A Stop to Free Trade with China: South America Stands Apart

Marcela Valente of the ipsnews.net published a very interesting article this week discussing why Mercosur has decided to pass up a recent offer of a free trade agreement with China. Mercosur fell off the radar screen in the discussions on international trade after the FTAA died post 2001. With the recent dramatic suspension of Paraguay from Mercosur and Venezuela’s rapid acceptance into the trade bloc, Mercosur has returned to making headlines in recent weeks. In a June 25th meeting between Mercosur members Argentina, Brazil and Uruguay, with Chinese Premier Wen Jiabao, Mercosur expressed interest in expanding trade with China, but shut down the idea of having a FTA with China. China’s trade with Brazil and Argentina grew exponentially over the last few years and was one of the main reasons Brazil was able to weather the 2008 economic crisis so well, mainly due to China’s need for raw materials. With both BRICS nations seeking to transform its current economic power into a more diverse and stable economic policy model, Brazil, Argentina and Mercosur turned its sails against the winds of the last fifteen years, and stopped a free trade deal with its second largest trading partner.

It is quite odd for a trading bloc like Mercosur that is based on the principles of free trade to now stop an opportunity to open further trade with its fastest growing trading partner. This is true to a greater degree since the FTAA would have opened trade between all major nations in the Americas and was a focus of the Brazilian Presidency during Brazil’s economic boom coming from the Cardoso administration, though the Lula years and to today. The cautionary move by Mercosur may have a lot to do with the specific trading relationship and a history of failed industrialisation attempts in Latin American economic development. Currently, many industrial advocates in Mercosur countries are more comfortable in dealing with its Mercosur partners as they can play on an even keel, competing with other Latin American competitors who are limited by the same rules of the market. Advocates like Argentina’s toy industry representative see free trade with China as a wave of consumer goods that will erode local production and industry so that South America would be tied to its past as a sole exporter of raw materials. This is a concern of many industrial advocates in Latin America as Brazil and Argentina require as much R+D and development as China currently, and while they can export many raw materials it is very difficult to compete with manufacturers that dominate the global market to such a high degree, nearly 80% of the global toy market as noted by Argentina’s toy industry advocate. Mercosur’s manufacturing base has a lot to fear as the U.S. is starting to see its own manufacturing leaving mostly to China, Mercosur seeks to avoid the years of U.S. job losses in those industries.

For generations, Latin America has made profits off commodity booms, only to see economic collapse once the commodities lose demand and profits become scarce in lean times. Development policies in the ’60s, ’70s and early ’80s nearly destroyed economic growth in the region as ISI policies sought to close borders and produce products from within as a method of growing Latin America’s industrial base to a level of global competition. Now the global economic crisis the region has been facing has been offset by the same raw materials, keeping the Latin America dependent on the market cycle of those goods, but still above water in the meantime. I do not believe Mercosur’s delaying of an FTA with China is bad policy as to build international ties and R+D may allow Brazil and Argentina to diversify its economy while the funds exist to change their own development policy. It seems that free trade with China, or even an FTAA does not seem as beneficial to Mercosur as it once was, and it is certain that many U.S. manufacturers who have been competing with low cost Chinese goods may put pressure on both candidates in the 2012 election campaign to roll back open trade with China. This fight to role back open trade depends on retailers, as U.S. retailers can roll back prices on their mostly Chinese made goods and place consumers against manufacturers in Mercosur as well.