Feel That Breeze From Brazil

It's nice to have a prosperous neighbor. Battered by financial shocks from Mexico's peso collapse, Argentina's economy is in a serious slump. But Brazil, Argentina's chief partner in the Mercosur free-trade bloc, is booming--and gobbling up Argentine products from wheat to home appliances. The export surge is cushioning the downturn in Argentina's home market and bringing home billions of dollars in hard currency to shore up the beleaguered Argentine peso. "Brazil has become an important market even for small and medium-size businesses that hadn't previously exported," says Economy & Public Works Minister Domingo Cavallo.

Indeed, the export bonanza, together with the return of deposits that had fled from Argentine banks, may be starting Argentina on the road to economic recovery. Economists who just a few weeks ago were predicting little or no economic growth this year are now projecting a modest 2% to 3% increase in gross domestic product for the full year, close to Cavallo's 3% forecast (box). Rising exports to Brazil will account for 0.5% of the growth, according to Michel Alaby, a So Paulo expert on Mercosur, which also includes Uruguay and Paraguay.

CHANGING TIDE. In effect, Argentina is reaping its reward for the boost it gave to Brazil's economy by sharply increasing imports from that country between 1991 and 1994 (chart). During those years, Brazilian companies used otherwise idle productive capacity to flood Argentina with everything from autos to frozen poultry. The result was Brazilian trade surpluses with Argentina that averaged nearly $800 million a year between 1991 and 1994. This year, the trade balance is flip-flopping, with Argentina piling up a projected $2.3 billion surplus. Total Argentine exports are expected to jump to $21 billion this year, up from $15.7 billion in 1994, with Brazil accounting for nearly half the gain.

What that means is that Mercosur, launched in 1991, is functioning as an economic stabilizer as well as a border opener. Trade flows between Argentina and Brazil are helping to compensate for the ups and downs of the business cycles in both countries. And while the U.S. has delayed action to bring Chile into the North American Free Trade Agreement (NAFTA), the growing economic ties between Brazil and Argentina are strengthening Mercosur as the core of a prospective South American trade bloc. As a step toward eventual hemispheric integration, Cavallo says, South American countries "are first opening among themselves to prepare for a more multilateral opening."

The growing importance of Brazil is reshaping the strategies of some Argentine companies. Benefiting particularly from Brazil's consumer boom are Argentine producers of products such as foods and home appliances. Take Santa Fe-based SanCor, Argentina's biggest dairy-foods company, with 1994 revenues of $844 million. With home market sales flat this year, "we are looking to Brazil for growth," says Foreign Trade Manager Hernan Tevez. SanCor expects to export products worth $55 million this year, up from $36 million in 1994, with 70% of the total going to Brazil.

OVERSEAS STAKE. Germany's Grundig bought a piece of the action this year by taking a 10% stake, with an option to buy 50%, in Argentina's Aurora, which sells products such as washing machines and VCRs to Brazil. "Business has jumped since the start of the Real Plan," says Aurora Export Director Pedro Waisman, referring to the reforms that launched Brazil's recovery last year. Aurora expects sales this year to equal 1994's $300 million. But exports, which totaled only $22 million in 1994, will account for half of this year's sales.

Also benefiting from Argentine-Brazilian trade ties is South Carolina-based textile maker Greenwood Mills Inc. It paid $18 million last December for a 20% stake in the textile division of Argentine manufacturer Alpargatas. So far this year, Alpargatas' exports to Brazil are running 35% ahead of last year's pace. "Mercosur is a very attractive market, both in population and in rising income," says Paul E. Welder, Greenwood's executive vice-president for finance.

The biggest compensatory swing in trade between Argentina and Brazil is in autos. In the first six months, Argentine auto exports to Brazil leaped to 30,000 cars, compared with 35,900 in all of 1994. "We are counting on the Brazilian market to make up for the slowdown in domestic sales," said Mauricio Macri, president of Sevel Argentina, the Argentine assembler of Fiats and Peugeots, at a recent conference on Mercosur. Brazil, worried about a fast-rising trade deficit, announced in May that it would limit auto imports. But it agreed this month to stick with Mercosur guidelines that will allow Argentina to ship 70,000 cars to Brazil this year. That export windfall, worth around $600 million, should give another push to Argentina's recovery. And that should create even more believers in freer trade for South America.

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