RIO DE JANEIRO, BRAZIL – Instability on the other side of the River Plate has always been frowned upon by the neighboring shore, and although a tradition of good neighborliness has been maintained, the past 2 decades have shown some friction between Argentina and Uruguay.
The installation of pulp mills in the Uruguay River virtually opposite the Nandubaysal beach resort, near Gualeguaychú, was nothing but a follow-up of Jorge Batlle’s statements, to whom Argentines are a group of thieves (“chorros”) with no exception (“from the first to the last”).
Argentina’s protectionist bias and its exchange and import controls between 2011 and 2015 convinced the Uruguayan authorities that subordination to MERCOSUR or any other “umbrella” would entail more costs than benefits. Inevitably, mechanisms were gradually enabled for unilateral agreements with third powers whose feasibility could make sense if the bloc’s viability were to plunge into an irreversible crisis, or almost so.
The basic condition (and it was no secret to anyone) was very simple: a deep and permanent disagreement between Buenos Aires and Brasilia, with the Brazilian government favoring trade agreements with each member country independently of the unanimous agreement of MERCOSUR.
The clear dislike of the current Brazilian government of Argentina was exacerbated by the live exchange of views between the presidents of Brazil and Argentina in early 2021. The attitude and statements of Minister Paulo Guedes and President Jair Bolsonaro made it clearer that the “rift” between the two countries is widening and deepening.
Upon assuming the pro-tempore presidency of MERCOSUR on July 8, the Brazilian president reaffirmed his criticisms through a speech in which he stated that in the first semester this year (under the pro-tempore presidency of Argentina) the bloc failed to show concrete results in terms of the review of the Common External Tariff and its flexibility to negotiate trade agreements with non-MERCOSUR partners on a member-by-member basis.
Concurrently, the Uruguayan government announced that it would start negotiating trade agreements with countries outside the bloc.
Last Wednesday’s announcement by the Uruguayan president of the unilateral opening of negotiations with China should not come as a surprise to anyone. Last August 13, at the height of the “Olivosgate” affair, the Argentine president received his Uruguayan counterpart, Luis Lacalle Pou, at the Olivos presidential residence. Uruguayan government sources told the Argentine media that Uruguay would advance in negotiations with other countries and would then notify the remaining governments of the bloc, thus confirming what had already been “announced” a month earlier.
Officially, Lacalle Pou’s announcement refers to his willingness to start negotiations with China, the latter having reportedly taken the initial step. Until now, the Chinese government had stated that it would not close any agreement with Uruguay should any of the other MERCOSUR members be against it. However, the Uruguayan President announced at last Tuesday’s press conference that the Chinese government officially proposed to start a bilateral pre-feasibility study for a Free Trade Agreement between the two countries.
An announcement that leaves him more like a spokesman for a fait accompli, under the strong influence of the Chinese government, rather than as a tool in a strategy under his control to initiate unilateral agreements with several countries, thus marking the beginning of an almost inexorable dilution of MERCOSUR.
Both Argentina and Paraguay maintain that the bloc’s founding agreement, and in particular the Ouro Preto protocols, must be respected. These will probably be the basis of their arguments for the Common Market Council meeting on September 22 and 23. But they are unlikely to change something that Uruguay has had on the table, and has been negotiating for months.
The inevitable reaction of Brazil and Argentina’s industrial sectors will make itself felt, in some way, since such an agreement aims at transforming Uruguay into the main entry point for Chinese manufactured goods (finished, or parts assembled in Uruguay) bound for Brazil and Argentina.
As former Brazilian President Fernando Henrique Cardoso warned years ago, the problem in MERCOSUR will not be t-shirts or footwear for Brazil or Argentina, but cars and other manufactured goods of Chinese origin. Without a prior adjustment of local tax and regulatory restrictions, it is clear that it will not be easy to compete with Chinese producers who for over a decade and a half have enjoyed generous export subsidies and numerous tax benefits.
Uruguay is not an industrial power, but it could become the inevitable gateway to its neighbors for Chinese goods that enjoy explicit subsidies and tax exemptions, mainly from subnational administrations, both provincial and municipal.
The evidence seems to suggest that the initiatives taken in the past 3-4 years by Japan, the European Union, and the United States to get China to abandon this practice have not yielded any significant results. The Chinese government has maintained its “Made in China 2025” subsidy program for information and communications technology goods producers, as well as those in other areas.
If Uruguay ultimately closes a free trade agreement with China, industrial sectors in neighboring countries will inevitably perceive it as an unequivocal threat.
The course of events will no longer depend on the reactions of MERCOSUR partners but rather on the kind of unilateralism of the Uruguayan government, with the apparent “blessing” of the Brazilian government. Should it advance, even with agreements with other countries, it would mark the irreversible end of MERCOSUR as we know it.