Uruguay and China take concrete first step towards future free trade agreement outside Mercosur

RIO DE JANEIRO, BRAZIL – With the announcement of a feasibility study, Uruguay and China took the first step towards what could be a future Free Trade Agreement (FTA) between the two countries, something that is currently not allowed under MERCOSUR rules – the trade bloc that Uruguay is part of along with Argentina, Brazil and Paraguay.

President Luis Lacalle Pou announced at a press conference that China has formally agreed to move forward in the negotiation of an FTA with Uruguay, something which had not happened until now. The next step will be to conduct a study on the agreement’s implications, which would be ready before the end of the year.

“This government has expressed its intention to open to the world with all MERCOSUR partners, but it has been explicitly stated that should this not be possible, Uruguay would try to do so itself,” Lacalle Pou said. “First a feasibility study will be conducted.”

MERCOSUR celebrated 30 years since its foundation in March with a summit between the presidents of the member countries, which evidenced their differences. Lacalle Pou said that MERCOSUR should not be “a burden” for regional trade and called for a relaxation of the bloc’s rules, something Argentina rejected.

Individual trade agreements by MERCOSUR members are currently not allowed and changing this would mean transforming the bloc from a customs union to a free trade zone. Uruguay and Brazil have pushed for such a change in recent years, but failed to reach a consensus with the other two 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, a Uruguayan foreign trade expert. “Lacalle Pou tried to make the agreement through MERCOSUR but Argentina’s protectionism prevented it.”

A CLOSE RELATIONSHIP

Uruguay’s interest in signing an FTA with China is part of a positive moment in the relationship between the two countries, which have had a strategic partnership agreement in place since 2016. In addition, Uruguay was the first MERCOSUR country to adhere to China’s Belt and Road initiative, which Argentina and Brazil have not yet joined.

China is Uruguay’s main trading partner, accounting for 30% of total foreign trade, according to official data. Most of the trade consists of raw materials, although the Uruguayan government intends to expand trade in services, technology, tourism and electronics within the framework of the FTA negotiations.

Meat is the main product exported to China (56%), totaling US$351.4 million in the second quarter of 2021, followed by seeds and oleaginous fruits. Automotive vehicles, chemical products, and industrial manufactures are Uruguay’s main imports from China.

“Uruguay is implementing an international strategy of positioning itself as a quality food supplier. The problem is that there is no consensus within MERCOSUR on its international strategy, with different views within the bloc,” said Marcelo Elizondo, an Argentine foreign trade specialist.

One of the first impacts of an FTA would be the reduction of tariffs, which today reach up to 35% for exports from MERCOSUR. This implies a reduction in the price of products exported from Uruguay, which could make them more competitive in the Chinese market.

Uruguay’s National Meat Institute (INAC) estimates that Uruguay will pay US$150 million in tariffs to China this year for exports from the sector. In addition to saving that money, an FTA with China would allow an increase in beef, poultry and pork production, INAC says in its report.

The signing of the trade agreement would also generate new export flows for Uruguay, says Bartesagi in a study on the FTA’s effects. Such was the case of Peru, Chile and Costa Rica, which have already signed an agreement with China and have incorporated new export products.

“Uruguay and China are complementary economies, so an FTA could be negotiated in less than a year. All studies show that we would benefit from the agreement. We save money on tariffs and we can export other products. China knows that Uruguay is a reliable food producer,” Bartesaghi said.

However, not everyone is entirely convinced. Marcelo Abdala, the secretary general of Pit-Cnt, Uruguay’s main trade union, called for a review of the idea because FTAs are often “beneficial for the export of raw materials but lethal for sectors with higher added value, such as manufacturing.”

THE FUTURE OF MERCOSUR

Paraguay’s Minister of Foreign Affairs Euclides Acevedo said that they are following this decision “with concern” and assured that the country continues to uphold MERCOSUR’s rules. Meanwhile, Argentina’s Minister of Productive Development Matías Kulfas said that MERCOSUR “negotiates as a bloc and not individually.”

On the other hand, Brazil’s Foreign Trade Secretary Paulo Guedes endorsed Uruguay’s decision. “It is in line with the need to modernize MERCOSUR, with greater negotiating flexibility for member countries. It is an example of the reality that is being imposed, given the bloc’s loss of dynamism,” Guedes said.

Uruguay admits that it is in a “hurry” and “anxious” to finalize the trade agreement, as it knows that the window of opportunity will remain open as long as Jair Bolsonaro’s Brazil holds the pro tempore presidency of MERCOSUR. In addition, Brazil will hold presidential elections in 2022.

The bloc’s members do not agree on the role of MERCOSUR in their economies and societies.

“We currently have a Brazilian position. I don’t know if it will change. I know that the one we have today serves Uruguayan interests in the case of moving forward bilaterally with China. If it serves us now, let’s take advantage of it,” Lacalle Pou said at the press conference where he announced the agreement.

For International Relations PhD Julieta Zelicovich, Uruguay’s announcement may lead to different scenarios. Uruguay could formally leave MERCOSUR as a result of its negotiation with China, or it could cause the other countries to accept a relaxation of the bloc or directly redefine MERCOSUR.

“The bloc’s members do not share a convergence of views on the role of MERCOSUR for their economies and societies, nor on the bloc’s role in the world and in the strategies for international insertion,” she said, “There is still a long way to go.”

Trade experts describe MERCOSUR as one of the least effective organizations in the world, both in terms of trade among its members and with external partners. For Elizondo, of all trade blocs, MERCOSUR is the one exporting the least in the world in relation to its Gross Domestic Product (GDP).

MERCOSUR is currently in open negotiations with South Korea, Singapore, Canada, Lebanon and the European Free Trade Association (EFTA). It is also finalizing the last details of a trade agreement with the EU, which has been delayed by French objections to Brazil’s allegedly lax environmental protection. Its main export destinations are China, the United States, and the EU.