Argentina and Brazil advance in a new trade agreement to replace the dollar exchange with the peso and the real

President Alberto Fernández’s visit to Brazil had one main objective above all others: to ask for resources and gifts from his lefitst peer Lula da Silva.

And although the Government left empty-handed regarding direct credit lines, it did manage to make progress in confirming a bilateral trade agreement that could be officially announced next week.

The trade agreement is intended to generate a series of instruments to replace the use of the dollar as the currency for financing imports.

From the Brazilian point of view, the incentive to sign the agreement is the relaxation of the arsenal of quantitative regulations that Argentina applies to Brazilian imports, something that violates the idea of “customs union” foreseen by the Mercosur nomenclature.

Brazil does not apply greater quantitative restrictions to the trade balance or extend exchange controls, although it maintains specific withholding taxes (mainly on hydrocarbons).

The bilateral agreement between the two countries affects an annual volume of imports of up to US$15 billion.

From the Argentine point of view, the agreement may mean yet another patch implemented by Sergio Massa to safeguard the BCRA’s position and postpone an open and more pronounced devaluation of the official exchange rate.

The BCRA’s debt with importers already amounts to US$4 billion due to the regulations to postpone the effective payment of goods and services to suppliers abroad.

On the other hand, a huge amount of imports are still blocked by the SIRA system of non-automatic licenses.

The agreement aims to expand the so-called Local Currency Payment System (SML), which has been in place since October 2008 and includes trade with Paraguay.

Still, until now, it only covered 10% of trade transactions between Brazil and Argentina.

The second point still subject to negotiation is the trade deficit that Argentina maintains with Brazil, which deepened in the first four months of 2023, mainly due to the sharp drop in Argentine exports that exceeded the also very sharp drop in imports (via quantitative restrictions).

The application of extreme distortions such as export taxes, the multiple exchange rate system, and the impact of the drought caused soybean imports from Brazil to soar by 934% year-on-year at the end of April.