Mauricio Macri is taking power with a mandate to jumpstart his country's flagging economy. But can he tip the region towards free trade?
On Dec. 10, Argentina’s President Mauricio Macri entered the Casa Rosada with a mandate to revive a sputtering economy and take the country in a new direction. The agenda is long, including revitalizing the export sector, controlling inflation, and bringing in foreign direct investment. After 12 years of left-leaning rule by first Néstor and then Cristina Fernández de Kirchner, Macri seeks to move South America’s second-largest economy from an inward-looking, clientelistic state to an open, internationalist one. This long-overdue shift could open a new flood of trade and foreign direct investment — but it could also set the stage for a larger shift.
If things go as planned and new life is injected into the economy, the result would be a win for the Argentine people. But it would also be a larger win for the rules-based approach to global economic governance. A Macri presidency, and the house cleaning expected to come with it, may be a catalyst for a broader update in international commerce that goes far beyond its own borders — a realignment of key emerging economies toward the high-standard trade policies being pursued by the United States in the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).
Macri was elected on Nov. 22 on a political platform that would bring change to Argentina. In technical default since July 2014, the country has been shut out of international credit markets for almost a year and a half and has been forced to look for money from China, borrowing $7.5 billion for infrastructure investments in 2014. The Argentine people must reckon with annual inflation, though officially at 14 percent, that opponents of the Kirchner administration have estimated to be double that. These problems, swept under the rug by the last administration, will now be top priorities.
Macri has also signaled that Argentina’s role in the global economy will change during his watch. During the campaign and after winning the vote, he said that his election would mean a closer relationship with the United States and Europe. Macri has also promised to immediately lift capital controls and export restrictions. Once Argentina inevitably finds a deal with the holdout hedge funds that have been fighting the country in court since they acquired Argentine bonds after the country’s 2001 debt default, it will re-enter the global economy without constraints.
Although the opposition has the most seats in both chambers of Congress, Macri still has the freedom to forge a new international direction, including in trade. He can take action in Argentina’s immediate neighborhood, at the hemispheric level, and with the two mega-regional trade deals: TPP and TTIP.
But first he must focus on regional economic concerns. At the top of the agenda is deepening Argentina’s trade relationships with its partners in Mercosur, the Southern American common market founded by Argentina: Brazil, Paraguay, Uruguay, and Venezuela, who joined in 2012. The bilateral Argentina-Brazil link is crucial. Like Argentina, Brazil has for several years favored a growth model focused on its domestic economy, with the result that it has one of the lowest percentages of trade to GDP worldwide. But Brasilia, under pressure with an economy contracting by a record 4.5 percent, is beginning to understand that it cannot grow unless it opens its economy further to the world.
Together, Argentina and Brazil can accelerate Mercosur’s negotiation of a free-trade agreement with the EU. Despite Brazil’s recent efforts to revive the deal, including by threatening to negotiate separately with the EU, it has languished for over five years since formal negotiations were relaunched in May 2010, mainly because of Argentina’s lack of interest. A June summit with the EU fell flat even amid heightened expectations that the two sides would exchange tariff offers. At least Venezuela, mired in internal economic problems, cannot impede the deal. Even if Venezuela remains in Mercosur — Macri, prior to the Nov. 22 election, had said he would seek Caracas’s suspension for not upholding the group’s democracy clause — its membership has no bearing on the negotiations since it joined the group too late.
The second opportunity for Macri to increase economic integration through trade is also within the hemisphere: the relationship between Mercosur and the Pacific Alliance (Chile, Colombia, Mexico, and Peru). At roughly $3.5 trillion in purchasing power parity, Mercosur and the Pacific Alliance are equal in size, but the similarity stops there. Mercosur — until now — has been inward looking, with attention focused on spurring trade within the customs union.
The Pacific Alliance’s priorities, on the other hand, lay in attracting foreign investment and making their economies a magnet for global value chains. The two groups have struck a number of accords in technical issues but higher-level cooperation has so far proven elusive. A new leader in Argentina and Brazil’s need to rethink its economic calculations may just be the one-two punch needed for a broader and deeper approach to aligning the two regional groupings.
Chile, for example, has recently proposed that the alliance and Mercosur work toward “convergence” of the two groupings, whose members both face a challenge from the end of the commodities boom and uncertain future Chinese demand for their exports. With Macri’s election, the door is open for talks to increase trade and investment through, for example, customs facilitation, tariff reduction, and standards alignment.
Discussions could also focus on Mercosur countries taking part in the Pacific Alliance’s stock market cooperation. With three of the four Pacific Alliance countries party to the TPP negotiations — Chile, Peru, and Mexico — greater Pacific Alliance cooperation may also spur Mercosur to look eventually at joining TPP.
The third leg of Argentina’s trade policy should be the United States. With the new reformist administration in Buenos Aires, two avenues are open to Mercosur. One could be to initiate U.S.-Mercosur talks in areas such as mutual recognition agreements covering industrial testing and certification standards or accords to support an open Internet. These may one day lead to a full-fledged free-trade agreement. But that is a long way off. The broader, 12-nation TPP may offer a faster route to unlock trade and investment with the United States.
Another option is for Argentina to make a push with both the United States and the EU to have Mercosur be among those at the top of the list for joining TTIP once it is completed. Argentina, Brazil, Uruguay, and Paraguay would be natural additions to the rules-based, open economy model being negotiated (as would the four countries of the Pacific Alliance).
The Argentine people voted for change and momentum is clearly on Macri’s side, giving his new administration an unprecedented opportunity to make progress on these three key steps. Together they could be the harbinger of a tipping point in the global economy, reinforcing the liberal, internationalist trade and economic model that faces a challenge from China, Russia, and other economies with a statist and mercantilist outlook. Together, an Atlantic triangle — the United States, the EU, and Latin America — could be at the forefront of the next wave of global trade policy leadership.