MEXICO CITY Brazil is pushing Mexico to slash its auto exports to Latin America's biggest economy by more than a third to about $1.4 billion a year as it attempts to shield its own struggling industry from a strong currency.
The export quota, proposed in a letter to Mexico's government dated March 8, is one of several Brazilian demands to rework an increasingly shaky bilateral automotive trade deal.
The proposal fans a dispute that has stirred tensions between the two Latin American giants, and Brazil's demands could also upset nations such as the United States that provide components for cars made in Mexico.
Analysts said the tough line taken by Brazil showed how the South American giant has become more and more assertive thanks to a sustained period of growth in recent years that has pulled the country into the front rank of global economies.
In the letter, Brazil said the proposed quota - which it wants for the next three years - was the average annual value of Mexican auto exports to Brazil in the last three years.
It would represent a cut of over 40 percent from what Mexico exported to its southern trading partner last year.
The three biggest car exporters from Mexico last year were U.S. carmakers Ford Motor Co. (F.N) and General Motors Co (GM.N), followed by Germany's Volkswagen (VOWG_p.DE).
A Mexican government official, who asked not to be named, said any possible quota should be based on the latest bumper export numbers, not on a three-year average.
"What we say is that it needs to start on the basis of trade flows today, and that we can establish mechanisms to avoid a sudden increase in exports," the official said.
In 2011, Mexican auto exports to Brazil hit $2.4 billion, the official noted. This was a jump of about 70 percent from the previous year, when exports were just shy of $1.4 billion.
Mexican lawmakers have said they expect the government to try and fight any attempt by Brazil to break the accord at the World Trade Organization. Brazilian officials have said they do not believe the agreement is contestable.
Brazil also said in its letter to Mexican Foreign Minister Patricia Espinosa and Economy Minister Bruno Ferrari that Mexico should liberalize trade on heavy vehicles, a move that could favor Brazilian exports to Mexico.
According to Brazilian figures, automotive trade between the two nations resulted in a $1.7 billion deficit for Brazil in 2011, more than double the previous year's.
Brazil's letter said the two sides had agreed to define the terms of the revised deal by Friday. This detail prompted an angry response from the Mexican official.
"Trying to negotiate by letter and peremptorily fixing a date doesn't show great willingness to negotiate and reach a deal," the official said, adding that the two sides needed to get together and discuss things face to face.
Nevertheless, a government official in Brazil said there was scope for further talks next week.
"There's still some room for negotiation, but it's very small," the official said on condition of anonymity. The official described talks so far as "difficult," adding that there was a chance the auto trade deal could be canceled.
In a separate letter dated March 7, also seen by Reuters, Mexico said it was prepared to consider limiting its exports to Brazil on the basis of last year's export figures - "plus a percentage" to be negotiated.
The Brazilian demands also stipulated that Mexico should agree that 35 percent of its automotive parts be sourced in accordance with a formula for a "regional content index" and that it should rise to 45 percent over four years.
Neither the formula nor the "region" were defined in the letter, but the demand could unsettle other countries that supply parts to Mexico's auto plants.
The Mexican official said the proposal was not realistic.
"Establishing a percentage that's unattainable for Mexican or Brazilian industry is simply de facto cancelling the deal or putting a stop to trade," the official said.
Mexico said earlier this week it was waiting for a response to an invitation to restart the talks from Brazil, which has stepped up trade measures and capital controls to try to shield its local manufacturers from a stronger real.
Brazil's economy grew just 2.7 percent in 2011 as soaring business costs and uncompetitive industries hurt what had been one of the world's most dynamic emerging markets. By contrast, the Mexican economy grew by nearly 4 percent last year.
The biggest drag on Brazil's economy continues to be industry, which contracted 0.5 percent in the fourth quarter compared with the previous quarter. Manufacturers have blamed most of their problems on Brazil's currency, which has strengthened about 40 percent since the depths of the financial crisis in 2009 and by about 5 percent this year.
Still, Rodolfo de la Garza, a Latin America expert at Columbia University, said Brazil's letter to Mexico illustrated the country's increasing self-confidence across the Americas.
"They're going to push their position," he said. "Brazil is not going to kowtow to the United States. And all things being equal, it might be preferred in most of Latin America to the U.S. Latin America has had a rough relationship with the U.S."
(Additional reporting by Brian Winter and Jefferson Ribeiro; Writing by Dave Graham; Editing by Dan Grebler)