MEXICO CITY Mexico has yielded to Brazilian pressure to slash auto sales to the southern giant, fixing an export quota for the next three years to save a decade-old trade agreement between Latin America's two dominant economies.
Mexico's Economy Minster Bruno Ferrari said on Thursday Mexico had agreed to curb its auto exports to Brazil to an average of about $1.55 billion over the next three years, bowing to Brazilian concerns about its ailing industrial sector.
Brazil made its demands after the value of Mexican car exports jumped by around 70 percent in 2011, aggravating a glut of cheaper imports that are hurting Brazil's manufacturers.
The quota is the latest in a string of efforts by the Brazilian government to protect its industry. It is reciprocal, and free trade between the two nations will resume after three years, according to the agreement thrashed out in Mexico City.
The accord fell far short of what Mexico said it would fight for, and prompted harsh words from Mexican free trade advocates.
"They (Brazil) are being total bullies and we are just accepting and saying 'yes.' I think it is a very bad sign that Mexico just agreed like that," said Luz Maria de la Mora, a former Mexican official who helped negotiate the original 2002 auto deal.
"What kind of message is Brazil sending to the world?" she told Reuters. "Is this the way emerging economies are going to behave? Are these the economies that will become the engines of global growth with these kinds of policies, that are completely uncertain and unpredictable?"
Ferrari said Mexico and Brazil had also agreed that Mexico would raise the proportion of auto parts it sources from Latin America to 40 percent in five years, up from 30 percent now.
The two concessions were close to what Brazil had asked for, and will drag Mexico's exports down to a level way below the $2.4 billion worth that Mexican trade figures showed it had exported to its southern trading partner last year.
Mexico had earlier said the 2011 figure should serve as the starting point for any quota between the two governments.
Mexico faces the prospect of hitting the quota long before the year ends, as exports to Brazil more than doubled in the first two months of this year from 2011.
Analysts believe Brazil's victory will do little to stem a steep slowdown in Latin America's largest economy.
The dispute has undermined relations between free-trade disciple Mexico and Brazil, which is increasingly resorting to protectionist measures. Data show that Brazil has had much the better of recent trade between the two nations.
Between 2000 and 2010, Mexico racked up a trade deficit of more than $26 billion with Brazil, according to figures from Mexico's Economy Ministry. Mexico made it back into the black only last year, when it ran a surplus of around $330 million.
According to the deal struck on Thursday, Mexico will limit its auto exports to Brazil to $1.45 billion this year, a figure that rises to $1.56 billion in 2013 and $1.64 billion in 2014.
Brazil had initially asked Mexico to cut its annual exports to $1.4 billion per year for three years and raise the amount of Latin American parts used in Mexican-made cars to 35 percent in 2012 from 30 percent -- increasing gradually to 45 percent.
The deal means Mexico must still reach the 35 percent target in a year but will have four more years to reach 40 percent.
Earlier on Thursday, Brazil said it had backed down from a third demand to open up trade in heavy vehicles.
Brazil's imposition of a quota on Mexico may upset countries like the United States that provide components for cars made in Mexico. It could also dent investment plans in Mexico.
In terms of total car exports from Mexico, U.S. automakers Ford Motor Co. (F.N) and General Motors Co (GM.N) led the pack last year, followed by Germany's Volkswagen (VOWG_p.DE).
The quota is unlikely to solve the problems making it hard for Brazilian automakers to compete, analysts say. Manufacturers in Brazil have been hurt by a local currency that is stronger than Mexico's peso and face high local taxes and wages.
Global carmakers have taken advantage of the changing macro-economic climate to increase output in Mexico. Asian automakers in particular have recently ramped up exports from Mexico to Brazil, using the relative weakness of the Mexican peso and the strength of the Brazilian real to supercharge profits.
Brazil's move to limit commerce could endanger recently announced plans by Honda (7267.T) and Mazda (7261.T) to build factories in Guanajuato state. It could also affect Nissan's (7201.T) plans to build a plant in Aguascalientes state.
Auto industry experts said companies have made Mexican investments based partly on expectations that Mexico would have unfettered access to the Brazilian market.
"Firms like Mazda came to Mexico thinking precisely about the Brazilian market," said Armando Soto, an auto industry consultant at Kaso y Asociados in Mexico City.
(Additional reporting by Michael O'Boyle and Jeferson Ribeiro; Editing by Leslie Adler and Jan Paschal and Paul Tait)