Uruguay and China: South America’s most talked-about trade talks

Uruguay and China are negotiating a free trade agreement (FTA). At first glance, the two countries seem like an odd couple to negotiate a free trade agreement.

The two countries are on the other side of the world, one being the second-largest economy in the world and the other one of the smallest countries in South America.

In many ways, however, negotiations between China and Uruguay over a possible trade agreement make perfect sense. After all, China is Uruguay’s largest export market and one of its most important suppliers.

Still, the idea surprised many in the region and caused an uproar in Mercosur, the trade bloc that includes Argentina, Brazil, Paraguay, and Uruguay. That’s because Mercosur was conceived as a customs union and traditionally negotiates trade agreements jointly.

In practice, however, Mercosur is an imperfect customs union. If anything, it resembles a free trade area, having adopted neither a comprehensive common tariff nor a coordinated trade policy.

Nevertheless, Argentina has strongly criticized Uruguay’s trade strategy, leading to tense exchanges at Mercosur summits.

On the other hand, the public seems to welcome the idea within Uruguay, with the predictable exceptions of business sectors and unions that fear fierce competition from Chinese imports.

Negotiators will likely accommodate their objections through exemptions or long delays in eliminating certain tariffs. The political side is also relatively clear, as Uruguay’s last president, who belongs to the opposition Frente Amplio party, also supported the idea.

The other problem for Uruguay is Mercosur’s failure in “global integration. The bloc’s split over a trade agreement between Uruguay and China reflects the different structures of the members’ economies.

Mercosur’s large members, Argentina and Brazil, protect a wide range of goods compared to Uruguay. It causes significant trade diversion and leads Mercosur consumers to favor goods produced in the region over competing products that are more competitively produced elsewhere but are subject to costly import tariffs.

Without favorable market access in much of the world, Uruguay’s exports face significant tariffs that many of its competitors avoid, thanks to free trade agreements. For this reason, Uruguay’s various leaders have flirted with the idea of bilateral trade agreements since at least the beginning of this century.

President Luis Lacalle Pou has clarified that he is willing to negotiate trade agreements unilaterally, even if the other Mercosur members disagree.

A significant number of imports from Argentina and Brazil are already excluded from the Mercosur Common Customs Tariff due to special arrangements for the Manaus and Tierra del Fuego special tariff areas.

Uruguay’s total imports under the proposed FTA with China would be far less than the imports that Argentina and Brazil have exempted from tariffs.

Recently, China has reportedly signaled its interest in an agreement with all of Mercosur, but this remains unlikely.

For one thing, Paraguay does not maintain diplomatic relations with China, as it has close ties with Taiwan. In addition, Argentina has held back in Mercosur free trade talks, and an agreement with the European Union has been stalled for several years.

Recently, Mercosur members could not even agree on a request from Ukrainian President Volodomir Zelensky to speak at a Mercosur summit.

Mercosur recently reached an agreement with Singapore, but the ratification process will take some time.

Uruguay, meanwhile, appears interested in continuing to explore bilateral trade agreements. Lacalle Pou mentioned possible agreements with Turkey and, more importantly, with the Trans-Pacific Partnership, a grouping of 11 countries that also includes Canada and Japan.

With information from Latina Press