LONDON – European auto makers will be looking to boost exports to South America’s Mercosur trade-pact region if the European Union can strike a free-trade agreement.

A resumption of negotiations on slashing tariffs for goods traded between the EU’s 27-member countries and the 4-country Mercosur block, consisting of Argentina, Brazil, Uruguay and Paraguay, recently was announced by the European Commission.

An earlier attempt to forge an FTA was suspended in 2004 after nine years of talks failed to secure an agreement. The collapse of the deal was a disappointment for auto makers, because Mercosur tariffs on EU vehicle imports run as high as 35% on cars.

Automotive sales are, a “sector of particular interest to EU exporters” to Mercosur, an EC memorandum says.

EU Trade Commissioner Karel de Gucht believes the time is ripe to restart the talks. “Such negotiations are challenging, but the moment is right to take a fresh look at the state of discussions so far.”

De Gucht’s team will be looking to secure better market access for food and industrial goods as the price for a deal. Members also will be pressing for Mercosor governments to strengthen intellectual property rights rules, protecting EU vehicle manufacturers and parts makers from counterfeiters.

European auto makers are enthusiastic about renewed talks for a Mercosur deal, although there are warnings export growth might not be as straightforward as many are hoping.

"We've been looking forward to a restart of the negotiations for some time now, so this is good news, and we hope that we'll be able to export more to Brazil," says Erik Bergelin, head of trade and economics for the ACEA European automobile manufacturers group, which represents 15 European car, truck and bus producers.

Many European auto makers already have production facilities in the Mercosur countries –Volkswagen AG, Fiat Automobiles SpA and Renault SA among them. But Bergelin says there is a gap in the high-quality, high-cost premium-car segment.

"These are not produced in South America at present, and we would like to export them from Europe without the duties," he says. The ACEA also would like closer association with Brazil and Argentina on regulatory issues "in order to look forward to some global harmonization."

Peter Cooke, professor of automotive management at Buckingham University in the U.K. and an authority on the industry, agrees South America offers growth opportunities.

However, Cooke warns there already is "quite a sophisticated motor manufacturing industry" in the region, which exports heavily, in particular to West Africa. He also reminds that “all the major (European) players are there already."

Unable to compete as exporters to Mercosur, European auto makers such as Fiat, Renault, Volkswagen and Mercedes-Benz have invested heavily in production in the region with great success.

Fiat, for example, sold more cars and light-commercial vehicles in Brazil last year than in Italy, the first time in the auto maker’s 111 years that its home market slipped to second place.

Cooke says if there was to be an increase in trade from Europe to South America, "we can assume it will be reciprocal and trade will come the other way as well."

But he also wonders how auto makers already producing in the region would react. "Do you tell the people who are already there they should be sending cars from Europe?"

Thales Stucky, an associate with Baker & McKenzie International in Brazil, says the answer likely is “yes.” "If executed, this agreement would significantly increase the market of EU auto makers, especially in Brazil."

Brazil was the world’s fifth-largest car market in 2009, with car sales rising 11.4% to a record 3.14 million, according to the Brazilian Motor Vehicle Manufacturers Assn. Analysts predict the country will become the fourth-largest vehicle market in 2010, behind China, the U.S. and Japan.

However, Stucky also agrees passenger vehicles currently imported to Mercosur countries from Europe mostly are German luxury cars.

"With today’s import duties, more-economical European cars find a very tough market in South America,” he says. “Argentine and Brazilian economy cars are well-regarded and dominate the market.”

European imports cannot hope to compete while such high tariffs are in place, he adds.

“They do not have another mechanism to recover the cost of the import duty other than shifting it directly to the price of the vehicles, which can imply an additional cost of up to 35% in the sales price."

But if import duties were to be cut, loyalty to domestically produced vehicles would not be a deterrent to consumers buying European vehicles.

“When buying a car, Mercosur consumers are more concerned with the price of the vehicle and the associated costs of maintenance than the place where the vehicles are made,” Stucky says.

“Thus, if the price and costs of domestic-made vehicles can become equivalent to those of foreign-made vehicles, I believe foreign-made vehicles can successfully increase their share in the market.”

– with Pacifica Goddard in Caracas and Keith Nuthall