Uruguay bets on free trade deal with China outside Mercosur

Both governments will evaluate the feasibility of an agreement, despite Mercosur forbidding countries from negotiating outside the bloc


Uruguayan president Luis Lacalle Pou announced at a press conference that China has formally agreed to move forward in FTA negotiations with Uruguay (image Presidencia de Uruguay)

Uruguay and China took the first step towards a possible free trade agreement (FTA) with the announcement of a new feasibility study on 7 September, despite bilateral deals being prohibited by Mercosur – the South American trade bloc that comprises Uruguay, Argentina, Brazil and Paraguay.

Uruguayan president Luis Lacalle Pou announced at a press conference that China has formally agreed to move forward in FTA negotiations with Uruguay. The next step will be a study on the implications of the agreement, with the findings expected before the end of the year.

“This government has expressed its intention to move towards the world with all Mercosur partners but, at the same time – and this has been explicitly stated – if it is not possible to move forward together, Uruguay will try to do so,” Lacalle Pou said.

In March, Mercosur celebrated 30 years since its creation with a summit attended by presidents of member countries, an event which served to highlight their differences. Lacalle Pou said Mercosur should not be “a burden” for regional trade and called for a relaxation of the bloc’s rules, a proposal that Argentina rejected.

Individual trade agreements by Mercosur members are currently not permitted and changing the rule would mean transforming the bloc from a customs union into a free trade zone. Uruguay and Brazil have pushed for such a change in recent years, but without reaching a consensus with other members.

“Uruguay is taking this step because it has the support of Brazil and because China realises that it can no longer wait to find a consensus with the rest of Mercosur,” said Ignacio Bartesaghi, an expert on foreign trade in Uruguay. “Lacalle Pou tried to make the agreement via Mercosur, but Argentina’s protectionism prevented it.”

Uruguay and China: a closer trade relationship

Uruguay’s desire to sign an FTA with China comes during a period of good relations between the two countries, which have had a strategic partnership agreement in place since 2016. Uruguay was also the first Mercosur country to sign up to China’s Belt and Road Initiative (BRI), which Argentina and Brazil have both yet to join. Paraguay does have diplomatic relations with China.

China is Uruguay’s main trading partner, accounting for 30% of its total foreign trade, according to official data. Most trade is in raw materials, although the Uruguayan government intends to advance trade in services, technology, tourism and electronics within the framework of the current FTA negotiations.

Uruguay is taking this step because it has the support of Brazil and because China realises that it can no longer wait to find a consensus with the rest of Mercosur

Meat is Uruguay’s main product exported to China, accounting for 56% of exports, worth a total of US$351.4 million in the second quarter of 2021. Seeds and oleaginous fruits – mainly soy – follow, according to official data collected by the Catholic University of Uruguay. Automobiles, chemicals and industrial products are Uruguay’s main imports from China.

“Uruguay is implementing an international strategy to position itself as a quality food supplier,” said Marcelo Elizondo, a specialist in foreign trade from Argentina. “The problem is that Mercosur does not have a consensus on its international strategy, with different visions within the bloc.”

One of the first impacts of any FTA would be the reduction of tariffs, which can be up to 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.

Uruguay’s National Meat Institute (INAC) estimates that Uruguay will pay US$150 million in tariffs to China this year for exports from the beef sector. In addition to saving on such costs, an FTA with China would allow for an increase in beef, poultry and pork production, INAC argued in a recent report.

In an investigation into the effects of the FTA, Bartesaghi argued that the signing of the agreement would also generate new export flows for Uruguay, as was the case for Peru, Chile and Costa Rica – all of whom have trade agreements with China and incorporated new exports.

“Uruguay and China are complementary economies, so an FTA could be negotiated in less than a year. All studies show that we would benefit from the agreement. We save money on tariffs and we can export other products,” Bartesaghi said. “China knows that Uruguay is a reliable food producer.”

However, not everyone is entirely convinced. Marcelo Abdala, the secretary general of Pit-Cnt, Uruguay’s main trade union, called for a review of the idea as FTAs tend to be “beneficial for the export of raw materials but lethal for sectors with higher added value, such as manufacturing”.

The future of Mercosur

Paraguay’s foreign minister, Euclides Acevedo, said that his government is “concerned about this decision”, and assured that the country continues to uphold Mercosur’s rules. Meanwhile, Argentina’s Minister of Productive Development, Matías Kulfas, said that countries in Mercosur “negotiate as a bloc and not individually”.

On the other hand, Paulo Guedes, Brazil’s Minister of the Economy, supported Uruguay’s decision. “It is in line with the need to modernise Mercosur, with greater negotiating flexibility for member countries,” he said. “It is an example of the reality that is being imposed, given the bloc’s loss of dynamism.”

Uruguay appears to be in a hurry to conclude the trade agreement, as it recognises that the window of opportunity will only remain open as long as Jair Bolsonaro’s Brazil holds the pro tempore presidency of Mercosur. Were Bolsonaro to lose presidential elections in Brazil in 2022, Uruguay would likely have less support for reform within the bloc.

It is in line with the need to modernise Mercosur, with greater negotiating flexibility for member countries

At the press conference in which he announced the potential agreement, president Lacalle Pou said that Brazil is currently on the same page with Uruguay on the FTA, but he was unsure if this would change in time. “I know that Brazil’s position serves Uruguayan interests, in the case of moving forward bilaterally with China. If it serves us now, let’s take advantage of it,” he added.

Julieta Zelicovich, an international relations expert from the National University of Rosario in Argentina, believes that Uruguay’s announcement could lead to several different scenarios: Uruguay could formally leave Mercosur as a result of its negotiations with China; or the agreement could lead to the rest of the countries accepting an easing of the bloc’s rules; it could even lead to a broader restructuring of Mercosur.

“The members of the bloc do not have a convergence of views on the role of Mercosur for their economies and societies, nor on the place of the bloc in the world and in the strategies for international integration,” Zelicovich said.

Trade experts have described Mercosur as one of the least effective entities in the world, both in terms of trade among its members and with external partners. According to Elizondo, of all the trading blocs, Mercosur is the one that exports the least in the world in relation to its gross domestic product (GDP).

Mercosur is currently in open negotiations over FTAs with South Korea, Singapore, Canada, Lebanon and the European Free Trade Association (EFTA), while it is also finalising the last details of a trade agreement with the EU. Its main export destinations are China, the US and the EU.

Given the notoriously complex and often drawn-out process of trade negotiations, finalising a Uruguay–China FTA during the window of opportunity identified by the Lacalle Pou government will be a challenge. In any case, with significant potential implications for the future of the bloc, its progress will be closely monitored.