Argentine Elections Could Narrow Brazil's Mercosur Reform Path

5 MINS READApr 10, 2019 | 09:00 GMT
Argentine President Mauricio Macri, left, and Brazilian President Jair Bolsonaro are pictured after a meeting in Brasilia in January 2019.

Argentine President Mauricio Macri, left, visits Brazil to discuss the future of Mercosur with Brazilian President Jair Bolsonaro.

(EVARISTO SA/AFP/Getty Images)
  • Brazilian President Jair Bolsonaro's push to reform the trade policy of the Common Market of the South (Mercosur) risks collapsing without the support of Argentina.
  • Bolsonaro will thus continue to press Argentina to accept his proposed changes, which include reducing tariffs and allowing member states to negotiate and sign trade deals individually.
  • However, if negotiations drag past Argentina's next presidential election in October, Bolsonaro risks facing a new leftist government that could stall his reform push.
  • Bolsonaro also faces an increasingly hostile political landscape at home that will limit his ability to withdraw from the bloc altogether, which could force Brazil’s government to ultimately reduce its proposed reforms.

Shortly after taking office in January, Brazilian President Jair Bolsonaro hit the ground running on his ambitious effort to boost economic growth by significantly altering the trade policy of the Common Market of the South (Mercosur). Bolsonaro has pushed to amend the bloc’s charter, which currently requires unanimity among Mercosur's four full members — Brazil, Argentina, Paraguay and Uruguay — to negotiate and sign bilateral free trade agreements with other nations and blocs.

The Big Picture

Brazil's new president Jair Bolsonaro has envisioned a deep reform of Mercosur's foreign trade regulations, with the intent of effectively freeing Brazil from its restrictions on signing new free trade agreements. But the window to approve and implement his desired import tariff and trade policy reforms is quickly narrowing, with the potential for a leftist government to take power in Argentina before the end of the year — thwarting the consensus he's built so far among the bloc's member states.

In trying to persuade the other member states to back his proposed reform, Bolsonaro has assured them that allowing individual trade deals would open up foreign trade and investment opportunities for not only Brazil, but the entire Mercosur bloc. His government has also called for a sharp reduction in the bloc’s tariffs, which would allow more foreign businesses to both enter and take a greater share of the domestic markets within the bloc.

But a successful Mercosur trade reform is far from certain due to the potential for a political transition in Argentina in December, along with Bolsonaro's fraught relationship with Brazil's legislature and the business community. And as a result, Brazil's new leader may be forced to contend with more modest results than he had originally envisioned and promised on the campaign trail.

A graphic showing Mercosur member countries.

The Argentine Time Bomb

The largest hurdle that currently stands in the way of Bolsonaro’s effort to amend the bloc's trade policy is timing. Right now, Bolsonaro has general agreement from each of the bloc’s member states that some manner of reform is necessary. But that consensus — which is required to make any change to the Mercosur charter — could quickly dissipate, should a leftist government take office in Argentina before the end of the year.

On Oct. 27, Argentinians will begin casting their votes in the next presidential election, where incumbent President Mauricio Macri will fend off challenges from several candidates — the most formidable being leftist former President Cristina Fernandez. Should Macri and his conservative administration fail to secure a second term, it would usher in a swing to the left in Argentine politics, which risks slowing (or completely stalling) Bolsonaro’s push to remake the bloc’s trade charter.

A left-leaning president would have numerous institutional tools at their disposal to actively hamper any Brazilian push for reforming the organization's charter. They could, for example, simply choose not to send any Argentine officials to Mercosur meetings, thereby blocking even the discussion of any key amendments to the charter.

A chart showing Mercosur's top trading partners.

Macri's successor will also inherit a country in the midst of a recession, with sky-high inflation and a steep collapse in imports — making broad, long-term trade reforms an even tougher political sell. Any new administration will likely be reluctant to agree to measures that could make Argentina's domestic manufacturing base even more vulnerable to foreign competition. And Bolsonaro's proposed amendment has the potential to do just that by allowing bilateral trade deals between Brazil and other nations to occur without Argentina. Such negotiations could, in theory, expose Buenos Aires to heavier imports, as well as erode its exporters’ share in the Brazilian market.

With Uruguay and Paraguay likely maintaining their pro-reform support, Bolsonaro’s push to bend Mercosur to his will largely rides on maintaining Argentine support. On April 9, Brazilian Foreign Minister Ernesto Araujo visited Argentina to discuss the mutual reduction of import tariffs that Brazil has proposed. But to successfully evade the threat of a new leftist government in Buenos Aires thwarting his plans, Bolsonaro will need to get Argentina to officially approve both his import tariff and trade policy reforms by December at the latest.

Trouble on the Homefront

To meet the looming deadline, Brazil’s government could be forced to water down its proposed reform to the charter's trade policy, such as only reducing some import tariffs. Otherwise, there's a chance Bolsonaro could resort to pulling out of the bloc altogether. Bolsonaro's administration has already threatened to withdraw from Mercosur, which would throw both regional and foreign trade into disarray by disrupting cross-border supply chains between the bloc's member states. However, such a move would not sit well with Brazil’s business-friendly (and increasingly, Bolsonaro-unfriendly) Congress.

Bolsonaro ultimately may be forced to either reduce his trade demands to more modest aims, or desist from his Mercosur liberalization push entirely.

Since taking office, Bolsonaro has prioritized continuing Brazilian Justice Minister Sergio Moro’s anti-corruption probe, which recently ensnared the father-in-law of lower house president Rodrigo Maia. As a result, the country's lawmakers have become increasingly wary of Bolsonaro's corruption crackdown for fear that they may, too, fall victim to investigations — worsening his already thorny relationship with Brazil's political establishment.

Thus, there's a good chance that Brazil’s private sector and Congress would align against any move by Bolsonaro to withdraw from Mercosur. In doing so, Congress could even hold key pieces of legislation that his administration wants to pass, such as security reforms, hostage until Bolsonaro steps down from leaving the bloc. Bolsonaro's government, therefore, ultimately may be forced to either reduce its trade demands to more modest aims, or desist entirely.

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