June 12 (Bloomberg) -- Argentina and Brazil agreed to modify a bilateral vehicle trade accord in a bid to kick-start plunging trade between the neighboring countries.
The two countries agreed to extend an agreement on the import and export of vehicles and auto parts for one year while reducing a so-called flex clause to 1.5 from 1.95. Under the current agreement, for every $1.95 Brazil exports to Argentina, it must import $1 from Argentina in order for both countries to benefit from tax exemptions.
Exports of vehicles assembled in Argentina for companies including Volkswagen AG, Renault SA and Ford Motor Co plunged 39 percent in May as Brazil’s economy grew 0.2 percent in the first quarter, crimping demand. While the reduced flex clause may appear to benefit Argentina, Brazil will also benefit since its neighbor had been blocking imports amid reserves that have fallen near an eight-year low this year, said Lorenzo Sigaut Gravina, chief economist at Buenos Aires-based consultancy Ecolatina.
“Industrial trade between Argentina and Brazil was plummeting,” Sigaut Gravina said in a telephone interview. “Beyond the flex, what this agreement means is a return to trade that’s less controlled.”
Argentina posted the smallest first-quarter trade surplus since 2000, the year before it defaulted on a record $95 billion, as exports fell 16 percent in March. International reserves, which President Cristina Fernandez de Kirchner has used to pay foreign debt obligations since 2010, have fallen 25 percent in the past year to $28.8 billion.
Brazil and Argentina said they’ll begin working on negotiations to sign a five-year agreement starting July 2015. Under the agreement, signed following a meeting between Argentine Economy Minister Axel Kicillof and Brazilian Industry Minister Mauro Borges, Argentine sales to Brazil mustn’t fall below 11 percent of total vehicle imports while Brazil will have a 44.3 percent share of Argentine vehicle imports.
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