, “We have the second most open economy in the region” after Colombia.