South American tensions threaten Mercosur trade deal

South American tensions threaten Mercosur trade deal

Spats between Brazil and Argentina could roil critical summit

Members of the South American bloc Mercosur are battling to keep the regional grouping intact, just months after sealing what should have been its landmark achievement — the conclusion of decades-long negotiations to secure a far-reaching trade deal with the EU.

But now rows between the presidents of Brazil and Argentina, Mercosur’s dominant economies, threaten to break up one of the world’s largest economic blocs, with a gross domestic product of $2.7tn.

Brazil’s far-right president Jair Bolsonaro has claimed that if Argentina “causes trouble, Brazil will leave Mercosur”.

Argentina’s left-leaning leader Alberto Fernández, who takes over as president next week, threatened during his election campaign to revise the accord, the first comprehensive trade deal by Mercosur since the bloc was formed in the early 1990s. “The tensions are clear,” said Luis Lacalle Pou, Uruguay’s incoming president, ahead of the summit in southern Brazil on Thursday.

Analysts fear the two presidents could use Mercosur as a punching bag to ramp up support at home if people take to the streets — as has happened in Chile and Colombia — to protest against their policies.

“There are three scenarios: one, Mercosur is frozen; two, Bolsonaro goes wild and Brazil leaves Mercosur; or three, Brazil takes advantage of the fact that Argentina will not want to move forward in trade liberalisation vis-à-vis the rest of the world to negotiate a waiver in trade policy [with other countries],” said Pedro da Motta Veiga, director of the Brazilian Centre for Integration and Development Studies in Rio de Janeiro.

The agreement between the EU and Mercosur — formed with an original vision of boosting trade and investments within its member nations — encompasses everything from Argentine steaks to German car parts. Sealed this year after two decades of negotiations, the deal will slash tariffs on each side’s exports. Big prizes for the EU included reduced duties on industrial goods and wine, while South American producers will receive preferential access to European beef, poultry and sugar markets.

A break-up of Mercosur would not just jeopardise this deal but could add to global trade tensions as the UK prepares to leave the EU, and the US and China continue a trade war that this week ensnared Argentina and Brazil after President Donald Trump threatened to slap tariffs on imports of steel and aluminium from both countries.

“Paradoxically, this attack from the American administration may help bridging the gap between the Brazilian president and the incoming administration of President Fernandez in Argentina,” said Esteban Rópolo, a trade expert with global law firm Baker McKenzie in Buenos Aires.

For Monica Herz, a senior fellow at the Brazilian Centre for International Relations in Rio, the discussions within the bloc “will surely be very tough, but Mercosur still has a future, because the economic interests are very significant” for the member nations. Indeed, according to Brazil’s confederation of national industry, or CNI, Brazil last year exported $20.9bn, or almost 9 per cent of its total exports, to fellow Mercosur members.

The CNI added that Argentina, Uruguay, and Paraguay combined purchased more than 20 per cent of Brazilian manufactured products, underscoring that Brazil’s “position must remain pragmatic” and focused on deepening such trade links.

Senior officials in Brasília explained it will not be easy for their president to break Brazil away from Mercosur, as he will face stiff resistance from local industrialists at a time when his government is trying to push through ambitious economic reforms.

A senior Argentine diplomat warned that if Mercosur collapses, “it will be hard for everyone, but especially for the smaller countries that rely on the economics” of the regional bloc, as their economies are more open than those of their bigger neighbours.

In meetings with European diplomats since his election in late October, Mr Fernández has shown a more moderate stance towards the deal with the EU. And after initially calling Mr Fernández a “red bandit” — and declining to attend his presidential inauguration on December 10 — Mr Bolsonaro has vowed to have a “pragmatic” relationship with Argentina, which his Argentine counterpart said he was “delighted” to hear.

“It’s what we have to do, because Mercosur will outlive Bolsonaro and Alberto Fernández,” he said, adding that the grouping is necessary “to build a common market that enables us to confront the challenge of globalisation with another force”. Uruguay’s Mr Lacalle Pou hopes that “pragmatism would prevail over ideology”.

 

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