Uruguay and China have taken the first step towards a possible free trade agreement (FTA) with the announcement of a new feasibility study on September 7, despite the ban on bilateral agreements by Mercosur – the South American trade bloc that includes Uruguay, Argentina, Brazil and Paraguay.
Uruguayan President Luis Lacalle Pou announced at a press conference that China has officially agreed to move forward in FTA negotiations with Uruguay. The next step will be a study on the implications of the agreement, the conclusions of which are expected before the end of the year.
“This government has expressed its intention to go out into the world with all Mercosur partners, but at the same time – and this has been explicitly said – if it is not possible to move forward together, Uruguay will try to do it, âsaid Lacalle Pou. noted.
In March, Mercosur celebrated the 30th anniversary of its creation with a summit bringing together the presidents of the member countries, an event that highlighted their differences. Lacalle Pou said Mercosur should not be “a burden” on regional trade and called for a relaxation of the bloc’s rules, a proposal Argentina rejected.
Individual trade agreements of Mercosur members are currently not allowed and changing the rule would mean turning the bloc from a customs union into a free trade area. Uruguay and Brazil have pushed for such a change in recent years, but without reaching a consensus with other members.
“Uruguay is taking this step because it has the support of Brazil and because China realizes that it can no longer wait to find a consensus with the rest of Mercosur,” said Ignacio Bartesaghi, trade expert. outside in Uruguay. “Lacalle Pou tried to close the deal through Mercosur, but Argentina’s protectionism prevented it.”
Uruguay and China: a closer trade relationship
Uruguay’s willingness to sign an FTA with China comes during a period of good relations between the two countries, which have had a strategic partnership agreement in place since 2016. Uruguay was also the first country in the country. Mercosur to join China’s Belt and Road Initiative (BRI), which Argentina and Brazil have not yet joined. Paraguay has diplomatic relations with China.
China is Uruguay’s main trading partner, accounting for 30% of its total foreign trade, according to official data. Most of the trade is in raw materials, although the Uruguayan government intends to advance trade in services, technology, tourism and electronics as part of the ongoing FTA negotiations.
Uruguay takes this step because it has the support of Brazil and because China realizes that it can no longer wait to find a consensus with the rest of Mercosur
Meat is Uruguay’s main product exported to China, accounting for 56% of exports, for a total of US $ 351.4 million in the second quarter of 2021. Oil seeds and fruits – mainly soybeans – follow, according to official data collected by the Catholic University of Uruguay. Automobiles, chemicals and industrial products are Uruguay’s main imports from China.
âUruguay is implementing an international strategy to position itself as a supplier of quality food,â said Marcelo Elizondo, foreign trade specialist from Argentina. “The problem is that Mercosur does not have a consensus on its international strategy, with different visions within the bloc.”
One of the first impacts of any FTA would be the reduction of tariffs, which can go up to 35% for Mercosur exports. This implies a fall in the price of products exported from Uruguay, which could make them more competitive in the Chinese market.
The National Meat Institute of Uruguay (INAC) estimates that this year Uruguay will pay US $ 150 million in tariffs to China for exports from the beef sector. In addition to saving on these costs, an FTA with China would allow increased production of beef, poultry and pork, INAC argued. in a recent report.
In investigation On the effects of the FTA, Bartesaghi argued that signing the deal would also generate new export flows for Uruguay, as was the case for Peru, Chile and Costa Rica – which have all trade agreements with China and have incorporated new exports.
âUruguay and China are complementary economies, so an FTA could be negotiated in less than a year. All the studies show that we would benefit from the agreement. We save money on tariffs and we can export other products, âBartesaghi said. “China knows Uruguay is a reliable food producer.”
However, not everyone is fully convinced. Marcelo Abdala, general secretary of Pit-Cnt, the main Uruguayan union, called for a revision of the idea because FTAs ââtend to be “good for the export of raw materials but deadly for the sectors with higher added value. , such as manufacturing â.
The future of Mercosur
Paraguayan Foreign Minister Euclides Acevedo said his government was “concerned about this decision”, and assured that the country continues to respect Mercosur rules. Meanwhile, Argentina’s Productive Development Minister MatÃas Kulfas said the Mercosur countries “are negotiating as a bloc and not individually”.
On the other hand, Paulo Guedes, Brazilian Minister of the Economy, supported Uruguay’s decision. “This is in line with the need to modernize Mercosur, with greater negotiating flexibility for member countries,” he said. “This is an example of the reality that is needed, given the loss of dynamism of the bloc.”
Uruguay appears in a hurry to close the trade deal, as it recognizes that the window of opportunity will only remain open as long as Jair Bolsonaro’s Brazil holds the pro tempore presidency of Mercosur. If Bolsonaro lost the presidential elections in Brazil in 2022, Uruguay would likely have less support for reforms within the bloc.
It is in line with the need to modernize Mercosur, with greater negotiating flexibility for member countries
During the press conference in which he announced the potential deal, President Lacalle Pou said Brazil is currently on the same page as Uruguay on the FTA, but it was not not sure that would change in time. âI know that Brazil’s position serves Uruguayan interests, in the event of a bilateral advance with China. If it helps us now, let’s take advantage of it, âhe added.
Julieta Zelicovich, an expert in international relations at the National University of Rosario in Argentina, believes that Uruguay’s announcement could lead to several different scenarios: Uruguay could officially leave Mercosur following its negotiations with China ; or the deal could get the rest of the countries to agree to a relaxation of bloc rules; it could even lead to a wider restructuring of Mercosur.
“The members of the bloc do not have a convergence of views on the role of Mercosur for their economies and their societies, nor on the place of the bloc in the world and in international integration strategies,” Zelicovich said.
Trade experts have described Mercosur as one of the least efficient entities in the world, both in terms of exchanges between its members and with external partners. According to Elizondo, of all the trading blocs, Mercosur is the one that exports the least in the world relative to its gross domestic product (GDP).
Mercosur is currently in open FTA negotiations with South Korea, Singapore, Canada, Lebanon and the European Free Trade Association (EFTA), while it also finalizes final details of a trade deal with the EU. Its main export destinations are China, the United States and the EU.
Given the notoriously complex and often lengthy process of trade negotiations, finalizing an Uruguay-China FTA during the window of opportunity identified by Lacalle Pou’s government will be a challenge. Either way, with significant potential implications for the bloc’s future, its progress will be closely watched.