Hello from Buenos Aires, where one of the most protectionist economies in the world is set to isolate itself from global trade even more in an attempt to mitigate the impact of an economic crisis that has only been made worse by Covid-19.
Concerns are high that the interests of Argentina and Brazil may now be so far apart that this could damage the Mercosur regional trade bloc.
John Murphy, senior vice-president for International Policy, US Chamber of Commerce, joins us for today’s Tit-for-tat, while our Chart of the day highlights a decline in South Korean exports.
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Mercosur’s forking paths
Opinion was always divided among Argentina’s political and business elite about the merits of former president Mauricio Macri’s efforts to liberalise the country’s protectionist economy.
The high point of his achievements was the free trade agreement last year that he played a key role in securing between the EU and South America’s Mercosur trade bloc, which also includes Brazil, Paraguay and Uruguay.
Not only is that deal now at the very least likely to face delays in its implementation, but the future of Mercosur itself is in question after Argentina’s new president, Alberto Fernández, signalled that the country is in no fit state to contemplate any new deals given the fragile state of the economy.
The initial announcement just over a week ago that the country would no longer participate in the bloc’s trade discussions caused a hullabaloo among its other members. That forced some apparent backtracking by Argentina, which late last week clarified that it would merely postpone the implementation of any new deals, rather than not implement them at all.
“There was a lot of amateurism [with the initial announcement], they didn’t realise the tremendous strategic and political impact,” said Marcelo Elizondo, a business consultant in Buenos Aires specialising in international trade and investment. “It had looked like the end of Mercosur as we knew it, but this is still an important change,” he said of the $2.7tn trade bloc that was formed in the early 1990s.
Mercosur deals are important for agricultural exports, the star performer of the Argentine economy © Enrique Marcarian/Reuters
The move is odd given Argentina’s heavy dependence on neighbouring Brazil, a desperate need for foreign investment that is now greater than ever, and the importance of Mercosur deals for agricultural exports, the star performer of the Argentine economy.
Analysts wonder whether Mr Fernández thinks that picking a fight with Brazil’s hard-right President Jair Bolsonaro may benefit him politically. If so, trade and investment policy is clearly not as much of a priority as keeping the leftist faction loyal to his powerful vice-president, Cristina Fernández de Kirchner, on side.
Meanwhile, some in Brazil are rubbing their hands with glee. Mr Bolsonaro — who has called Mr Fernández a “red bandit”, and did not attend his inauguration — has already warned that if Argentina causes trouble, Brazil will leave Mercosur.
In a way, Mr Fernández’s move “is a blessing in disguise”, according to a senior diplomat in Brasília. Currently Brazil’s hands are tied by Mercosur, which is a regional customs pact that forbids its member countries from individually negotiating trade deals with countries. Mr Bolsonaro has been keen on launching trade talks with the US.
“This gives us the right atmosphere to restructure and reshape Mercosur,” added the Brazilian official, stressing that South America’s largest country has been making a serious effort to open up its traditionally closed economy before coronavirus hit.
Unlike Argentina — which is on the brink of yet another sovereign debt default — the macroeconomic stability that Brazil has enjoyed in recent years has enabled it to develop a new generation of more competitive companies that now want to expand beyond national borders, with opportunities at home reaching a limit.
Meanwhile, Argentina’s clear historic preference for economic nationalism appears to be as deep-rooted as ever, despite the demonstrably poor results. With Argentina’s share of global trade steadily declining over the past 60 years — from 0.8 per cent of global exports to 0.3 per cent today — it now has just a handful of multinationals. It has one of the lowest ratios of trade to gross domestic product in the world, at about 32 per cent (compared with an average of 50 per cent in the region and 60 per cent in the world).
That looks unlikely to change. Although Mr Fernández last week tried to placate Uruguay’s new president, Luis Lacalle Pou, by insisting that Argentina wants to remain in Mercosur, and even expand it, it is hard to be too optimistic about its prospects as a motor for regional economic growth.
Andres Schipani also contributed to this piece.
Charted waters
The decline in South Korean exports slowed in April in a better than expected result for a bellwether of the region’s electronics supply chain.
Exports from Asia’s fourth-biggest economy last month fell 2 per cent to $48.86bn from a year earlier, according to government data reported by news agency Yonhap.
The fall marked the fifth straight month of declining exports but bucked forecasts of a 5 per cent fall from economists polled by Reuters. It also marked an improvement from an 8.2 per cent year-on-year drop in March.
Tit-for-tat
John Murphy, senior vice-president for International Policy, US Chamber of Commerce, answers three key questions
It’s fair to say that trade negotiations have not been at the top of governments’ agendas of late. Is this risky — and what are the most pressing issues the US needs to resolve with its trading partners?
Trade is one of many urgent priorities for policymakers, but trade policy . . . less so. The WTO says world trade may fall by a third this year, and, paradoxically, air cargo rates on key routes have doubled — or more. There has been a 95 per cent decline in air travel, both domestically in the US and internationally. But the drop in trade is a consequence more than a cause of the sharp economic slowdown we are seeing in many economies. In the short term, US and other world leaders urgently need to ensure the flow of trade continues for a host of critical goods, not just medical supplies, but agri-food, machinery and parts, and ICT products that keep our economy running.
How are you helping to keep supply chains with America’s closest neighbours running smoothly?
While the US and its North American neighbours have not imposed new trade barriers, we have seen supply chains sputtering, especially across the border with Mexico. The US and Mexico have differed on what’s considered an essential business or service. A patchwork of rules in North America and Mexico’s quarantine orders — which have closed many suppliers — has hurt production of some key goods. We are working with top US and Mexican officials to seek a flexible approach that can balance the imperative of social distancing with the need to keep critical industries operating.
How are your members dealing with the restrictions on trade in global PPE and other medical supplies?
Some 80 countries have imposed new export restrictions on PPE and other medical supplies, but it’s critical that policymakers don’t draw the wrong conclusion from pandemic-related shortages and impose “Buy Local” rules or other forms of forced localisation. Look at N-95 masks: key manufacturers have always made all their N-95s for the US market here in the US. Today’s shortages aren’t due to offshoring: rather, the problem is that the pandemic caused demand to surge by 50 fold. Imposing “Buy Local” rules now would hamstring our pandemic response by making it harder to supplement our domestic production with the imports that are literally saving lives right now. For a contrast, look at pharmaceuticals, where we benefit from diversified supply chains — and no shortages.
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Tokyo talk
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