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An assembly line in Mexico. Brazil and Mexico have ended a tense standoff over autos, with Mexico agreeing to cut its exports to Brazil in order to keep its preferential tariff status.

Dario Lopez Mills/Associated Press/Dario Lopez Mills/Associated Press

Mexico and Brazil have settled a spat over the automotive sector, with Mexico agreeing to cut future car exports in return for keeping alive a decade-old trade treaty with Latin America's largest economy.

The agreement, under which Mexico will slash average annual exports to Brazil to $1.55-billion (U.S.) for three years, ends a tense month-long dispute between Latin America's two largest economies.

In February, Brazil said it was considering ending a 2002 treaty, which gives the two countries preferential access to each other's car markets. Brazil raised the possibility after imports of Mexican cars jumped more than 30 per cent to $1.7-billion, according to Mexican figures.

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The threat was the latest in a series of moves by Brazil to protect domestic industry from a rising tide of imports.

Brazil has in recent weeks reignited its "currency war" – as it calls its efforts to stem the appreciation of its currency, the real, against the dollar – and taken a string of trade-related measures in a bid to revive its flagging industry.

Industrial production slipped a much worse-than-expected 2.1 per cent in January compared with December, with part of the fall driven by a 30.7-per-cent decline in automotive output.

While part of this was due to technical factors in the truck industry, automotive production has been consistently weaker since the middle of last year as producers have struggled with rising imports, particularly from Asia but also from Mexico.

Mexico is keen to retain its front seat position in Brazil, which in 2010 overtook Germany as the world's fourth-largest car market and is set to be bigger than Japan by 2015.

Some commentators criticized Thursday's agreement, suggesting that Mexico had caved in to Brazilian demands. As part of the negotiation, Mexico also agreed that car manufacturers should increase the locally sourced content of vehicles from the current 30 per cent to 40 per cent during the next five years.

They also pointed out that for most of the life of the 2002 vehicle agreement, Brazil has been the net beneficiary, notching up many successive years of trade surpluses with Mexico.

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Francisco de Rosenzweig, Mexico's undersecretary of trade, said that Thursday's outcome was positive and that his country had defended free trade in the region. "We will go back to free trade within three years," he told the FT in an interview. "We managed to maintain a long-term agreement."

He added that car manufacturers in Mexico were kept close to the talks throughout the negotiation. "We went hand-in-hand," he said.

Global car manufacturers have announced billions of dollars in investment in Mexico in recent years. Mr. de Rosenzweig said that in some cases, including Mazda and Honda, those investments had been made with one eye on Mexico's preferential access to Brazil.

Luis de la Calle, a respected Mexican economist and a negotiator of the North American free-trade agreement, said that Thursday's settlement would preserve most of Mexico's preferential treatment with Brazil.

"That preference is valuable," he said. "Mexico is now the only large and efficient car manufacturer to have preferential access to the Brazilian market."

In an effort to stem rising imports, Latin America's largest economy late last year hiked tariffs on vehicle imports from other countries by 30 percentage points to 35 per cent.

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At the same time, Mr. de la Calle criticized recent protectionist moves by Brazil, arguing that raising trade barriers was not the best way of dealing with economic imbalances. "It's the dilemma of Dilma," he said, referring to Brazilian president Dilma Rousseff.

"She has to decide if she is going to advance with reforms to make Brazil more competitive or go the other way and put more controls in place."

Copyright The Financial Times Ltd. All rights reserved.

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