Customs union or free-trade zone? ‘Big changes; could be on way for the Mercosur after government decides to walk away from future trade talks.
Argentina’s controversial decision to pull out of new trade negotiations involving the Mercosur bloc is a move that could pave the way for the largest transformation of the regional trade grouping since its foundation 25 years ago.
Calls for the bloc’s shake-up have escalated in recent years and now, given recent political shifts in the region and this week’s move by the Alberto Fernández administration, experts feel the time for change may well have arrived.
The Mercosur bloc – also made up of Uruguay, Paraguay, Brazil and Venezuela, with the latter currently suspended – has been criticised for being one of the least-effective entities in the world, both in terms of trade between its members and with external partners.
“Argentina’s decision could accelerate the crisis of the Mercosur bloc and provoke big changes, such as agreeing to individual trade agreements and lowering the tariffs charged for trading in the bloc,” Ignacio Bartesaghi, trade expert at Uruguay’s Universidad Católica, told the Times.
Individual trade deals by Mercosur members are currently not permitted under the bloc’s rules, specifically by what’s known as “Decision 32,” agreed 20 years ago. Changing it would mean overhauling and transforming the bloc from a customs union to a free-trade zone.
Uruguay and Brazil have long desired that outcome but such a move has been firmly rejected by Argentina, due to the impact it would have on the economy. Now, with the Fernández administration distancing itself from its trade partners and training its gaze on local issues, this could become a more realistic possibility
It might not be the only upcoming disruption either. Demands to reduce the common external tariff (TEC) of the bloc are also on the rise, as a way to increase trade with the rest of the world. Tariffs are now at 14 percent and they have never been changed – last year, former president Mauricio Macri proposed, with Brazil’s support, to lower them to five percent.
“Brazil has changed its economic structure over the years and needs lower tariffs to increase trade, so it’s putting a lot of pressure on,” said Julieta Zelicovich, an expert and researcher in international relations. “But Argentina’s economy is different and needs higher tariffs.”
Last year, the Mercosur’s members exported goods worth US$227.2 billion to countries from outside the bloc, a 17 percent drop from 2018’s data. China, the United States and the Netherlands were the main destinations. Meanwhile, imports to the bloc totalled US$175.1 billion, a 20 percent decline on the previous year.
Argentina’s decision means it will no longer be involved in the ongoing talks with South Korea, Singapore, Lebanon and India. Of all of them, the most sensitive exchange for the Fernández administration is South Korea, one of Asia’s economic powerhouses with a growing industrial sector.
In a joint statement with Brazil’s Industrial Confederation (CNI), the Argentine Industrial Union (UIA) said it was concerned by the potential impact an agreement with the Asian country could have on the local economy. South Korea has “a larger capacity to compete, with a dominant position in many sectors” and could affect Mercosur’s industry, the groupings said.
Brazil, Uruguay and Paraguay have expressed interest in speeding up all ongoing negotiations, a gesture that’s struck a nerve inside the Fernández administration. While it won’t participate in future trade talks, Argentina will remain involved in finishing up the already signed deals with the European Union (EU) and the European Free Trade Association (EFTA).
Nevertheless, even this deal won’t be easy to seal. Fernández has questioned in the past the deal with the EU, claiming on the campaign trail last year that it “punishes” Argentina and that it should be reviewed. The agreement still has to be approved by the Congress of each Mercosur member country, let alone the various European parliaments.
“We should take this time to reflect on the Mercosur bloc. If the other countries want to throw the bloc overboard, then let’s just say it no longer exists. If each of us negotiates whatever each wants, then what’s the purpose of the bloc?” Fernández said in an interview with El Destape Radio recently.
Politics and partners
Political tensions are also running high among the Mercosur’s members. The presidential election victories by Jair Bolsonaro in Brazil last year and Luis Lacalle Pou in Uruguay this year have changed the political tide in Latin America. The two conservative leaders have formed a joint front with Paraguay’s president Mario Abdo to push for reforms in Mercosur.
A stand-out feature of Uruguay’s foreign policy over the past few years has been its desire for a trade deal between Mercosur and China, an idea dismissed out of hand by the bloc’s other members. But with a more flexible bloc, Uruguay could seek that agreement alone.
As with Lacalle Pou, Bolsonaro has repeatedly expressed his desire for bilateral deals outside of the Mercosur’s remit. During a BRICS summit last year, Brazil’s Economy Minister Paulo Guedes said negotiations with China for a free-trade deal were already underway.
In 2016, Beijing published a framework document detailing its policy towards Latin America and the Caribbean. In it, the Chinese government expressed its desire to “explore bilateral commercial potential,” and highlighted the potential signing of free-trade agreements (FTAs) with countries in the region.
At the same time, deals with the United States could also be on the table too. US President Donald Trump, issuing his backing for Bolsonaro, said last year that his country “will pursue a free-trade agreement with Brazil,” describing the country as a “big trading partner” that currently hits the US “with a lot of tariffs.” Both countries oversee the exchange of more than US$100 billion in goods and services every year, indicating how large a scope an agreement could cover.
“If the bloc allows bilateral deals, Uruguay and Brazil will seek free-trade agreements with China and the US. But both negotiations will likely be difficult,” Zelicovich said. “Bolsonaro and Trump have shown to have close ties so that could facilitate an agreement.”