Trump Tough Talk Pushes Argentina, Brazil to Embrace Trade

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  • Argentine, Brazilian leaders to discuss trade and investment
  • Talks include plans to expand Mercosur’s international reach

Two of South America’s most pro-market presidents are struggling to shake off the protectionist policies of the past when it comes to international trade.

Tuesday’s state visit by Argentine President Mauricio Macri to his Brazilian counterpart Michel Temer brought together the leaders of the largest two economies in Mercosur, the regional trade bloc. Both men took office amid deep economic crises in their respective countries and both have won investor accolades for dismantling the anti-competitive policies of their leftist predecessors in their efforts to boost growth.

Mauricio Macri

Photographer: Diego Levy/Bloomberg

Amid the global reassessment of trade deals prompted by U.S. President Donald Trump, Argentina and Brazil discussed deepening bilateral trade ties as well as ways of boosting Mercosur, but there were no significant breakthroughs in the agreements signed. With record-high unemployment in Brazil and legislative elections due this year in Argentina, the question remains how willing the two leaders will be to pursue a free trade agenda.

"Although both Temer and Macri are branded as market-friendly, they are still quite sensitive to the political environment in both countries," Edward Glossop, economist at Capital Economics, said by phone. "There are much more severe domestic challenges to overcome first before trying to stimulate trade in Mercosur."

Michel Temer

Photographer: Christopher Goodney/Bloomberg

The two presidents signed deals extending cooperation on diplomacy, border issues and consular services. They also committed to periodic meetings between the two countries’ respective trade bodies and announced the creation of a new agency to harmonise sanitary and phytosanitary standards.

In a ceremony held afterwards, Macri highlighted the need for the two countries to work closely following what he described as a change in the global scenario.

"We want to give an historic push to Mercosur," he said. Temer echoed the sentiment, stressing the need to reduce obstacles to trade within the bloc.

Since its founding in 1991, the Mercosur trade bloc - comprising Brazil, Argentina, Uruguay and Paraguay - has been riven by internal disputes over trade policy. It has made little headway in striking deals outside the region. Talks between the European Union and Mercosur started in 1999 but the two organizations have yet to finalize an agreement.

"Mercosur is the worst of both worlds," said Oliver Stuenkel, an associate professor of international relations at the Getulio Vargas Foundation, a business school and think-tank. "It’s a non-functioning free trade agreement that limits its members’ capacity to sign other free trade agreements."

Both Temer and Macri have implemented economically liberal policies as part of efforts to haul their countries out of recession. While Temer has set limits on Brazil’s public spending and started opening up infrastructure to foreign investment, Macri has removed currency controls and restored Argentina’s access to global bond markets. Economists expect both countries to return to growth this year, though Brazil’s recovery still looks set to be modest.

Trade Partners

Argentina remains a key market for Brazilian exports, ranking third on the list of the Brazil’s trade partners behind China and the U.S.

The crisis in Brazil has forced Argentina to diversify its exports to Asia and Europe, according to Marcelo Elizondo, director of international trade consultancy Desarrollo de Negocios Internacionales. But Brazil continues to be Argentina’s biggest trade partner and is an essential market for its manufacturing sector and for small and medium-sized enterprises, Elizondo said.

"Argentina sells agricultural products to the entire world but it sells half of its industrial products to Brazil," Elizondo said. "When Brazil grows, Argentina grows."

While Argentine exports to Brazil contracted 11 percent in 2016 to $9.03 billion, there are signs that trade between the two may be picking up again. Exports increased 57 percent year-over-year in December to $847 million, driven by a 75 percent increase in vehicle sales. Imports from Brazil over the same period grew by 28 percent to $1.3 billion.

Much of the trade between the two remains governed by a complex series of tariffs and quotas that few expect to see change any time soon. 

In the automotive industry, which accounts for half of Brazil and Argentina’s trade, a deal signed in June last year stipulates that Brazil can sell 1.5 dollars worth of automotive goods tax-free to Argentina for every dollar worth of goods that it imports. Antonio Megale, president of the Brazilian car-makers association Anfavea, told reporters on Monday that he expects no changes to the deal following Macri’s visit.