Uruguay Appears to Buck Mercosur on Trade with China; Latin America Hedges against a Trump Trade Policy

General Director for International Economic Affairs of the Uruguayan Foreign Ministry, Ambassador Ricardo Nario, affirmed on December 13, 2016 that Uruguay would not say “no” to or step back from China in regard to the negotiation of a bilateral China-Uruguay free trade agreement (FTA), a noteworthy position in light of Uruguay’s membership in Mercosur, the rules of which prohibit individual member states from entering into trade agreements with third countries, allowing exclusively for Mercosur to negotiate such agreements en bloc. Additionally, Uruguay’s interest in cementing trade and investment ties with China is consistent with an ever greater pessimism in the Latin American region toward strengthening such economic ties with the United States in the context of a forthcoming, trade-skeptic Trump presidency.

Uruguay Gives the Appearance  of Going It Alone

Uruguayan President Tabaré Vázquez and Chinese President Xi Jinping agreed in mid-October 2016 to commence negotiations toward a bilateral FTA as soon as possible, and Uruguayan Foreign Minister Rodolfo Nin Novoa has since held internal consultations with other ministries to study and quantify the economic impact, by sector, an FTA with China would have. The Vázquez Administration had originally wished to negotiate such FTA alongside its fellow Mercosur member states (i.e., Brazil, Argentina, Paraguay and Venezuela), as prescribed under Mercosur Resolution No. 32/00; however, Ambassador Nario’s mid-December 2016 remarks pointed to several factors that would make difficult negotiating en bloc, including (i) Paraguay not having diplomatic relations with China but, instead, with Taiwan; (ii) Brazil and Argentina not having adopted a “One China Policy”; and (iii) Brazil and Argentina not recognizing China as a market economy, a position with implications for the proper calculation and application of trade remedies (e.g., antidumping and countervailing duties (AD/CVD)). Also, Venezuela’s Mercosur membership has been in suspension since early December 2016 due to alleged violations of adhesion protocols, which only complicates negotiating trade deals en bloc, at least in a political sense.

Although several press reports indicate that Uruguay has since assured its fellow Mercosur member states that it will not seek a bilateral Uruguay-China FTA, there is precedent to support the Vázquez Administration’s doubt that Mercosur, as a whole, could negotiate and successfully conclude an FTA with China: until recently, due to political pressure the Brazilian and Argentine agricultural and industrial sectors exerted on Mercosur negotiators, trade talks toward a comprehensive European Union-Mercosur trade agreement floundered, a topic this blog has discussed in a previous entry. However, as compared to former Argentine President Cristina Fernández de Kirchner and former Brazilian President Dilma Rousseff, the current Argentine and Brazilian Presidents Mauricio Macri and Michel Temer, respectively, are ostensibly less trade skeptic and more amenable to open markets, which has given new momentum to the ongoing EU-Mercosur trade discussions. Nonetheless, Ambassador Nario hinted at the opportunity cost Uruguay would incur by not having preferential access to the Chinese market through an FTA, asserting that there will be an additional 350 million middle-class Chinese within the next four years, and these are potential consumers of goods in which Uruguay is already export-competitive, e.g., beef and grains; he also noted that Australia and New Zealand already have preferential access to the Chinese market under extant FTAs, and that these two countries export many of the same goods as Uruguay, a fact that will likely increase support within Uruguay’s agricultural sector for a China-Uruguay FTA.

Latin America Side Eyes Trade with the United States under Trump

The Vázquez Administration’s overtures toward China on strengthening bilateral trade and investment ties also reflects a trend that is occurring in many Latin American countries to hedge against uncertainty in regard to future trade with the United States under a Trump presidency. Citing job losses in the United States he attributes to, inter alia, the offshoring of US factors of production (e.g., manufacturing plants), US President-elect Trump has levied harsh criticism at FTAs into which the United States has entered, including a threat to withdraw the United States from the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP)—as of yet not ratified by the US Congress, and to seek high punitive tariffs on goods imported into the United States from Mexico and China; prospects also appear gloomy for successfully completing negotiations toward a Transatlantic Trade and Investment Partnership (TTIP), between the United States and the European Union, given this trade-skeptic posture on the part of the incoming Trump Administration, another topic this blog has discussed in a previous entry. It is then perhaps not coincidental that, against this backdrop of President-elect Trump’s rhetoric on trade, many public and private sector leaders across Latin America are pivoting toward increased economic ties with China.

As recently as March 2016, the Vázquez Administration expressed a positive disposition toward negotiating a Mercosur-United States FTA, an idea for which the Administration of Argentine President Mauricio Macri expressed support in October 2016. A Mercosur-United States FTA is now unlikely, at least in the near term; President Barack Obama, who appears acquiescent toward the Agreement, will leave office on January 20, 2017, and the incoming Trump Administration is unlikely to pursue such FTA given the foregoing trade-skeptic rhetoric.

While the incoming Trump Administration appears poised to withdraw the United States from TPP, of which Mexico, Peru and Chile constitute three of the twelve members, China has offered an alternative path for Asia-Pacific regional economic integration—without the United States. At the November 2016 Asia-Pacific Economic Cooperation Summit in Peru, Chinese President Jinping reportedly received a standing ovation from Latin American business leaders upon expressing China’s vehement support for free trade and cross-border investment in the Pacific Basin. In this vein, and as an alternative to the US-inclusive TPP, President Jinping is pushing the Free Trade Area of the Asia-Pacific (FTAAP), a potential trade agreement between the ten members of the Association of Southeast Asian Nations (ASEAN), and Australia, China, India, Japan, New Zealand, South Korea, Canada, Mexico, Peru and Chile.

Even though the United States already has FTAs in place with Canada, Mexico, Peru and Chile, in addition to Singapore, Australia and South Korea, TPP would (i) set a unified goods trade regime (e.g., tariff treatment, customs procedures and rules of origin) among these countries, increasing the ability of member state producers and exporters to establish efficient, cost-effective regional supply chains, and (ii) create the rules for cross-border investment and trade in services in the Asia-Pacific region. FTAAP would accomplish many of the same things, but with more countries—except the United States—and governed by rules largely reflecting the wishes of FTAAP’s hegemon: China.

An Outlook for the Western Hemisphere

Were it to pull away from free trade, the United States would risk losing ground in the Western Hemisphere not only on the economic front but, also, in regard to geopolitical relevancy. Uruguay’s recent move to strengthen ties with China is entirely consistent with the tone other Latin American countries have taken, particularly since Donald Trump won the November 2016 US presidential elections. China has taken note of the potential void the United States could leave in the Western Hemisphere under a trade-skeptic Trump Administration, and press reports suggest that it is moving aggressively to fill it. Whether the United States indeed leaves this void now depends on whether President-elect Trump, upon assuming office, fulfills his campaign promises to raise protectionist trade measures and turn the country inward, or whether this was simply campaign rhetoric aimed at riling an electoral base with deep misgivings about the virtues of globalization. Starting on January 20, 2017, we shall see.

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2 thoughts on “Uruguay Appears to Buck Mercosur on Trade with China; Latin America Hedges against a Trump Trade Policy

  1. Pingback: With a Trump Trade Policy on the Horizon, Mercosur Moves forward with Europe | Latin Trade Blog

  2. Pingback: Mercosur Continues Cozying to Pacific Alliance | Latin Trade Blog

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