Brazil and Uruguay Give South American Trade an Adrenaline Shot

Welcome back to Foreign Policy’s Latin America Brief.

The highlights this week: Brazil and Uruguay shake up the status quo in customs union Mercosur, the Community of Latin American and Caribbean States finds little consensus on democracy in the region, and Colombia resists sending weapons to Ukraine. 

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Trade was high on the agenda of Brazilian President Luiz Inácio Lula da Silva’s first overseas trip of his term to Argentina and Uruguay this week. The former jaunt included Tuesday’s summit of the Community of Latin American and Caribbean States (CELAC) in Buenos Aires.

During Lula’s visit to Argentina on Monday, Brazilian Finance Minister Fernando Haddad announced that a government-owned bank would issue new credit lines for Brazilian companies to export goods to Argentina, and Lula and Argentine President Alberto Fernández announced that the two countries would study a financial mechanism to conduct bilateral trade without converting transactions to U.S. dollars, which Argentina sorely lacks.

While Lula and Fernández referred to this mechanism as a “common currency” in an op-ed last weekend, Haddad has since clarified that the leaders are considering a common unit of account for trade operations rather than a currency that would replace the Brazilian real and Argentine peso.

Then, at the CELAC summit the next day, leaders from center-right Uruguayan President Luis Lacalle Pou to leftist Colombian President Gustavo Petro called for Latin America to trade more internally.

And on Wednesday, during meetings in Uruguay’s capital of Montevideo, Lula proposed talks on “modernizing” the Mercosur customs union, an “urgent” approval to its draft trade deal with the European Union, and subsequent exploration a free trade agreement with China. Mercosur’s rules prohibit any one of its members—Argentina, Brazil, Paraguay, and Uruguay (Venezuela is suspended)—from making trade agreements without the others’ consent, but Lacalle Pou has been studying the possibility of an independent bilateral trade deal between Montevideo and Beijing.

Altogether, the week’s events were an adrenaline shot to Mercosur—and a signal that Brazil’s return to regional engagement may address long-standing criticism that South America is not living up to its potential on foreign trade.

Lacalle Pou argues that Mercosur’s slowness to make deals with new markets is holding its members back from trade opportunities. The potential EU deal has been in the works for more than 20 years and was stalled further under former Brazilian President Jair Bolsonaro over EU objections to his environmental record. Last December, following Lula’s election, European Commission President Ursula von der Leyen said in a speech that the EU had a “unique window of opportunity” to approve the deal.

It appears that Lacalle Pou’s vocal complaints about Mercosur have affected Lula’s stance on the EU deal, former Brazilian diplomat Rubens Barbosa told Foreign Policy. “During the campaign, [Lula’s] Workers’ Party had said they wanted to reopen negotiations on the agreement.” On Wednesday, Lula said simply he hoped to sign it.

But while Uruguay’s haste to negotiate a trade deal with China—and Lula’s pledge that Mercosur will consider one—resolves a short-term rift, it also sets the customs union up with a longer-term dilemma.

Lula’s foreign affairs advisor is among policymakers who have warned that shrinking industrial sectors have become a problem for South American countries in recent years, as industrial sector jobs are often better paid than the jobs in raw materials extraction and the service sector that are replacing them. The big boom in South American commodities exports since the turn of the century is intertwined with the continent’s growing trade with China, which tends to buy raw materials from South American countries and in turn sells them manufactured goods.

For Brazil, that means China’s rise has not only increased the role of commodities in Brazilian exports but also led Chinese-manufactured goods to replace Brazilian-manufactured goods in other markets, such as Argentina. In 2021, China overtook Brazil as the top exporter to Argentina, despite the fact that its goods are hit by a tariff when they enter Mercosur.

A 2019 study from the Brazilian government’s Institute of Applied Economic Research modeled a potential Brazil-China trade deal and concluded that it would increase Brazil’s trade flow with China overall but reduce Brazilian employment in manufacturing.

Lula’s overtures on bilateral trade with Argentina “could help Brazil export more manufactured goods,” José Augusto de Castro of the Brazilian Foreign Trade Association (AEB) told Foreign Policy, as Argentina is a top destination for Brazilian-manufactured goods, such as cars. Brazilian exports to Argentina have been as high as $22.7 billion in 2011 but in 2022 totaled $15.3 billion, according to AEB. Government credit for exporters has been scarcer in recent years, Castro said, adding that Brazilian state support helps exporters do business in a country with as much economic uncertainty as Argentina.

A new mechanism for non-dollar-denominated trade could likewise increase commercial flows between Argentina and Brazil, Barbosa said. Though the system’s exact structure is yet to be negotiated, it’s expected that transactions “would be guaranteed by the two central banks,” inserting more trust into cross-border commerce.

But “there’s a limit” to how much government credit can be provided to exporters, economist Lia Valls Pereira of the Brazilian Center of International Relations told Foreign Policy. A boom in exports of Brazilian-manufactured goods requires a series of other reforms in education, infrastructure for transporting goods, and industrial policy, she said.

For the time being, a Mercosur-China deal is likely still years away, former Brazilian Foreign Trade Secretary Welber Barral told Foreign Policy. “Remember that simpler negotiations, like [Mercosur’s ongoing talks] with Canada, have already gone on for six years.”

Still, Lacalle Pou suggested in a press conference on Wednesday that he did not mean to delay the prospect of a Mercosur-China deal indefinitely. “Uruguay has its negotiations [with China],” he told reporters. “If there is a decision by Lula and the [Brazilian] government to advance with China, we can easily fold if that is what is really consistent with the needs of our country.”

Mercosur has been jolted out of its stasis.

Saturday, Jan. 28, to Wednesday, Feb. 1: German Chancellor Olaf Scholz travels to Argentina, Chile, and Brazil.

Sunday, Feb. 5: Ecuador holds local elections as well as a nationwide referendum on changing eight points in its constitution.

Guatemala-Colombia rift. Guatemala’s ongoing crackdown on anti-corruption judges and prosecutors caused a diplomatic rift with Colombia last week after the Guatemalan government went after a Colombian cabinet minister who previously worked as part of an international anti-corruption mission in Guatemala City.

Guatemalan authorities on Jan. 16 said they were investigating Colombia’s defense minister, Iván Velásquez, for “illegal, arbitrary, and abusive acts” they say he committed while setting up plea bargain deals as part of his leadership of the anti-corruption mission between 2013 and 2019.

Both countries summoned their ambassadors for consultation after the incident, and Petro said he fully backed Velásquez. Guatemala’s crackdown comes ahead of a presidential election later this year and has already prompted U.S. sanctions on the country’s attorney general and current anti-impunity prosecutor, who issued the new charges against Velásquez.

Colombia’s Russian guns. Petro announced this week in a press conference that the United States had requested that Colombia allow Russian-made weapons in its possession to be sent to Ukraine as part of efforts to ramp up Ukraine’s defenses against Russia. Petro said he declined to do so.

U.S. Southern Command chief Laura Richardson had said last week at an Atlantic Council event that Washington was in talks with six countries about the possibility of sending weapons to Ukraine but did not name the countries in question. Petro said that his position “does not mean that we are not worried about aggression,” but that Colombia supports a policy of peace and therefore would not send battle supplies.

Washington has sought such weapons shipments from other countries in recent months. Western ally Germany approved the export of tanks this week, while Israel has allowed the United States to send U.S. military stockpiles stored in the country to Ukraine but has stopped short of shipping its own weapons.

Nurses care for a newborn baby in a neonatal care unit at Roberto Santos General Hospital in Salvador, Bahia state, Brazil, on Oct. 17, 2022.RAFAEL MARTINS/AFP via Getty Images

The cost of gene therapy. A series of lawsuits in Brazil has established the precedent that the country’s public health system must cover the costs of an expensive gene therapy that treats paralysis in infants. The Brazilian government will pay around $1 million for each one-time treatment, a staggering amount for a public health system that spent around $340 per capita in 2019. The condition that the drug treats affects around 250 to 300 newborns in the country each year.

The whopping sum is part of an ongoing debate about whether developing countries should make groundbreaking but highly expensive drugs available in their public health systems, the New York Times reported. Brazil negotiated with the drug manufacturer Novartis to pay some $600,000 less per course of the drug than users had been paying in the country—but around $500,000 more than the country’s drug pricing authority said it should cost.

Given the costs, some Brazilian lawmakers argued that it was not worth covering the drug because of how it would strain the public health system financially, with one saying it was “not sustainable in the long term.”

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People from different nationalities take part in a protest outside the Sheraton hotel, where the Community of Latin American and Caribbean States summit was hosted, in Buenos Aires on Jan. 24.ALEJANDRO PAGNI/AFP via Getty Images

CELAC, which held its annual summit on Tuesday in Buenos Aires, is a younger and far more loosely organized forum for Latin American countries than the Organization of American States (OAS), which has a permanent headquarters and is linked to a human rights court. The OAS includes the United States and Canada, while CELAC does not.

When the United States hosted the OAS leaders’ summit—known as the Summit of the Americas—in Los Angeles last June, it excluded Cuba, Venezuela, and Nicaragua over democracy concerns. Those countries were invited to Tuesday’s CELAC meeting in Buenos Aires, though Venezuelan President Nicolás Maduro withdrew at the last minute, reportedly over fears that he could be arrested in Argentina. Envoys from China, the United States, and the European Union were also invited to the summit.

Mexico and other Latin American countries protested Cuba, Venezuela, and Nicaragua’s exclusion last June on the grounds that problems in the region are best dealt with through face-to-face engagement. Tuesday’s meeting saw a handful of statements calling for a return to democracy in the region—notably from Lacalle Pou and Chilean President Gabriel Boric—but the summit’s joint communique contained no naming and shaming of regional governments, falling short of that ideal.

On Venezuela, CELAC members said in the communique that they supported the Maduro government’s ongoing negotiations with the country’s opposition but did not mention the opposition’s goal of securing guarantees for competitive elections in 2024.

A meetings of CELAC finance ministers is set to occur in the first half of this year, and a meeting of CELAC heads of state and the European Union is scheduled to take place in Brussels in July.