(Adds Brazilian trade minister comments and treaty details)
By Rodrigo Viga Gaier and Alonso Soto
RIO DE JANEIRO/BRASILIA, March 9 (Reuters) - Brazil and Mexico agreed on Monday to keep a cap on their bilateral auto trade nearly unchanged, in a victory for the South American nation to shield its struggling car industry and limit its trade deficit.
Both countries set the quota of exports of light vehicles between them at $1.56 billion for the first year, increasing 3 percent annually until the treaty expires in 2019, Brazil's foreign ministry said. Exports above that limit will carry a tariff of 35 percent.
The last treaty, signed by the countries in 2012, had an annual limit of about $1.5 billion and had called for the free trade of vehicles after its expiration on March 19.
As Brazil's auto industry struggled with low productivity, plunging exports and layoffs that hit nearly 9 percent of its workforce, President Dilma Rousseff pushed to extend trade quotas in order to ease the pain. Mexico wanted free trade to bolster its own flourishing car sector.
Brazilian Trade Minister Armando Monteiro said the new agreement is fair for both countries and helps compensate for losses that Brazilian car factories have had in recent years.
"The slight reduction in the quotas takes into consideration the adjustment we are seeing in our local (auto) market," Monteiro told reporters in Rio de Janeiro.
As part of the deal Brazil will also have a bigger say on what kind of cars it wants to import and vice-versa for Mexico, Monteiro added.
Mexico's Economy Minister Ildefonso Guajardo said his government understood the challenges facing Brazil's economy and that the deal makes business more predictable in both countries.
Last year, Mexico passed Brazil to become the biggest auto producer in Latin America, but Brazil remains one of the world's five biggest auto markets, with decades-old factories run by Fiat Chrysler, Volkswagen, General Motors and Ford.
Car makers including BMW, Kia, Audi , Honda, Nissan and Mazda have all begun production in Mexico or announced plans to start manufacturing there. (Editing by Chizu Nomiyama and W Simon)