Good times for the Brazilian auto industry, which will invest US$11.2bn from 2010 to 2012 (38% more than the $8bn in 2008-2010), are likely to be hit by unexpected price hikes.

The federal government has decided to suspend, within six months, the 40% duty cut on auto parts set 10 years ago to protect local car makers. It is unknown if the burden will also hit parts not made in Brazil for technology and/or production scale reasons.

Auto parts will cost more but the government cited the mounting external deficit in the supply sector, the generator of highest number of jobs in the production chain. In 2009 alone, Brazil imported $2.5bn more than it exported in parts. This year the imbalance has threatened to double.

Other measures have been announced to help exports which historically have been hindered by direct and indirect taxation. One initiative was the establishment of EXIM Brazil, a dedicated agency for foreign trade spun off from state owned investment bank BNDES.

The announcements caught automakers association Anfavea by surprise despite their lengthy discussions with Sindipeças, the domestic and foreign auto parts manufacturers’ association. These last had been complaining about the uncontrolled rise in vehicle component imports.

Anfavea president Cledorvino Belini said “models with higher foreign parts content will suffer price hikes and lose competitiveness”.

The recently elected executive fears that more fully assembled cars will be imported, lowering the trade deficit for the auto parts segment, but possibly disturbing the trade balance between imported and exported vehicles.

From financial point of view, the end result could be even worse for the country.

In 2009 Brazil imported 15,000 more vehicles than it exported (490,000 vs 475,000) for the first time in 12 years. In value there was a surplus because higher truck, bus and tractor prices made up the difference.

Belini, also president of Fiat Group here, is holding to the earlier forecast of 3.4m new vehicle registrations in 2010 (including trucks and buses) due to economic recovery and credit offers despite higher interest rates.

He expects that steel, hiked by rising iron ore prices, will also be blamed for vehicle cost hikes passed on into retail prices.