November 5, 2010
In the midst of a declining US dollar and another Fed quantitative expansion -$600 billion by mid-2011- as well as elections in Venezuela and Brazil, there has been relatively little attention in the hemisphere to what has been emerging as a perennial problem: sustained Brazilian surpluses in its bilateral trade with Argentina.Trade between the two countries did not dip as sharply as overall decline in 2009, although the Brazilian surplus did go down, and the brisk recovery in growth of both countries in 2010 has contributed to a resurgence in bilateral exchange. Foreign Minister Amorim predicted in September that Argentina would wind up as Brazil’s second largest trading partner this year, replacing the United States.
Yet virtually every year since 2005 there have been continuing trade conflicts, resolved at the last minute. Argentina seeks to restrict a variety of industrial imports and a compromise is ultimately reached at the ministerial level. Special funds are made available to Argentine borrowers, and matters continue. With rapid growth and terms of trade gains for both countries, the Brazilian surpluses quickly recur. Back in 2008, there was even agreement on some trade in domestic currencies, but that, too, has seemingly disappeared in the midst of global shock.
If Serra had won the presidency, the question of Mercosul and its future would have received more critical attention. He was much less inclined to go along with the current scheme. But Dilma, as Lula earlier, continues to assert its centrality in Brazil’s foreign policy. Indeed, discussions are underway again with the EU for a bilateral pact, with expected agreement to occur sometime next year. That was much preferred to an FTAA that quickly was sidetracked back in 2003. Of course, those negotiations have been going on and off for almost 15 years, and always manage to get sidetracked by European unwillingness to accept primary exports and Argentine and Brazilian reluctance to accept manufactured products.
At root, Mercosul’s problem is simple. Argentina’s exports to Brazil primarily consist of automobiles and parts –to the extent of 35% of the total- and while Brazil also exports in this same sector to Argentina- to the extent of 15%- its focus in this sector, and more generally, is international in scope. There is a wide range of other manufactured products that Brazil exports to its neighbor, and where Argentina, despite a devaluing peso, remains not very competitive. Lack of access to imports of capital goods and modern technology over almost a decade makes a difference. So does a higher Argentine domestic rate of inflation than is officially reported. That has eventually eroded the large initial currency, and consequently, real trade advantage of Argentina in the years immediately after 2001.
So there is no bilateral balance, despite exchange rates that presumably favor Argentine exports. Note that trade within the automobile sector is far from free, and has been managed to provide multinational firms located there special quantitative access to the large Brazilian market. Back in 1994, in the treaty of Ouro Preto, such arrangements were long since to disappear in the midst of a common market that has still not emerged.
There is little reason to expect any policy change in either country in the near future. One can anticipate another visit by the Argentines to Brasilia next spring to respond to Brazilian complaints about lack of market access. Another last minute compromise will emerge. But this imbalance will begin to become more troublesome when economic growth next year lessens, and an election in Argentina looms. Then there will probably begin to be more attention to Mercosul, but without a very good sense of what exactly to do.