Like most Latin American states, Uruguay's economy depends largely on commodity exports, with agriculture playing a particularly important role. Uruguay also serves as a regional banking and transshipment hub through its Atlantic port capital of Montevideo.
Uruguay's geography and location have been key in shaping its economic relationships. Sandwiched between the much larger countries of Brazil and Argentina in the Southern Cone of South America and with little in terms of geographic barriers, Uruguay has historically been a buffer state. Traditionally, Uruguay's imperative has been to balance between the two states. This is reflected in its trade relationships: Brazil and Argentina are major export destinations for Uruguayan goods (17 percent and 5 percent, respectively) and are the two largest of Uruguay's import partners at 17 percent and 15 percent of total goods.
Uruguay's economic growth has slowed in recent years — from an average of 6.4 percent from 2010 to 2012 to 4.4 percent in 2013 and 3.3 percent in 2014. The two main factors behind this slowdown are the fall in global commodity prices and increasing trade tensions within Mercosur.
One option for Uruguay moving forward is to expand its economic relationships outside of Mercosur, particularly with Mexico. Uruguay already has a free trade agreement with Mexico, but Montevideo has been encouraging companies from third-party countries to set up a portion of their production chain in Uruguay. Montevideo has specifically targeted Brazil, which does not have a free trade agreement with Mexico but has been looking to increase its own industrial and automotive exports there. Brazil has faced problems accessing the Mexican market — high Brazilian import tariffs have complicated talks over establishing a new trade agreement between the two countries — so Brazilian companies have been looking at Uruguay as a place to assemble and produce goods to send to Mexico. Moreover, Uruguay's labor laws are more flexible than Brazil's, so Brazilian companies operating in Uruguay would not have to deal with as much red tape as they do in Brazil. This could create more foreign direct investment into Uruguay, while Brazil and potentially other countries could take advantage of Uruguay's free trade pact with Mexico.
Uruguay has also been pushing Argentina to approve a free trade deal between Mercosur and the European Union. The deal has been under negotiation for several years but continues to face hurdles and delays. The incoming government prefers to stick to the negotiation process as a bloc, though further delays could force Uruguay to revise its position. Achieving such a trade deal bilaterally, as Riezler suggested, would be very difficult for Uruguay because the Mercosur bylaws prevent member states from signing most bilateral free trade agreements (with Mexico serving as an exception) without the unanimous approval of the rest of Mercosur. Therefore, any departure from the current negotiations would likely depend on the position of Brazil, which, like Uruguay, is seeking to speed up the negotiation process but has much stronger economic and political heft within Mercosur.
