MERCOSUR faces crossroads amid Uruguay-China FTA negotiations

Uruguay and China seek to focus on bilateral trade relations outside of MERCOSUR. Montevideo’s push exposes tensions over the trading bloc’s future and could eventually even precipitate its end. Here is why.

A comment by Amadeus Marzai

 

“This government has expressed its intention to move towards the world with all MERCOSUR partners but, at the same time – and this has been explicitly stated – if it is not possible to advance together, Uruguay will still try to do so,” Luis Lacalle Pou, president of the small South American country south of Brazil stated on a press conference in September 2021.

Corresponding to this statement, Uruguay and China are currently undertaking first steps towards a Free Trade Agreement (FTA), conducting a feasibility study expected to be completed this year.

This article will explain how the Uruguayan push to strike a trade deal with China could affect MERCOSUR and regional integration in South America all together.

 

An imperfect trade area

The Southern Common Market (MERCOSUR), consisting of Argentina, Brazil, Paraguay, and Uruguay, can be understood as an imperfect free trade area where intra-regional trade only makes up a relatively small portion. While the first two decades after the bloc’s foundation in 1991 brought a remarkable increase in trade within the member countries, intra-regional trade has consistently declined in the last ten years.

Despite being heavily dependent on foreign trade, MERCOSUR simultaneously imposes comparably high external tariffs, thereby complicating extra-zonal trade. For example, while the average tariff level worldwide is nine percent, MERCOSUR’s Common External Tariff (CET) is one of the highest globally, with 12.5 percent on average, and can be as high as 35 percent. An expression of the protectionist policies long pursued by the MERCOSUR members, particularly Argentina and Brazil. Faced with external shocks such as financial crises, the bloc’s member countries tended to rely on protectionism in the past.

Nevertheless, there are hundreds of exemptions from the CET, and external tariffs are often applied asymmetrically, thus representing a flexibilisation of the bloc’s basic rules. The regulations on trade agreements with third parties are more stringent, specifying that any such deal must be approved unanimously by MERCOSUR member states.

 

Uruguay and Brazil versus Argentina

That is where the FTA with China sought by Uruguay comes into play. The administration of President Lacalle Pou advocates for a greater flexibilisation of MERCOSUR, especially allowing its members to negotiate trade deals with third parties independently.

Uruguay’s president recently showed himself unsatisfied with MERCOSUR’s previous modernisation efforts and even called on his colleagues to prevent the membership in the bloc from becoming a burden, leading to a public spat with Argentina’s president Alberto Fernández in March 2021.

The Uruguayan initiative is closely coordinated with Brazil and meets open ears in Paraguay, with Argentina heavily resisting the other three member’s proposals for commercial liberalisation (including lowering the CET).

After a seldom and short-termed overlap of market-liberal presidents in MERCOSUR’s traditionally protectionist powerhouses Argentina and Brazil (Mauricio Macri and Jair Bolsonaro, respectively), relations between the two South American giants have deteriorated since, in late 2019, the leftist administration of Fernández took office in Buenos Aires.

Things further complicated when the economically liberal government of Lacalle Pou came to power in Uruguay in spring of 2020, replacing the leftist coalition that had ruled the country 15 years prior.

 

Uruguay’s bet on China

But what exactly do the initiators hope to achieve with their proposed reforms? The Lacalle Pou administration in Montevideo and the one of Jair Bolsonaro in Brasília are attached to the neoliberal idea of lean government and self-regulating markets. Both countries enjoy comparable advantages in commodities, which they wish to enhance through better access to global markets. 

Uruguay is particularly strong in agriculture, with beef being the top export good. However, the global market for such goods is curtailed by protectionist policies. To the small country’s disadvantage, Australia, and New Zealand (two major competitors in the beef market) already enjoy preferential access to the vast Chinese market. Naturally, Uruguay’s interests lie within the idea to strike for a similar deal.

That is why Montevideo’s rapprochement with China is not necessarily a new development, as the previous leftist governments had already tried to strengthen relations with Beijing. This bipartisan interest in Sino-Uruguayan cooperation found expression in high-profile state visits in 2011 and 2016, the first major business meeting between China, Latin America, and the Caribbean being held in Punta del Este in 2017, or the Lacalle Pou administration relying on the Chinese Sinovac for its anti-Covid-19 vaccination campaign.

As a result of this process, China replaced the United States as the top export destination for Uruguayan goods and became the primary purchaser of its beef, buying more than 23 percent of the country’s total exports and 61 percent of its beef.

 

Reprimarisation and national sovereignty

But back to the MERCOSUR for a moment. Besides low intra-regional trade and narrow accessibility, the trade bloc in recent years also experienced a reprimarisation of its exports, caused by strong global demand for raw materials, which is driven by the increased economic gravity of Asia, China in particular.

The People’s Republic currently is by far the biggest trade partner of MERCOSUR, accounting for 29 percent of its exports and 28 percent of its imports. In 2020,  almost 77 percent of MERCOSUR’s total exports were natural resources – such as iron ore, copper, petroleum, soybeans, or meat – marking the highest percentage of commodity exports since the organization’s existence.

Critics highlight that this process could lead to the deindustrialisation of MERCOSUR’s economy as exports of raw materials creates little to no value for the exporting country. Furthermore, besides causing significant damage to climate and environment, reprimarisation exchanges numerous formal and skilled workplaces in the industry against fewer and lower-paid jobs.

Notably, industrial associations in Argentina and Brazil have expressed their concern about the flexibilisation proposal, emphasising the advantages of conducting trade negotiations as a bloc, particularly in times of economic uncertainty.

It is understandable that regional giant Brazil expects to gain more leeway in bilateral trade negotiations by distancing itself from the bloc. However, it is curious that a country the size of Uruguay also believes in the advantage of negotiating trade deals with economic heavyweights like China bilaterally instead of doing it in a bloc with Brazil and Argentina. Some critical voices argued that Uruguay’s call for more national sovereignty to trade with China, or the UK, serves domestic corporate interests only.

 

The end of political integration in the Southern Cone?

In a broader political sense, it is important to remember that MERCOSUR is probably Latin America’s most ambitious project of regional integration. Beyond being a trade bloc and the declared main goal of establishing a customs union (which has not yet been achieved), MERCOSUR institutionalised the relations of its members and facilitated joint policymaking in various fields such as civil and labor rights, education, health, infrastructure, migration, or tourism.

The two reform proposals currently under discussion – bilateral agreements with third countries and a drastic reduction of the CET – call into question two crucial pillars of the bloc and could herald the beginning of the end for MERCOSUR.

Even beyond frictions about trade, signs of disintegration could already be witnessed: under the pro tempore presidency of Brazil in the second half of 2021, the joint institute for human rights was dissolved, and the structure of the MERCOSUR social institute was downsised.

Such progress should be followed carefully as deeper regional cooperation in Latin America seems to be the only sustainable alternative to a subordinate and precarious position in the world market. More instead of less regional integration also seems advisable regarding global challenges such as the loss of biodiversity or climate change.

 

A new constellation looming

Although Lacalle Pou maintains “the vocation of belonging to MERCOSUR,” a successful ratification of a bilateral FTA with China could lead to Uruguay’s exclusion from the bloc, a broader restructuring, or the gradual dissolution of MERCOSUR and all its achievements in economic and wider regional integration.

Another chapter in this ongoing dispute could be opened by the possible and not unlikely election of Luiz Inácio Lula da Silva as president of Brazil in October 2022. The former president and leftist icon of Latin American politics supported Argentina’s president Fernández by stating that “this is no moment for MERCOSUR to consider unilateral tariff reductions without any reciprocal benefit for the bloc’s exports.”

On the issue of bilateral agreements with third countries raised by Uruguay, Lula would probably also take a contrary stance to Bolsonaro. Two rather protectionist governments in Buenos Aires and Brasília would decisively shift the MERCOSUR power balance, possibly causing the isolation of Uruguay, which in turn could see itself confirmed in embarking on a path away from the bloc.

MERCOSUR’s future and effectiveness consequently depend on its leaders’ ideological orientation and the value they allocate to the bloc in their development strategies. Either way, the most ambitious integration project in Latin America faces turbulent days ahead.

 

The Polis Blog serves as a platform at the disposal of ‘Polis180’s & ‘OpenTTN‘s members. Published comments express solely the ‘authors’ opinions and shall not be confounded with the opinions of the editors or of Polis180.

Image via Amadeus Marzai

 

Amadeus is a member of the Polis180 programme connectingAsia and currently studies International Relations in the master’s programme at Leiden University. He specialised in conflicts within and the history of the Third World. As a passionate long-time fan of Uruguay’s men’s national football team, he has a special interest in the Latin American country.

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