Why Uruguay’s bet on China matters to Latin America

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Under a central coalition government led by President Luis Lacalle Pou, one would expect Uruguay to keep China at bay. But in a twist with broad implications for economic relations between China and Latin America, it does the opposite. The Uruguayan government is continuing its efforts to conclude a free trade agreement with China, already the largest buyer of its exports. A deal with the small country could have huge implications for the rest of the region. Indeed, on September 8, the chief of staff of the President of Uruguay, lvaro Delgado, declared his wish that Uruguay become the “gateway” to economic integration between China and the MERCOSUR countries – Argentina, Brazil, Uruguay and Paraguay.

Uruguay’s pressure for a deal has been criticized within the region, especially from its MERCOSUR partner, Argentina. But if Uruguay succeeds in pushing back restrictions placed on bilateral trade agreements by MERCOSUR, it could force a much-desired rollback of protectionist trade policies in the region. National economies in the region, including Argentina, would benefit from being able to conclude their own trade agreements. Of course, these deals would likely lead to closer economic and political ties with China, which comes with its own geopolitical risks – for example, the backfire of the United States.

Like other MERCOSUR countries, Uruguay has strong comparative advantages in agriculture, particularly in food and raw materials. The global market for these products is heavily congested with protectionist policies, which hamper trade with China even as New Zealand and Australia, Uruguay’s export rivals in the Chinese market, benefit from preferential access. Uruguayan exporters have been eager for more than a decade to negotiate an agreement for comparable access to the Chinese market for their goods – and the government has taken note.

The proposed deal did not come entirely out of nowhere. High-level state visits and other agreements in recent years have signaled the strengthening of ties between Uruguay and China. In 2011, Xi Jinping, then vice president of the Chinese government, paid an official visit to Uruguay to meet with President José Mujica. Then-Uruguayan President Tabaré Vázquez visited in 2016, and the following year the first major business meeting between China, Latin America and the Caribbean was held in Punta del Este. in Uruguay.. In December 2020, Lacalle Pou secured assistance from President Xi to access the Chinese Sinovac vaccine. The doses started arriving in March 2021 and have helped Uruguay conduct a rapid vaccination campaign that compares favorably to other countries. “

But even as Uruguay draws closer to China, MERCOSUR rules stand in the way of a bilateral trade deal with the world’s second-largest economy. Thirty years after its creation, MERCOSUR operates as an imperfect free trade area, with a significant share of trade managed by sectoral and bilateral agreements (for example, in the automotive sector). The deviations from the ground rules are wide enough for MERCOSUR to be seen more as a flexible agreement than what is written in the founding documents of the bloc. However, two relevant rules remain in force, albeit weakly: the Common External Tariff (CET) and restrictions on entering into preferential agreements with third countries, such as the one Uruguay is trying to conclude with China. Argentina and Brazil, the largest economies in the partnership, preferred not to dilute the tariff preference given in the deal by allowing other countries to make their own deals. This, in turn, has enabled these two economies to pursue highly protectionist trade policies over the past decades.

But the tide of protectionism has started to change, at least in Brazil. This is due to the influence of its Minister of the Economy, Paulo Guedes, who sees the need for greater trade openness in Brazil, which means a reduction in the CET. The current Brazilian government is receptive to a Uruguayan proposal to ease the process of signing agreements with third markets, offering the possibility of different speeds in common MERCOSUR agreements, as well as the freedom for each country to sign agreements independently. . This would remove a key element of the protectionist pact that characterized the original construction of MERCOSUR, one of the most closed plurilateral agreements on the planet.

There is notable resistance in Argentina, which, supported by Paraguay, continues to oppose this plan. However, as Argentina’s economic and political woes mount, its opposition seems likely to prove insufficient to block the ongoing change.

China, meanwhile, is eager to capitalize on any trade opening in the region. In recent years, the country has pursued an aggressive policy of signing free trade agreements, reminiscent of the policy of “competitive liberalization” pursued by the United States under the administration of George W. Bush – but with adjustments for match Chinese interests. Preferential access to the huge Chinese market is granted in exchange for closer political relations.

A China-Uruguay deal promises to boost not only trade but also investment, as improvements in market access encourage companies to increase production and seize new opportunities. The potential free trade agreement between the two countries appears to be the first step in historic change for the southern cone of Latin America. Uruguay will benefit because they moved first – and whoever moves first, can move twice.

Valiant is professor of international trade at the University of the Republic of Uruguay.

Key words: China, China and Latin America, Mercosur, trade liberalization, Uruguay

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The views expressed in this article do not necessarily reflect those of Americas Quarterly or its editors.

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