Mercosur under pressure – focus on China and the Argentine peso

Internal and external stresses strain Mercosur

The external economic shocks to which the world economy is exposed since the onset of the koruna pandemic by early 2020 at the latest lead to a rapid decline in economic and political buffer capacity, especially in developing countries. Recent events in South America clearly illustrate the political divergence growing within trade organizations such as Mercosur. These, in turn, along with existing currency discrepancies, especially with regard to the Argentine peso, limit further integration efforts, such as a single currency in South America. The current occasion is the opening of negotiations between Uruguay and China on a bilateral free trade agreement.

In our premium “How realistic is the single currency in Latin America?” From July 4, 2022, we emphasized the possibility of a single currency in South America.

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EMH PM Trade bannerBecause such a scenario is currently appearing in various election campaigns in Latin America, and the question of the prospects of economic success is raised. In our article, we indicated that chronic weakness Argentine Pesos vs US Dollars (XC0006013970) is one of the main obstacles to the common currency of Mercosur.

Just comparing the currency divergence of South America’s two largest economies to the US dollar since the penultimate Argentine President Macri took office at the end of 2015 shows the enormous deflationary pressure exerted by the Argentine peso not only on Brazil but on all other South America.

US Dollars to Argentine Pesos on TradingView

Mercosur (Mercado Común del Sur – Southern Common Market) gave another signal of its institutional weakness a few days later.

Because, as it turns out, member states are to varying degrees vulnerable to China’s attempts to advertise the tightening of bilateral trade agreements.

This is exactly what happened recently between Uruguay and China. Uruguay, often referred to as the “Switzerland of South America”, explained last week to start negotiations on a bilateral free trade agreement with China.

It should be mentioned that one of China’s tactics in international economic relations is to conclude bilateral trade agreements, which then politically limit the room for maneuver between other countries, the more a country is dependent on investment or trade in goods with China. Bilateral agreements can also interfere with joint decision mechanisms within other trade organizations such as Mercosur.

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The Paraguayan government blamed the argument that opening unilateral negotiations with China would not affect the arrangements with Mercosur. Paraguayan deputy foreign minister Ricciardi stressed in the Paraguayan newspaper Ultima Hora that what Uruguay did was a decision and not a consensus message. This shows how strong the political turmoil is in Mercosur.

And that is exactly what the Argentine Foreign Minister pointed out with regard to the uncoordinated Advance Uruguay to a bilateral free trade agreement with China.

It remains unclear to what extent Paraguay, Brazil and Argentina were informed in advance of Uruguay’s progress, and to what extent they agreed to it in advance.

However, Argentina’s reaction clearly shows that there was not enough political consensus in Mercosur.

At the same time, China economically binds Argentina both as a major destination country for Argentinean agricultural exports and as a major investor in Argentina’s run-down infrastructure. In 2021, China took over 7.9% of all Argentinian exports, behind Brazil with 15.1% the second largest export destination.

Argentina’s accession aspirations faced The BRICS community and The Silk Road Initiative in China intertwine with Mercosur’s goals, as can be seen in the intention of the Uruguayan initiative.

What is the conclusion?

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Claudemus advertising bannerSouth American countries are currently exposed to varying levels of economic tensions. Uruguay’s recent bid to conclude a bilateral trade agreement with China also shows the institutional weaknesses of the Mercosur community. In addition, a large divergence in monetary policy weighs down on trade relations between member states, which is particularly evident in the discrepancy between the two largest economies in South America, Brazil and Argentina.

In terms of monetary policy, the Argentine peso and the deflationary pressures it causes remain a major obstacle to South America’s integration. The example of Mercosur shows once again that tensions between bilateral and collective trading institutions can harm efforts to promote regional integration.

July 21, 2022 – Arndt Kümpel

Signature - Arndt Kümpel

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