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reflections

Feb 8, 2017 | 03:00 GMT

3 mins read

As NAFTA Stumbles, Mercosur Senses Opportunity

As NAFTA Stumbles, Mercosur Senses Opportunity
(YASUYOSHI CHIBA/AFP/Getty Images)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

To say that relations between Mexico and the United States are tense is an understatement. With major tussles looming over the proposed construction of a border wall and over the North American Free Trade Agreement, other trading partners sense opportunity. To be clear, NAFTA talks are not necessarily going to collapse. There is still a long way to go before that could occur, and much is still uncertain. Regardless, members of Mercosur, a trade bloc thousands of kilometers to the south of NAFTA, are already cozying up with Mexico to secure their spot should NAFTA fall apart.

Brazil and Argentina, the two largest Mercosur economies, are leading this push. Later this month, Brazilian officials will engage in talks with their Mexican counterparts on exporting more soybeans, beef and pork to Mexico. Argentina will follow up with a similar visit in April. Both have substantial agricultural sectors. If NAFTA were to dissolve, imports of U.S. agricultural products into Mexico would become subject to tariffs at the Most Favored Nation levels under the World Trade Organization — raising their price on the domestic market. For example, this would mean that nearly half of agricultural products listed by the Harmonized System of trade classification would face duties of 15 percent or higher. Under this new schema, South American agricultural products would be much more competitive in Mexico. U.S. exporters would be in the unenviable position of competing directly against Argentina and Brazil.

There is precedent for this. For over a decade, Mercosur and Mexico have enjoyed preferential trade agreements, largely centered on vehicle components. But building this out into greater trade volumes has its limits. Mercosur is not NAFTA and it cannot simply jump in where NAFTA leaves off. The North American bloc is significantly larger in economic terms: The combined GDP of Mercosur's five members is only one-fifth that of the United States. And Mercosur, unlike NAFTA, is a deliberately protectionist bloc, especially in terms of manufacturing. NAFTA, by contrast, continued an earlier opening of these sectors for the most part. While Mexico and Mercosur will likely find common ground on agricultural trade, any talks on increasing Brazilian imports of Mexican manufactured goods would face resistance from manufacturers and unions.

Even if NAFTA goes away, it will leave an enduring mark in the Mexican economy: Business-to-business relationships, supply chains and whole manufacturing centers have come into being under the agreement. Even with high tariffs in place, these connections will allow some industries to remain competitive, and high levels of bilateral trade will persist. Mexico would need to adapt and could face a downturn, but it could adjust to the new normal. The United States would still be Mexico's number one customer, largely unchallenged by South America.

Instead, a scenario without NAFTA would be one in which some sectors thrive and others lose out. U.S. food and agricultural exports to Mexico totaled around $16 billion in 2016. Argentina and Brazil could, in a post-NAFTA world, erode the U.S. share of the Mexican domestic market. For example, if Argentina, Brazil and other Mercosur members decided to amend existing preferential trade deals with Mexico, they could offset imports of U.S. corn and soybeans to Mexico. Mercosur is already trying to up agricultural trade with Mexico, and the demise of NAFTA could speed this process.

But the rumors of NAFTA's death are greatly exaggerated. Talks have yet to begin between Mexico, the United States and Canada. These negotiations might bring compromise instead of a sudden break. If that turns out to be the case, Mercosur would have much less of an opportunity to make inroads into Mexico.

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