A delegation of European parliament members visiting Paraguay on Tuesday said that the E.U. was tired of waiting for Mercosur to sign a free trade agreement (FTA). The visit follows that of Germany’s foreign minister to Brazil on February 13, where he urged a speedy conclusion to the E.U.-Mercosur FTA whose initial framework was agreed to in 1999. Renewed negotiations began in 2010 but after nine sessions there is still no end in sight.
Mercosur, the trading bloc of Argentina, Brazil, Uruguay, Paraguay, and Venezuela, is visibly disunited and its influence is being eroded. On February 11 and 12 the foreign ministers of Brazil and Argentina, the main actors around which Mercosur revolves, met in Buenos Aires for trade talks that were inconclusive and did not resolve points of contention.
Argentina and Brazil failed to agree to a new bilateral trade agreement last week for two main reasons. First and foremost is the protectionism that Argentina has resorted to in the past few years under President Cristina Fernández de Kirchner, which has seriously harmed Brazil’s exports to Argentina, its largest export market. (Check out Red Zone: Argentina for more info on Kirchner’s ill fated economic measures.) Argentina’s imports from Brazil were down 25% in 2014 from the previous year, at a time when both economies are facing major economic problems and are skirting recessions. In the past decade, high economic growth rates for both countries outweighed and masked the negative effects of protectionism, but now they are starkly apparent.
A secondary issue, which both foreign ministers tried to play down, was the effect of the new agreements that Argentina concluded with China earlier in February, totaling $21 billion in investments (including controversial projects that use Chinese loans and labor). Many of the details of the accords have not been made public, but Brazilian media worried that the deals will lead to China taking over Brazil’s long-running and prized market share in Argentina. MercoPress reported that business people from Argentina and Brazil expressed concern over the continued expansion of Chinese investments in the region, as well as “the continuous erosion of Mercosur and its original objectives in trade, investment and tariff reductions.” Trade within Mercosur dropped 10.6% in the first three quarters of 2014, in an accelerating trend (the third quarter drop was 16.3%). The Argentine Chamber of Commerce said that since Mercosur was failing in its goal to increase regional trade, it was “losing relevance.”
Argentina is relying heavily on import restrictions and foreign currency controls to try to attain a trade surplus and limit the rapid depletion of its hard currency reserves. Meanwhile it is deepening its dependency on China as an external economic lifeline. Given that combination, it is hardly a surprise that the main stumbling blocks to an FTA with the E.U. are Argentina and Venezuela, in which heavy protectionism and hostility to foreign companies are core parts of its disastrously-managed “revolutionary” economy. The other Mercosur countries are more receptive to a FTA, and after much wrangling Mercosur did eventually come up with a common joint proposal. The latest obstacle is now actually from some E.U. countries headed by France and Ireland who fear agricultural competition from South America and are worried about their unemployment rates rising. Officially, Mercosur is waiting for a response from the E.U., but even a favorable one will inevitably cause controversy among members, and could be a political issue in elections in Argentina and Venezuela later in 2015.
On January 26, Brazil’s Agriculture minister echoed Argentina’s view by saying “Mercosur must ensure freedom to its members to negotiate with other parties and must not become a burden.” A FTA with the E.U. is unlikely if even the two main members of Mercosur always place national interest over their nominal shared interests.