The rapid depreciation of Brazil's currency in recent months is hardly welcome news for Argentine exporters struggling with soaring costs at home, but the worsening outlook for the Brazilian economy is of even greater concern.

Brazil is Argentina's top trade partner, with bilateral commerce rising to almost $40 billion in 2011. Argentine factories have benefited handsomely, with goods like chemicals and automobiles accounting for 67%, or $11.87 billion, of Argentina's exports to its neighbor last year.

But 2012 is shaping up to be a more challenging year for Argentine exporters amid a sluggish Brazilian economy and periodic trade spats. Last week, Brazil's Finance Ministry cut its 2012 gross domestic product growth forecast to 4% from 4.5%. Participants in a weekly survey of analysts and economists by the Central Bank of Brazil put GDP growth at 2.99% this year and 4.50% in 2013. The Brazilian economy grew 2.7% last year.

"Trade between Brazil and Argentina is much more closely linked to economic activity than the exchange rate," said Enrique Mantilla, president of Argentina's exporters chamber. While a weaker real will crimp exporters' margins, Mantilla said its implications for Argentine exports to Brazil won't be clear until later in the year.

"If Brazil wants to substitute imports from Argentina, we are going to see that in four months, not today," he said.

Fabio Rozenblum, president of Argentina's auto parts association, voiced similar concerns earlier this month.

"For me, the slowdown in [Brazil's economic] activity is more worrisome than the exchange rate," he told Dow Jones Newswires on the sidelines of a conference.

Fortunately for Argentina's exporters, Brazil's economy is still expanding and authorities have taken steps to boost growth. The Central Bank of Brazil has lowered its benchmark interest rate, and in recent months President Dilma Rousseff's administration has announced a raft of stimulus measures, including payroll and sales tax cuts, as well as incentives to increase auto sales.

That's good news for Argentina's automobile industry, which shipped about 50% of its total production and a considerable volume of parts to Brazil last year. But vehicle exports to Brazil in the first four months of the year fell 25% from the same period in 2011.

Mantilla said the negative implications for Argentina of a weaker real might be neutralized if Brazil's stimulus measures are successful.

Argentina's manufacturing sector has enjoyed a renaissance in the last decade thanks to Brazil's emergence as an economic power and rapid growth at home that saw the economy almost double between 2003 and 2010.Factories also got a boost when Argentina ended a 10-year currency system that pegged the peso at one to the U.S. dollar. The peso's swift depreciation helped to restore competitiveness lost in the late 1990s when Brazil devalued its currency.

But double-digit inflation in the last four years has largely erased the benefits that Argentine industry enjoyed from a cheap currency.
The peso has actually strengthened against the dollar when taking into account annual inflation, which most private sector economists put between 20% and 25%. Argentina's heavily unionized labor force has won even higher wage increases.

The Central Bank of Argentina has allowed the peso to weaken about 3.8% in nominal terms so far this year, compared to 7.6% for all of 2011.
Argentine policy makers are loathe to let the peso slide, fearing such a move would aggravate inflation and capital flight that prompted the government to implement foreign exchange controls last October to protect its international reserves.

Rising salaries in Brazil and the steady appreciation of the real against the dollar until mid-2011 helped Argentine manufacturers offset high inflation at home. The real has lost about 7.8% against the dollar so far this year.

Trade disputes between the two countries add even more uncertainty to the complex relationship. Both countries have clamped down on imports this year, though for very different reasons. While Brazil is keen to protect its manufacturers from foreign competition, 

Argentine President Cristina Kirchner is desperately trying to slash the country's import bill in order to have enough hard currency on hand to pay creditors.

The measures have angered Brazil, whose trade surplus with Argentina shrank 39% on the year to $673 million in the January-April period. Brazil retaliated this month by slapping nonautomatic import licenses on Argentine farm goods like fruit and wheat flour, which can lead to long delays.

A spokesman for Brazil's Trade Ministry said the licenses won't be lifted until it confirms that Argentina has resumed imports of Brazilian pork.
Brazilian and Argentine officials are expected to meet in Buenos Aires in early June to negotiate an end to the dispute, he said.

Mauricio Claveri, an economist and trade analyst at research firm Abeceb, said trade tensions will likely continue until Argentina eases import restrictions.

"If [those barriers] become more flexible, that could pave the way for a better relationship with Brazil. Otherwise, conflict will remain high," he said.