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Mercosur faces potholes despite auto deal

BUENOS AIRES: More disputes may be on the way in South America's Mercosur trade bloc despite the resolution of a drawn-out and bitter dispute between Argentina and Brazil over auto trade, analysts said on Friday.

After months of talks, trade negotiators from South America's two largest economies forged a deal on Thursday that gradually will loosen rules on auto trade between the countries before freeing them entirely in 2006.

Commerce in autos between Brazil and Argentina and Mercosur partners Paraguay and Uruguay accounts for 20 percent of regional trade. Negotiators from Brazil and Argentina said on Friday they hope to reach similar sector import caps on steel, textiles, sugar and paper. Chile and Bolivia are associate members of the $1 trillion Mercosur, the world's third-largest trade bloc.

National newspapers heralded the auto pact as a major breakthrough after last year's trade disputes precipitated by Brazil's currency devaluation of more than 30 percent. But analysts warned that the customs union was not out of the woods.

"To the extent that one or more countries may want to make Mercosur a closed commercial zone, that would hurt Argentina," said Felipe de la Balze, a private trade consultant.

"Brazil's trade policy has historically been more closed and introspective than Argentina's. Brazil still believes that combining its economy with that of the rest of Mercosur is sufficient for its development. Argentina sees Mercosur as an instrument of growth by using it as a platform to export to the world," De la Balze said.

Last December, U.S. Trade Secretary Lawrence Summers warned local business leaders of the risks of Mercosur evolving into merely a commercial "enclave."

While Argentina's new government has said it wants to use the sheer size of Mercosur's 210 million people as the spring board for its exports, Brazil's position is not as clear.

Officials from both countries asserted their desire to avoid competing subsidies and other kinds of trade disputes between them after last year's strains.

"Both our countries are exploring a system of import caps to cover our more sensitive sectors," Argentine Deputy Foreign Minister Horacio Chighizola told reporters.

Under the auto deal, Argentina agreed gradually to increase its tariff on car imports to Brazil's current level of 35 percent. A common tariff on truck imports was set at 25 percent and a 14 percent duty was agreed upon for agricultural machinery.

"The best model we have is the accord we signed yesterday (on Thursday) in the auto sector, which also sets import caps because it anticipates special circumstances," Brazil's Mercosur ambassador Jose Botafogo Goncalves said.

"Is managed commerce a step back on the road to free trade? Not if it's a transitional management of trade aimed at improving the production quality in Brazil and Argentina," Botafogo Goncalves added.-Reuters