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Brazil threat to Mercosur


A Latin American Brexit?

- Bolsonaro mulled leaving trade bloc if Macri loses elections
- Mercosur recently struck a trade deal with European Union

By Simone Preissler Iglesias and Rachel Gamarski / Bloomberg

Petroleumworld 09 16 2019

It may not be as politically toxic as the United Kingdom's efforts to leave the European Union, but President Jair Bolsonaro's threat to leave Mercosur could prove almost as complicated and costly.

The move would be a major setback for the trade bloc comprised of Brazil, Argentina, Paraguay and Uruguay -- just as it reached a trade deal with the European Union after 20 years of talks.

Bolsonaro has said Brazil could leave Mercosur if Argentina, the second-largest economy in the customs union, pivots to the left after presidential elections in October.

But how feasible is such a break?

1. What is Brazil actually proposing?

Following the victory of Alberto Fernandez in last month's primary elections in Argentina, the leftwing opposition candidate is on course to beat President Mauricio Macri in the October presidential election. Bolsonaro has explicitly endorsed the current president and warned of a possible wave of Argentine migrants to Brazil in the event he loses.

Speaking just days after the Aug. 11 primary, Bolsonaro said that he does not believe that Fernandez wants to follow the principles of liberty and democracy. “If he creates any problems, then Brazil will leave Mercosur,” he said. He has not offered any further details to his proposal.

2. How would Brazil leave Mercosur?

The seriousness of the president's threat is not clear. Like Brexit, there would be severe commercial, bureaucratic and political obstacles to leaving the bloc and the process would be far from simple. Congress would have to approve a bill to end the free-trade agreement. Brazil would have to give up the common external tariffs it shares with its neighbors as well as the visa and passport-free travel its citizens currently enjoy in the area.

“It would be a sign of a lack of seriousness and would affect Brazil's relationship with the rest of the world,” said Aloysio Nunes Ferreira, former foreign minister under President Michel Temer, who worked to boost the strength of the customs union.

2. What would be the economic impact?

In the last ten years, Brazil posted a trade surplus of $87 billion over the other three Mercosur countries, an amount higher than over China or the European Union for the same period.

Brazil's surplus with Argentina alone is around $8.5 billion a year. Around half of Brazil's exports to its southern neighbor come from the automotive sector or from manufactured products. In other words, it is one of the few countries that buys Brazil's value-added products and not just its commodities. Argentina lags only the U.S. in its purchase of Brazilian shoes.

On the other hand, the Brazilian economy depends on Argentine wheat. Half of the grain product consumed in Brazil comes from Argentina, free of duties and export taxes.

Argentina's economic woes have a direct impact on Brazil. The current financial crisis in Buenos Aires may shave up to 0.5% off Brazilian economic growth this year, according to a study published this week by the Getulio Vargas Foundation think-tank and business school.

For Brazilian business owners, Mercosur represents the second-most attractive destination for their future exports, after the U.S. The trade bloc also generates around 31,100 jobs for every 1 billion reais in exports, according to a survey by the National Confederation of Industry.

3. What are the chances of Brazil actually leaving?

Given the complexity of leaving Mercosur completely, officials prefer to talk about making the current trade bloc more flexible. This would involve allowing the member states to make their own bilateral tariff agreements, provided all four Mercosur countries agreed.

In a recent interview Brazil's current foreign minister, Ernesto Araujo, struck a cautious note when asked about Brazil's possible exit from Mercosur.

“Perhaps we might need to think about an exit,” he said, adding that his government would have to weigh wider political views to decide what to do. “Mercosur is a reality that's part of the plan for our country, part of our economic recovery.”

The South American customs union is also far less politically problematic for Brazilians than the European Union is to the British -- to the extent that none of Brazil's major polling companies have bothered to ask the public's opinion of the bloc.

Still, with any withdrawal likely to have significant impact on both trade and jobs for an economy that remains trapped in the doldrums, the downsides appear to outweigh the benefits.

Welber Barral, a former foreign secretary of Brazil's Ministry of Industry and Commerce, said that reforming the bloc would be much better than abandoning it.

“We would have the same problem the U.K. has with Brexit today,” he said. “We would lose trade deals.”


Story by Nayla Razzouk, Javier Blas, and James Thornhill from Bloomberg. / 09 15 2019


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