China and Brazil trade with Argentina / China e Brasil na Argentina

Economic instability in Argentina poses threats to Mercosur exports

Sep, 19, 2022 Posted by Gabriel Malheiros

Week 202238

Argentina is experiencing one of its worst crises in history, exacerbated by the highest inflation in the last 30 years, which exceeds 70% annually. The consequences of such an economic downturn may extend beyond its borders to the other Mercosur countries, including Brazil, Uruguay, and Paraguay.

Brazil, the bloc’s leading economy, scored the highest level of exports to Argentina in the last four years. According to data from the Ministry of Economy’s Secretariat of Foreign Trade (Secex), they totaled US$ 8.9 billion between January and July 2022, 34% more than the same period in 2021.

The economic instability of its neighbors worries Brazilian exporters and economists, who see Brazil’s increased presence in the Argentine market as temporary. For the professor of International Economics at the Pontifical Catholic University of Paraná (PUC-PR), Masimo Della Justina, the crisis in Argentina should lead to a drop in exports from all countries in the Mercosur bloc. According to him, with the increase in import taxes in the country, the other members find it challenging to sell products to the non-neighbor, which defends protectionism.

“If Argentina, which is in crisis, imports less from Uruguay, Paraguay, and Brazil, the production area tends to suffer. In this sense, Argentina’s crisis ends up imposing an economic cost on its neighbors because they are not exporting the potential they have, and they also become poorer or fail to realize this potential,” he assesses.

Another Brazilian concern is losing more commercial space to China. The Asian giant has been taking over a market once dominated by Brazil in Argentina’s trade agenda, which has become the second largest exporter to Argentina. Currently, Brazil sells 19.2% of Argentina’s purchases abroad. Meanwhile, the Chinese lead as origin, with 21%, according to data from Indec, a research institute of the Argentine government.

Bruno Damasceno, the leader of Ibef-Technical SP’s Committee on Treasury and Risk, explains that the fear is justified because Brazil’s neighbor has never experienced such a trying economic time as the current one. “Brazil has lost relevance in Argentina as a trading partner to China, but it still benefits from exporting via roads, which is cheaper. Furthermore, there’s a prevalent concern in the international scenario that Argentina will not honor its debts,” assesses him.

The neighboring country is the third most important destination for Brazilian products, accounting for 4.6% of total exports in the year’s first seven months. According to Damasceno, the data show that the current period has benefited national exports, even though “Brazil has to worry about liquidity, as a guarantee structure so that there is no credit problem.” Moreover, Argentina’s commercial debt default is not just Brazilian, but global,” he analyzes.

Please see below the track record of Brazil’s exports to Argentina, in containers, from January 2021 to July 2022, as well as Brazil’s imports from the neighboring country in the same period. The data is from DataLiner.

Brazil and Argentina | Exports and Imports | Jan 2021 – Jul 2022 | TEUs

Source: DataLiner (click here to request a demo)

Increased tariffs

The lack of dollar monetary reserves, essential for Argentina’s current transactions, is the most concerning factor for Brazilian exporters. And the peso’s depreciation is worsening. The Brazilian currency was worth 15 pesos two years ago and is now worth 26.7 pesos.

Damasceno, from Ibef-SP, explains that as the country’s indexes have been the worst in the world, it is complicated to have a creditor without political and financial restructuring. Furthermore, the country’s low economic stability is not the only factor that hinders exports to Argentina.

To prevent the outflow of US dollars from the country, Fernández’s government has been increasing import tariffs on products from countries such as China, the US, and the nations that make up Mercosur.

Although the measure aims to increase government revenue, the foreign trade consultant at BMJ Consultores Associados, Josemar Franco, explains that this has further increased the discontent of Argentine people in business who export to the neighboring country.

“Mercosur’s mission is to facilitate trade among its members while recognizing that it is a Common Market. It is more than just a free trade zone. There is a higher degree of integration. That is why Paraguay, Uruguay, and Brazil have questioned Argentina’s implementation of these measures, claiming that it has made trade between the bloc’s countries more difficult,” he claims.

Since 2018, the Brazilian government, under then-President Michel Temer, and the Argentine government under Maurício Macri, planned the restructuring of Mercosur, with a review of the Common External Tariff (TEC) to allow a greater opening of the bloc with other foreign nations such as the Asian Tigers and the European Union.

However, with the election of the current president, Alberto Fernández, in 2019, the gap between Brazil and Argentina has grown wider. As the Brazilian elections approach, the future of Mercosur becomes uncertain. Suppose ex-President Luiz Inácio Lula da Silva, who currently leads polls in terms of voting intentions, takes over the government in January 2023. In that case, the question is whether he will follow a more protectionist line or if he will take a slightly more liberal stance.

Source: Correio Braziliense

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