By Brian Winter
BRASILIA, Feb 27 (Reuters) - Brazil's government is insisting on a fixed upper limit on vehicle imports and several other conditions in return for continuing a bilateral auto trade deal with Mexico, senior officials said on Monday, in a case that has raised fears of mounting protectionism in emerging markets.
Brazil said earlier this month it wants to renegotiate or end the tariff-free deal because it has unleashed a tidal wave of imports, damaging its own auto industry. Auto trade between Latin America's two biggest economies reached about $2.4 billion in 2011, with Brazil on the losing end of a $1.7 billion deficit - more than double the previous year's.
At the center of the dispute is Brazil's booming domestic auto market, which has become a major source of profits for foreign auto companies such as Fiat, Volkswagen and General Motors. The auto markets in both Mexico and Brazil are dominated by foreign automakers.
Brazil wants Mexico to agree to a "ceiling" on imports as a way to prevent the deficit from growing even further, the officials told Reuters. That would be a substantial change from the previous terms of the deal, which was open-ended, they said.
A senior delegation of Mexican officials, including Foreign Minister Patricia Espinosa, is due to arrive in Brasilia on Tuesday to try to negotiate a solution. Trade Minister Fernando Pimentel said earlier this month that Brazil would exercise an "exit clause" and likely reinstate normal tariff levels with Mexico, unless a deal can be reached.
The dispute has strained diplomatic ties between the two countries and put negotiations for a broader bilateral trade deal on hold. It has also highlighted Brazil's growing use of tariffs, taxes and other steps to shield its industries from what Finance Minister Guido Mantega has described as a "currency war" - the manipulation of exchange rates by countries such as China and the United States to favor their exports.
"Unfortunately, the reality of the world today is that (open-ended) free-trade deals are very difficult," one of the officials said. "You're almost obliged to have a limit because of all the actions countries are taking."
Mexican imports sold in Brazil are typically at the higher end of the value chain. Ironically, Brazilian President Dilma Rousseff uses several Mexican-made Ford Fusions as part of her own fleet, an official at the presidential palace confirmed.
Brazil will also ask for Mexico to increase the locally or regionally made content of cars covered by the deal, the officials said. One said that many Mexican cars carry a high percentage of parts from the United States.
The problems of Brazil's auto sector can also be attributed to problems at home. Extremely high taxes, a tight labor market and an overvalued currency mean that mid-sized sedans made in Brazil often cost two or three times as much as similar models in the United States.
Mexican officials have pointed out that the deal favored Brazil for many years. Ildefonso Guajardo, chairman of the economics committee of Mexico's lower house of Congress, said Brazil was not playing fair.
"The Brazilians were quite happy with the auto deal while they were running a surplus. The minute that Mexico started to run a surplus, they didn't like it," he told Reuters. "It's like if I said to you, 'Let's make a deal' and while I have an advantage over you, the deal's still valid, but when you have an advantage over me, it isn't."
Guajardo said he expected Mexico would use any legal room for maneuver it had to appeal such a move by Brazil at the World Trade Organization.
The Brazilian officials said, however, that the deal was likely not contestable at the WTO since it was bilateral in nature and Brazil was discussing the possibility of invoking an exit clause written into the agreement. (Additional reporting by Dave Graham in Mexico City and Ana Flor in Brasilia; Editing by Dan Grebler)