S American auto trade hangs on Mercosur talks

The future of auto trade in South America's Mercosur trade bloc hung by a thread yesterday as top members Brazil and Argentina struggled to reach a new accord on the key business before a Jan. 1 deadline, reports Reuters.

Vehicle and auto-part sales represent 20 per cent, of the $22 billion in internal trade within Mercosur, the world's third largest trade bloc - of which Uruguay and Paraguay are also partners.

The struggle to reach a new accord comes as Argentina tries desperately to hold onto vehicle plants which have started a slow exodus to Brazil in search of cheaper labour and a domestic market five times the size of Argentina's.

An accord on how Mercosur members handle vehicle trade expires Saturday, but Brazil and Argentina have yet to agree on whether they will extend it or reach a new deal.

Argentina told Brazil on Wednesday that if the two nations do not reach a pact it will go ahead with its own unilateral measures to protect its business.

"It may happen (a unilateral decree) if there is no answer from Brazil," Argentine President Fernando de la Rua said Thursday. "We would prefer to reach a deal, but if there isn't one we'll have to adopt a transition accord."

The feud over auto trade rules follows a series of Mercosur trade brawls that began in January when a devaluation of Brazil's currency, the real, threw regional trade off kilter. The government of former Argentine President Carlos Menem responded with protectionist measures that outraged Brazil.

In terms of auto trade, Argentina wants to stick with the existing rules while Brazil wants to cut down on limits.

Argentina has proposed extending the current vehicle pact for 60 days. That would maintain the import tax at 35 per cent for cars made outside Mercosur for sale in the trade bloc.

Argentina, with South America's second largest economy, also wants to stick with a clause saying Brazil must buy an Argentine car for every car it sells there, and visa versa. That clause suits Argentina because Brazilian cars are cheaper and the rule helps prevent Argentina from being flooded by Brazilian vehicles.

But Brazil wants to slowly do away with the one-for-one clause.

If Brazil does not agree to an extension under the current terms, Argentina has said it will introduce the measures within its own territory. Brazil has threatened to charge the 35 per cent import tax on Argentine cars if its smaller neighbour makes the unilateral move.

The big losers if the accord disintegrates would be auto companies in Argentina which send most of their cars to Brazil.

A source at Argentina's Foreign Ministry said Argentine and Brazilian negotiators would continue conversations throughout Thursday but it was impossible to say if they would reach an accord. An deal would have to come Thursday as Friday is a public holiday in Argentina.

The transfer of vehicle manufacturing plants from Argentina to Brazil has already caused the loss of 7,000 Argentine vehicle industry jobs, reducing the number of posts to 28,000, according to industry representatives.