Argentina/Brazil economy: Quick View – Argentina and Brazil sign new automotive accord

Event

On June 11th, amid a deep crisis in the automotive industries of both countries, Argentina and Brazil agreed to renew for one year a bilateral agreement governing automotive trade, and to negotiate a new five-year deal that should enter into force in July 2015.

Analysis

The multi-year agreement governing automotive trade between Argentina and Brazil expired in July 2013 without any new agreement being put in place. Under the old deal, Brazil was allowed US$1.95 in automotive exports to Argentina for every US$1 in automotive imports from Argentina, an arrangement intended to limit Argentina’s automotive trade deficit with Brazil.

Once the old deal expired, Argentina was exposed to free trade in cars from Brazil, raising fears that the more competitive Brazilian products would flood into its domestic market. This has not transpired, as recession and currency devaluation have instead caused consumer demand in Argentina to collapse. A combination of weak consumer demand in Brazil and comprehensive import controls in Argentina (which hamper production) has at the same time subdued Argentinian exports to Brazil. In the first five months of 2014, Brazilian automotive exports (most of which are destined for Argentina) fell by 20% year on year; in the same period, Argentina’s automotive exports (the vast majority of which go to Brazil) fell by 24%.

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