BRASILIA, May 6 (Reuters) - Brazil and Argentina plan to extend a key bilateral auto pact for another year, but the neighbors still have to agree the extent of duty-free car trade between them, Trade Minister Mauro Borges told Reuters on Tuesday.
Cars make up half the trade between the two countries and renewal of the auto agreement is crucial to restore trade volumes and help close widening gaps in their external accounts.
Last year both countries failed to reach an agreement on the amount of cars and auto parts that can enter each country free of tariffs, based on a formula known as "flex".
Authorities and business groups are meeting in Brasilia this week to set a new flex limit that would allow the car pact to be extended for another year.
"We have an initial understanding to extend the pact for 12 months, but we need to change the flex to give more comfort to the Argentinians," Borges said. "However, this cannot be a flex that lowers the volume of trade."
Previous flex rules that expired last year allowed Brazil to export $195 worth of cars and auto parts free of tariffs for every $100 that Argentina sent in the other direction.
Argentina has proposed to lower the flex to $130 worth of exports for every $100 of imports, which would reduce its deficit with Brazil, the world's No. 4 auto market.
Brazil is holding out for a higher flex limit, but sees Argentina's proposal as legitimate, Borges said.
A scarcity of dollars in Argentina has curbed Brazilian exports of cars, home appliances and other manufactured goods, reducing Brazil's trade surplus last year to its lowest in over a decade. The auto sector makes up about half of the $36 billion in annual trade between Argentina and Brazil.
Trade relations between both countries have been tense over the last two years as Argentina slapped restrictions on imports to shield its shrinking trade surplus and made it hard for Argentine businesses to access dollars to pay for imports.
In the first three months of the year, Brazilian exports to Argentina have dropped 13 percent compared to the same period last year, especially sales of cars and auto parts.
The drop in exports to Argentina and lower sales in Brazil have prompted the local car industry to fire hundreds of workers across assembly lines.
Borges said that the extension of the deal and a series of measures to facilitate credit flows between the two countries should help Brazilian producers and provide liquidity to Argentine importers.
He added that the Brazilian government is also seeking ways to stimulate local banks to provide more car credit to Brazilian consumers as loan default rates drop.
Brazil has long been a source of cash for automakers such as Italy's Fiat SpA, Germany's Volkswagen AG and U.S.-based General Motors Co and Ford Motor Co. (Writing by Alonso Soto; Editing by Eric Walsh)