Potential trade deal between China and Uruguay risks splitting MERCOSUR – The Diplomat
After democratization in 1988, the newly elected presidents in Brazil strictly follow the tradition: the first trip abroad is always to Argentina, then to Uruguay. The visit is usually accompanied by great fanfare, congratulations and the never-realized plans to transform MERCOSUR – a trading bloc that also includes Paraguay and Venezuela (suspended since 2016) – into the desired common market envisaged by the Treaty of Asuncion signed in 1991.
Luis Inacio “Lula” da Silva, who recently began his third term as President of Brazil, enjoyed a friendly atmosphere in Buenos Aires at the end of January, but reality caught up with him in Montevideo. On the agenda of his centre-right colleague, Luis Lacalle Pou, was the difficult task of preventing Uruguay from moving forward with a trade deal with China.
With a disproportionate amount of industry, human capital, and available land compared to other South American countries, Uruguay has always demanded more autonomy from MERCOSUR. The main opposition is the so-called Common External Tariff (TEC) imposed by all signatories on imports from outside the bloc. The unilateral reduction of this tariff is contrary to Article I of the Treaty of Asuncion, which provides for joint negotiations on the establishment of “a common external tariff and the adoption of a common trade policy towards third states or groups of states.”
Since the 1990s, Montevideo has tried several times to circumvent this limitation by entering into a trade agreement with the United States, but has been discouraged from doing so. However, Pou’s election in 2020 sparked calls for more economic independence. Last year, the Uruguayans filed Uruguay’s bid to join the Trans-Pacific Partnership, ignoring neighbors’ warnings of potential legal and trade moves if they negotiated trade outside the bloc. Now China is the next big thing.
Plans for a free trade agreement with Beijing have been on the Pou table since at least 2021. After talks with Chinese President Xi Jinping, Pou instructed officials from the Ministry of Commerce and Foreign Affairs to work with their Chinese counterparts on a feasibility study to be completed. by July 2022, which will eventually create room for progress in the negotiations. In an interview with the domestic press, he repeatedly complained about the protectionism of MERCOSUR and emphasized the need to open Uruguay to the world.
Pou makes good sense. MERCOSUR is indeed the fifth largest protectionist region in the world. In the more than 30 years since its inception, it has failed to establish itself as a relevant South American integration platform and today suffers from a poor foreign trade record. It is the integration bloc with the lowest ratio of foreign trade to GDP (14.9 percent compared to the world average of 33 percent).
It is also true that Uruguay, as a small economy, has relied too long on its two larger partners, Brazil and Argentina. Both have experienced periods of significant growth and political stability, but conditions have worsened due to the dismal economic performance of the past decade.
In Argentina, the inflation rate in 2022 was 94.8 percent, the highest in more than 30 years. Local economists estimate that this record could be broken in 2023, when the figure is expected to reach 98 percent.
On the other hand, Brazil is in the midst of a perfect storm of political instability, meager growth and the world’s second-highest real interest rate. Lula must live up to the expectations placed on his tenure, but instead he chooses to lose battles. For example, in recent days, Lula has spoken out against fiscal responsibility, hinting that he wants to overhaul the autonomy of Brazil’s Central Bank, and his promised new government spending control formula has yet to be revealed.
In theory, neither Lula nor Argentine President Alberto Hernandez object to discussing a joint trade deal with Beijing. The condition is to first fulfill a treaty signed with the EU that has not yet been sanctioned by the European members. However, in practice, it is unlikely that MERCOSUR will be able to consolidate any deals with the Chinese, since Paraguay has no relations with China and still recognizes the sovereignty of Taiwan. Moreover, the region is undergoing a significant phase of deindustrialization, and competition from Chinese manufactured goods at lower prices poses a serious threat to the local economy.
Pou and Beijing are left with very few options. If he wants, Montevideo can continue negotiations and risk being expelled from Mercosur, which could lead to disputes with neighbors, but with far more serious diplomatic consequences for the rest of the bloc. As for Beijing, it will have to deal with a backlash in Argentina, South America’s largest economy. join the Belt and Road Initiative, and Brazil, the country with the largest amount of Chinese investment in the world. Is it really productive to antagonize the mainstream South American countries in a world that is becoming increasingly hostile to the Chinese?
There is more at stake in this game than just trade balance results.