Trade and Investment

Uruguay-China FTA negotiations raise tensions over Mercosur’s future

The recent Mercosur summit revealed strains in the bloc. As Uruguay moves for a free trade agreement with China, other members discuss consequences and call for unity
<p>Uruguay’s president Luis Lacalle Pou (left) at the Mercosur summit in Asunción, 21 July. His desire to seek a free trade deal with China has caused tensions, with Mario Abdo of Paraguay (centre) and Alberto Fernández of Argentina (right) calling for regional unity in response (Image: Cesar Olmedo / Alamy)</p>

Uruguay’s president Luis Lacalle Pou (left) at the Mercosur summit in Asunción, 21 July. His desire to seek a free trade deal with China has caused tensions, with Mario Abdo of Paraguay (centre) and Alberto Fernández of Argentina (right) calling for regional unity in response (Image: Cesar Olmedo / Alamy)

The first face-to-face summit since the beginning of the pandemic for Mercosur, the regional trade bloc made up of Argentina, Brazil, Paraguay and Uruguay, exposed the rifts and differing visions for the bloc’s future among its members. Uruguay said it would move forward with its bilateral negotiations with China, while Argentina and Paraguay urged caution over the next steps.

Signing a free trade agreement (FTA) with China is a priority for Uruguayan president Luis Lacalle Pou’s government, which has already concluded a bilateral feasibility study and will soon begin negotiations. But there is a potential stumbling block: Mercosur rules prevent individual negotiations without the bloc’s endorsement.

Lacalle Pou, President of Uruguay, speaks at a press conference.
Read more: Uruguay bets on free trade deal with China outside Mercosur

This situation has pitted Lacalle Pou against his counterparts Alberto Fernández, of Argentina, and Paraguay’s Mario Abdo. But not so with Jair Bolsonaro, president of remaining Mercosur member Brazil, who has made no mention of the issue publicly, interpreted by many as support for making the bloc more flexible. These positions were repeated at last week’s Mercosur summit, held in Asunción, Paraguay.

In fact, the differences between the members of the bloc were so great that, as at the previous summit, there was no final joint declaration signed by all the countries. Uruguay did not want to support a document that did not refer to the possibility of reforming Mercosur to allow countries to enter into bilateral agreements.

In a communiqué, Argentina, Brazil, Paraguay and Bolivia, which is asking to join the bloc and participated as a guest, refer to agreements and advances with different countries, but nothing is mentioned about China. For the communiqué to have the status of a declaration, it needs to have been signed by all member countries.

“The summit showed the persistence of problems that have been dragging on for several years in the bloc,” said Julieta Zelicovich, a lecturer in international relations at the University of Rosario. “If Uruguay were to sign with China, we would be facing an extraordinary situation for Mercosur that would open up a number of different scenarios.”

Disputes in Mercosur

In his speech at the summit, Fernández questioned Uruguay’s moves to negotiate bilaterally with China and asked Lacalle Pou to include the entire bloc in the talks. “If we don’t realise that we have to be more united than ever, we are going to make the worst mistake,” Fernández said.

The Argentine president said that initiatives such as Uruguay’s are focused on the “short term”, and that while he would not refuse to “analyse everything that needs to be analysed” on the issue of flexibility that Lacalle Pou is calling for, he asked that the countries “go through this discussion together”.

The best way to protect Uruguay is to open up to the world, and that is why it is taking the steps it is taking

In response, Lacalle Pou said that negotiations with China will begin “shortly” and that once this stage has been reached, he will talk to Mercosur member countries “to go all together” to add “more negotiating power”. However, if Mercosur does not want to be part of the agreement, Uruguay will still proceed, the president added.

“President Fernández’s speech echoed a concept that he has repeated a couple of times, which is the concept of protecting ourselves. The best way to protect my nation is to open up to the world, and that is why Uruguay is taking the steps it is taking,” Lacalle Pou reiterated.

For his part, Paraguay’s president Mario Abdo said at the summit that “it is more convenient” to negotiate a joint agreement with China, and that the issue is of concern to his government – which does not have official diplomatic ties with China. “They [China] have very competitive costs and this could threaten Paraguay’s industries, as well as those of Argentina and Brazil,” Abdo said.

Brazil’s president Jair Bolsonaro did not travel to Paraguay for the summit, and limited himself to a pre-recorded video address in which he did not mention the issue of agreements with China – something that Uruguay interpreted as an implicit endorsement. In fact, Brazil’s foreign trade secretary, Lucas Ferraz, argued that there is a “need for greater flexibility” in the bloc.

“The announcement made by Uruguay will certainly bring an even greater impetus to the debate [on flexibilisation] within the bloc. Whether or not we will permit Uruguay’s move is a technical question,” Ferraz said. That “will happen at the time of the adoption of the agreement, not now,” he added.

Uruguay’s negotiations

A few days before the Mercosur summit, President Lacalle Pou announced at a press conference that Uruguay had finalised the feasibility study with China over an FTA, a process that had begun in September 2021. The conclusion was said to be positive by the president.

“In the coming days, our teams, together with the Chinese government teams, will formally begin talks for the FTA,” added Lacalle Pou, who clarified that the feasibility study will not be made public because “there are elements of the negotiation in which we are not starting from identical positions.”

On a visit to Montevideo, the director-general for Latin America and the Caribbean department in China’s Foreign Ministry, Cai Wei, said that his country is open to negotiating an FTA with both Uruguay and Mercosur. “China is a firm supporter of free trade,” he added. His remarks were reiterated by a spokesperson for the country’s Ministry of Commerce.

Despite Fernández’s rhetoric that we can ‘go together’, both Argentina and Brazil have no interest in signing an agreement with China

Ignacio Bartesaghi, head of the International Business Institute at Uruguay’s Catholic University (UCU) said that once the rounds of trade between the two countries begin, negotiations could be concluded within a year. However, he clarified that the deadlines will depend on the political will of both countries.

“Uruguay does not refuse to move forward together, but it is known that, despite Fernández’s rhetoric that we can ‘go together’, both Argentina and Brazil have no interest in signing an agreement with China. Therefore, today the only option seems to be for Uruguay to move forward bilaterally and then the other members can negotiate with China,” Bartesaghi added.

Uruguay’s FTA negotiations with China come at a good moment in the relationship between the two countries, which have already had a strategic partnership agreement in place since 2016. In addition, Uruguay was the first Mercosur country to join China’s Belt and Road Initiative, which Argentina recently joined.

cows in a pasture
Read more: Uruguay plans to boost beef production and lessen its climate footprint

China is Uruguay’s main trading partner, exporting mainly beef to the Asian country. In 2021, Uruguay exported a record US$9.8 billion, of which US$2.7 billion (28%) went to China, according to official figures. Looking at the total exported, 45% was beef, 13% was cellulose products (including timber and pulp) and 12% soybeans.

One of the first impacts that the signing of a trade agreement would have is the reduction of tariffs, which currently reach 35% for exports from Mercosur. This implies a reduction in the price of products exported from Uruguay, which could make them more competitive in the Chinese market.

However, there are differences of opinion within Uruguay regarding the benefits and risks of an FTA. Former vice-president Danilo Astori argued that a break with Mercosur would be the worst path for Uruguay, while Senator Guido Manini Rios, who is part of the current coalition government, said that negotiations with China should take place within the framework of Mercosur.

“Uruguay’s timetable does not coincide with that of Mercosur, it is difficult for the same deadlines to be met,” said Nicolás Albertoni, a Uruguayan international analyst and consultant. “We should not think that China is going to save us, or that China is ‘invading’ us. It is the beginning of a negotiation within the framework of a desire for greater trade openness.”