Bloomberg | 9 March 2020
South American bloc’s new trade appetite has suitors calling
By Ken Parks and Juan Pablo Spinetto
Potential trade partners are pursuing South America’s commercial bloc after a sweeping deal with the European Union showed most of its members are open to business, according to Uruguay’s Foreign Minister Ernesto Talvi.
At least four countries, including some “very important” economies, recently signaled to Uruguay that they want to explore trade talks with Mercosur, Talvi said in an interview on March 5 in Montevideo. He declined to name the countries because the meetings were private.
Mercosur is a customs union founded by Argentina, Brazil, Paraguay and Uruguay. By reaching an agreement with the EU last June, the bloc signaled it is serious about playing a greater role in the global economy. Diversifying trade partners is a growing necessity as Chinese demand is hit by the coronavirus epidemic.
“Mercosur’s brand has revalued enormously in the world because we started to show that we wanted to integrate and open up by signing cutting-edge free trade agreements,” Talvi said. The minister took office March 1 when President Luis Lacalle Pou started his five-year term.
Founded in 1991, Mercosur has suffered from frequent internal trade disputes, economic crises, and an aversion by Brazil and Argentina to expose their fragile manufacturing sectors to foreign competition. During the so-called “pink tide” of left-wing governments that ruled South America during the global commodities boom of the 2000s, things were different: the bloc was content to reap the fruits of their exports to China rather than actively court trade partners.
But Mercosur diplomats now have their hands full negotiating with South Korea, Canada and Singapore, while Indonesia and Vietnam are possible candidates. Plus, a deal with the European Free Trade Association — the bloc representing Switzerland, Norway, Iceland and Liechtenstein — is in its final stages.
Need for “Flexibility”
Talvi attributed Mercosur’s recent eagerness to seek trade agreements to a growing realization among the Brazilian business community that greater access to foreign markets was key to their survival. “It’s my perception that three countries — Brazil, Paraguay and Uruguay — have decided on dynamic and swift global insertion.”
“Argentina for now is very much conditioned by short-term problems,” he added. Argentina’s economy, the second-largest in South America, is widely expected to shrink for a third straight year amid double-digit inflation, capital controls and the potentially messy renegotiation of the government’s debt. Argentine industrialists and politicians are also loathe to open one of the world’s most protected economy at a time of high unemployment.
Talvi held up the EU deal as an example of how the bloc can tailor trade agreements to the needs of its member nations. Once ratified by the EU, the treaty will take effect on a bilateral basis between the EU and each Mercosur nation that has approved it. “It’s a very important element of flexibility,” Talvi said. “We don’t move at the speed of the slowest country. Those of us that are in a hurry can move more quickly.”
Uruguay will seek to modernize Mercosur by promoting measures that facilitate trade and supply chains within the bloc when it holds the organization’s rotating presidency during the second half of the year, Talvi said.
Uruguay depends on export markets to buy the vast surpluses of soy, beef and dairy products that its internal market of just 3.5 million people can’t absorb. However, exports fell 13% year-on-year to $1.17 billion in the first two months of 2020 due to a sputtering economic recovery in Brazil and the coronavirus epidemic in China.
That’s bad news for the Lacalle Pou administration, which faces the challenge of reviving a sluggish economy that has destroyed more than 50,000 jobs since 2014. Analysts expect the economy to grow a meager 1.5% this year and 2% in 2021, according to data compiled by Bloomberg.
Without more trade deals, Uruguay risks losing not only access to key export markets and jobs, but also social cohesion as the rural unemployed flock to cities, Talvi said. Trade promotion “is an absolutely fundamental strategy not just in economic terms, but for the reconstruction of our social fabric.”
Before taking office, Lacalle Pou said that his government would leave the Venezuela crisis resolution group known as the Montevideo Mechanism, whose other members are Mexico and Caribbean nations. When asked about the decision, Talvi explained: “We believe there are too many mechanisms, groups with the same objective and the same ineffectiveness. Regime change isn’t happening. What’s more, there are no negotiations” underway to seek a democratic change of government in Venezuela.
Although Talvi said that the Organization of American States is the best forum to address regional crisis, he thinks a new body representing the Americas and Europe might also be needed as a mediator in Venezuela.