RIO DE JANEIRO, BRAZIL – The delay in the ratification of the free trade agreement signed two years ago with the bloc clears the path for the Asian giant to continue strengthening its position in a vital region in the food sector.
Europe has less and less weight in MERCOSUR; the bloc made up of Brazil, Argentina, Uruguay, and Paraguay is now looking toward China. While the ratification of the free trade agreement signed in 2019 still needs the approval of some EU members (France, Austria, the Netherlands, Belgium, and Ireland), the American Southern Cone is multiplying its commodities trade with the Asian giant.
Even more importantly, it is opening up to the Asian giant’s tremendous investor flow. With figures in hand, the trade treaty agreed upon after two decades of endless negotiations may have come too late, leaving at China’s mercy a market of 265 million inhabitants.
The voices of warning, if not alarm, over the loss of muscle by European companies in MERCOSUR come from several fronts, and all of them call for stepping on the gas in ratifying the agreement.
A recent study by the prestigious German Ifo Institute alerts to the “Europe’s loss of relevance as a commercial partner of MERCOSUR countries,” to the detriment of the Asian behemoth. As the South American bloc turns 30 years old, “MERCOSUR’s imports and exports to and from Europe are decreasing in general,” reads the text, signed by the director of Ifo, Lisandra Flach.
In the case of South American sales to the EU, the drop amounted to 25% since 2015. By comparison, China’s share of MERCOSUR’s total exports multiplied 11-fold between 2000 and 2018: from 2% to 22.1%. The second world power -which is coming closer to being first in many major indicators- is now the most important sales market for the bloc. This reresents rise comes at a cost to the European Union, which in a not-so-distant time was the most important trading partner of the American Southern Cone.
“Without a trade agreement there is no platform to engage with MERCOSUR. If it had been closed in time, 15 years ago, it would have been a different story,” says Ignacio Bartesaghi, director of the Institute of International Business at the Catholic University of Uruguay and one of Latin America’s leading trade experts.
Splits in EU membership
The pact with MERCOSUR, the largest ever made by Europe, would mean the gradual reduction of 90% of customs barriers over a 10-year period. Resistance, however, prevents its ratification both in the European Parliament and in a reasonable number of member states. The text, still being translated into the 24 languages of the EU, clashes with a front composed of France, which hides its agricultural protectionism behind environmental questions, and others like Austria and the Netherlands, which do not agree with Jair Bolsonaro’s policies in regard to the Amazon.
On the side of the advocates of the agreement are Spain – its prime minister Pedro Sánchez has just pledged that the text could enter into force “sooner rather than later” – Portugal and the Nordic countries.
With Europe negotiating the rules of the game in its relationship with MERCOSUR and needing to put out internal fires, over the last 20 years China has had open ground in the Southern Cone. It has seized the opportunity to become strong in a market with which, unlike the Old Continent, it has no cultural or historical ties.
“MERCOSUR has become the main platform for protein production in the world, ahead of the United States and much more than the European Union. That is why the region has a privileged link, of a structural nature, with China, which is the axis of global demand for agrifoods,” says Jorge Castro, an Argentine analyst and president of the Strategic Planning Institute.
“All this is happening at a time when China experiences a consumption boom of more than US$7 trillion (R$37 trillion) in 2021, which leaves the U.S. in second place for the first time in the history of capitalism.”
China provides the demand and MERCOSUR the supply
MERCOSUR provides the supply of food and other raw materials; China provides a voracious demand. Conversely, the Asian country is willing to pour its financial surpluses into a region thirsty for investments in infrastructure and financing: between 2008 and 2018, Brazil was the 5th largest recipient of Chinese capital, after the U.S. (the world’s largest economy), Australia (within China’s geographical area of influence),the UK and Switzerland (which in turn serve as a springboard to third countries).
Just over one of every US$20 invested by Chinese companies abroad ended up in the South American giant, according to data from the American Enterprise Institute and the Heritage Foundation.
“Europe lost weight, first of all, because it failed to approve the preferential agreement: this not only curbs trade, but also investment,” Bartesaghi alerts. “And on the other side, China’s investments in the past 10 years have been huge, especially to Brazil and Argentina.”
Carlos Malamud, principal researcher for Latin America at the Spanish Real Instituto Elcano, agrees: “The stock – accumulated volume – of European investment continues to be much higher, but Chinese investment has been expanding much faster in recent years.” The China-MERCOSUR relationship has expanded far beyond the most common sectors: the technological dependence of the four members of the bloc is beginning to be substantial and “there is even a Chinese satellite base in Argentine Patagonia,” says Malamud.
China’s advance in the region has tensed the ideological debate in the MERCOSUR countries about the convenience of changing the traditional Atlantic axis (US-Europe) for Beijing’s. But needs, at least so far, may outweigh politics.
“When Argentina is in crisis, it knows it can rely on financing from China; when it needs investments, there is China. And this has allowed the Asian giant to enter strategic sectors in these countries, where it was not before,” says Bartesaghi. The latest example of China’s entry into the Southern Cone came with the Covid-19 vaccines, assisting Southern Cone countries with millions of doses while the bloc’s governments fight with Western suppliers to fulfill their delivery agreements.
Beijing-MERCOSUR relations are now so intertwined that, at this point, hardly anyone thinks that ratification of the treaty between the EU and MERCOSUR can stop the forces from advancing and and rebalance, even minimally.
“It can be a stimulus for trade and will create a more favorable base for investment,” says Malamud, “but we need to abandon the idea that Europe will replace China in the region: irrespective of the treaty what we see is a clear option by MERCOSUR countries to trade with China.”
Castro also thinks that the trend is little less than unstoppable. Times have changed, MERCOSUR and China benefit each other mutually, and Europe – with or without an agreement – has taken the back seat.
Source: El Pais