World Economy News 20/07/2019
Even in an age of globalized free trade, some of South America’s biggest economies have remained the kind of outliers of which U.S. President Donald Trump, with his skepticism toward international commerce, might approve.
That was long the case of the four member states of Mercosur, the bloc comprising Argentina, Brazil, Paraguay and Uruguay, whose economies have been some of the most cocooned in the Western Hemisphere.
Created in 1991, Mercosur (an abbreviation of Southern Common Market) was intended to integrate the four economies while also promoting exports and imports further afield. Yet for nearly three decades, Mercosur has done anything but that, handicapped by nationalist politicking and so-called anti-dumping clauses.
The result has been that Argentines, Brazilians, Paraguayans and Uruguayans have enjoyed old-school labor protections yet with significant parts of their economy using inefficient and outdated technology, while consumers pay more for often lower quality consumer goods and services. Even Mercosur officials acknowledges that frustration, with the organization describing itself as a ” process” on its website.
After some two decades of frequently stalled negotiations, Mercosur has signed a groundbreaking trade deal with the European Union. Over time, the treaty will see tariffs removed from more than 90% of exports between the Mercosur member states and the EU, totaling more than $100 billion of trade per year.
Altogether, 31 nations — assuming the United Kingdom follows through on Brexit — comprising 10% of the world population and 40% of its gross domestic product will open a new era of transatlantic trade that has the potential to boost economic growth.
Missed Opportunities for the U.S.
The move highlights how much of the world continues, however slowly and painfully, to merge economies through commerce. It also comes as the Trump administration moves in the opposite direction, launching trade conflicts with China, Mexico, Canada and the EU, while pulling the U.S. out of the Trans-Pacific Partnership, which would have been the world’s largest trade pact.
“It (the trade deal) is a very impressive step after a very long struggle, especially in the current inhospitable climate” says Michael Shifter, president of the Inter-American Dialogue, a Washington D.C.-based think tank.
A similar deal between Mercosur and the United States ought to have been on the cards, Shifter says, given the close relationship between Brazil’s ultra-conservative president Jair Bolsonaro and Trump, and the fact that Argentina’s center-right leader, Mauricio Macri, is a natural Washington ally.
However, public statements from Macri, who was the driving force behind the Mercosur-EU deal, indicate he has given up any hope of that possibility, Shifter says.
“This is just a missed opportunity for the U.S. Just as Latin America is now trying to move its economies in this new direction, the U.S. is very passive and not taking advantage,” he says. “It is just so unfortunate that the U.S. is out of sync, and losing influence in the region like this.”
Trade Deal Will Face Revisions
The deal still has a way to go before it is finalized.
It needs to be ratified by all 27 (not including the U.K.) of the EU’s national governments, and Belgian, French, Irish and Polish farmers have been vociferous regarding their concerns given that agriculture — in particular beef, soy and wheat — is one of the principal competitive advantages of all four Mercosur economies.
Indeed, the administration of Irish Prime Minister Leo Varadkar is already coming under heavy pressure from local cattle farmers concerned to boycott the treaty, which he is trying to resist.
The draft treaty text is almost certain to be amended in significant ways. But overall, it appears likely to pass through European legislatures with national governments unlikely to risk being criticized for vetoing it.
The deal also represents something of a badly needed personal triumph for Macri, who is campaigning for re-election in October’s presidential elections against a backdrop of economic disintegration in Argentina.
“Argentina wants to contribute to dynamic global growth in order to generate equitable and sustainable development,” Macri said during the recent summit of leading wealthy and developing countries in Osaka, Japan, where he achieved the breakthrough. To do so, he intervened in a dispute between Bolsonaro and Macron, with the latter objecting to the former’s plans to follow the U.S. by pulling Brazil out of the Paris Climate Treaty.
“We can only do that by working together, through greater connections between our economies that promote job creation, quality education, innovation, and the insertion of small and medium-sized businesses into global value chains,” Macri continued.
Reforms May Boost Trade Deal Benefits
A center-right construction magnate, Macri trampolined from the mayorship of Buenos Aires to the presidency by promising to streamline bloated public institutions and modernize the economy, which had suffered historically from heavy state intervention, including subsidies, export taxes and tariffs.
Yet Macri’s pro-market reforms could, so far, hardly have gone worse. The economy contracted nearly 6% in the first quarter and inflation is forecast to top 40% for 2019. Unemployment, meanwhile, is at 10%.
At the root of the problem, many economists believe, are technical errors in the sequencing and timing of his reforms, and in particular his administration’s inadvertent sowing of doubt regarding the Argentine peso, sparking a currency slide.
With the poorest Argentines particularly badly hit, the economic woes have opened the door for a possible return by populist former President Cristina Fernández de Kirchner, even as she faces nearly a dozen different criminal investigations for alleged corruption.
It was under her guidance that Argentina adopted various anti-free-trade measures, including the introduction of a controversial tax on agricultural exports.
“Kirchnerism had a problem of sustainability with its economic model. That was the reason it closed the economy,” says Gabriel Caamaño Gomez, an economist with Buenos Aires-based Ledesma Consulting. “It was not really out of conviction but the result was the same: Directly or indirectly, Argentina ended up exporting less.”
He agrees that the EU deal is a huge opportunity for Argentina and its Mercosur neighbors. “But to make the most of it, these countries will need a series of reforms, including labor and pension reforms,” Caamaño Gomez adds. “That is the only way to really take advantage of this deal. But if we do that, this is potentially very good economic news.”
Source: U.S.News & World Report