Brazil, Argentina and globalisation

Brazil, Argentina and globalisation

Brazil, Argentina and globalisation: More than fashionably late,

by Thomaz Favaro.

Brazil and Argentina welcomed 2017 as a fresh start. Both look poised to leave economic recession behind and recent leadership changes mean both expect to bolster their economies’ new-found vigour with successes on another front: foreign trade.

The accession of Argentine President Mauricio Macri and his Brazilian counterpart Michel Temer has fostered an unprecedented move towards greater openness to commerce. Brasília and Buenos Aires are negotiating (with Paraguay and Uruguay) a bilateral trade agreement with the EU, and are likely to approve an initiative that allows members of the Southern Common Market (Mercosur) trade bloc to pursue similar talks independently.

The irony, of course, is that this policy shift comes at a time when much of the world is beginning to head in the opposite direction. Major trading partners such as the US and the EU have seen anti-trade rhetoric reach ever-higher pitches. China – a favoured source of funds and trade deals for several Latin American countries in recent years – is no longer the open tap it was once perceived to be. That could spell trouble for Temer and Macri as they look to sell the benefits of greater trade liberalisation to a sceptical public. On one level, both see increased exports as a quick way of boosting economic growth. Without that growth, both will struggle to maintain political strength as their mandates progress. This in turn could have a profound impact on their ability to overcome robust opposition from vested domestic interests gearing for a fight against increased foreign trade.

Behind the times

Brazil and Argentina’s trade liberalisation agenda is undoubtedly a ‘catch up’ game. By most accounts, the two have been, at best, lukewarm supporters of globalisation. In the 1990s, Brazil and Argentina – together with Paraguay and Uruguay – formed Mercosur to create a single market in the Southern Cone and use it as a platform to grow international trade ties. But disagreements among member countries have left Mercosur lagging in trade liberalisation, with each country allowed to maintain a long list of exceptions to free commerce.

Progress on the external front has been even weaker, with only three bilateral trade agreements (with Egypt, the Palestinian Territories and Israel) signed in more than two decades. As a result, Argentina and Brazil are two of the most closed economies among emerging markets: exports and imports equal 23% and 27% of their GDPs, respectively.

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The deterioration of the two economies in recent years has convinced government officials in both countries of the urgent need to improve access to global markets. Brazil in May 2016 ratified the WTO's Trade Facilitation Agreement and will work on its implementation throughout 2017. The Export and Trade Promotion Agency was recently brought under the umbrella of the foreign ministry to align a joint strategy of commercial promotion and diplomacy. Brazil is also willing to expand the partnership within the BRICS nations – not least because it reinforces its aspirations to play a larger role in global politics.

Argentina’s priorities are more modest: to re-establish Latin American trade flows severely undermined by more than a decade of protectionism under previous administrations. Even so, Argentina has not abandoned overseas trade. Past dogmatic stances on issues such as sovereignty over the Falkland Islands/Islas Malvinas have been temporarily set aside in favour of promoting strong trade ties with the UK. And, in a symbolic twist, Argentina in December will host the WTO’s 11th Ministerial Conference, two years after receiving a stern reprimand from the organisation over protectionist import restrictions. These initiatives indicate a more pragmatic approach to foreign policy, with greater emphasis on diplomatic efforts to improve trade and create additional opportunities for investors.

Out of step

But the rest of the world may not be so receptive. After years of the EU facing particular intransigence from Mercosur over a potential trade deal, the tables have turned completely. Upheaval in Europe – following Brexit and Wallonia’s threatened veto of the EU’s trade deal with Canada – means the prospects of an agreement still in 2017 are slim in the extreme.

Argentina may have more success in re-establishing trade ties strictly within Latin America, notably via closer links with the Pacific Alliance of Mexico, Colombia, Peru and Chile, the most dynamic of the region’s trading blocs. But even there, a mix of weak economies and unpopular governments is creating challenges for policymaking and implementation. Major initiatives on that front will rapidly lose their lustre.

Popular challenges

In addition to external constraints on trade liberalisation, Temer and Macri face considerable domestic opposition to their policies. Yes, both countries are agricultural powerhouses that could benefit greatly from better trading conditions, as well as from opening new markets. But foreign competition is regarded with deep suspicion by local industrialists, rather than embraced for its potential to encourage dynamism.

Both countries have powerful manufacturing lobbies, a legacy of the period in which they based their development strategy on import substitution industrialisation. Protectionism is deep-rooted and goes beyond tariff barriers to trade. Foreign companies operating in the two markets often face an uneven playing field due to stiff local content requirements, high preference margins for domestic suppliers in government tenders, mandatory technology transfers and subsidised financial support for specific sectors.

Labour unions on both sides of the border are also sceptical of trade integration, and have played a critical role in blocking previous liberalising agendas. If greater trade – in terms of both exports and imports – is seen to result in losses even in the short term, Macri in particular would have a harder time facing down a labour backlash and the broader political repercussions that would almost inevitably follow.

Progress towards greater trade will be hard won on both the domestic and external front. Brazil and Argentina’s search for new foreign friends will continue, but they will find major trading partners reluctant to reciprocate. Investors locally may benefit from efforts to reduce bureaucratic hurdles to foreign trade, such as the implementation of integrated ‘single-window’ customs systems, but dismantling decades of protectionism will take markedly longer and will make for a bumpy ride. Despite their economic problems, full free trade and liberal economics remain a difficult political sell – and easy to wind back, at least on the domestic front, if prevailing political winds turn against incumbent governments.

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Image accreditation: Press Association - Brazil's President Michel Temer talks to Argentina's President Mauricio Macri in Buenos Aires, Oct 2016. 
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