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OPINION AND ANALYSIS | 29-06-2019 10:16

Macri scores brownie points overseas

It is important the Mercosur team make sure that the final conditions of the agreement generate opportunities rather than dependencies. It seems to be the case: falling tariffs for the industrial and agricultural sectors are what Latin America needs in order to take advantage of its competitive advantage.

Who did it worse, Mauricio Macri or Cristina Fernández de Kirchner? It is difficult to come to an objective agreement as to who caused more damage to Argentina’s economy, the widow of Néstor Kirchner or her successor, but what is clear is that a return to Kirchnerite populism would not only cause a negative reaction in the market, but it could also signal a return to an economic isolationism that has definitely caused irreparable damage to the population.

The historic signing of a free trade agreement between Mercosur and the European Union could mark the beginning of a new phase of economic development for the South American trade bloc, and it is definitely a political and cultural victory that President Mauricio Macri will try to capitalise upon his return from Japan. While the precise conditions of the agreement remain to be seen, it is encouraging that it will move forward. And, while the Macri administration has proven its absolute incompetence in the economic management of the country, it is definitely pointing in the right direction by opening up trade and investment channels with the one of the world’s largest markets.

At the same time, the initial response by the Kirchnerite political space is troubling to say the least: presidential candidate Alberto Fernández tweeted out that while he doesn’t know the details of the free trade agreement, he does know its perils, which translate into negative conditions for Argentina’s industrial sector and the country’s workers.

“Argentina counts with a mere 12 nations/markets with which it has partnered across the globe in which it gains market access through reciprocal trade agreements,” the president of the International Society for Performance Improvement explained in a research note released before the confirmation that the deal would officially pass yesterday. Brazil, with 11, the same number as Uruguay and two more than Paraguay, fared worse, while others like Chile (56), Colombia (35), Peru (15), and even Venezuela (29) showed greater openness, the report indicated.

While it is extremely important that the fine print doesn’t generate conditions that are overly favourable to the European Union, the free trade agreement sets the ground for economic integration that will most probably increase productivity for a region of the world that is among the most inefficient. More than 90 percent of Mercosur’s exports will see the elimination of tariffs, a report by the trade bloc indicated, while bureaucratic obstacles will also be reduced. The EU will slash tariffs on all of its imports of industrial goods and 81.7 percent of agricultural goods, which is where Argentina and South America in general have major competitive advantages. There will still be quotas in place so that the Mercosur products don’t end up “flooding” European markets. Obviously, Argentina’s markets, as part of the deal, will also open their doors to European products, as industrial and agricultural goods will see a reciprocal reduction in tariffs, meaning key productive sectors of the economy such as autos and food products will face greater competition.

The signing of this trade agreement while the world’s leaders are struggling with rising nationalism and protectionism in the context of the G20 summit in Osaka is also encouraging. While US President Donald Trump has shunned multilateralism and used protectionist tariffs to the detriment of the global economy, Mercosur and the EU actually need greater integration. One of Trump’s main objectives has been to renegotiate its bilateral trade circumstances with key partners. This, in certain areas, makes sense for the United States, particularly with China, which has emerged as a global industrial powerhouse that is progressively gaining geopolitical power through its commercial dealings. Yet, South American nations are at a massive disadvantage in terms of production and logistics costs, not to add corrupt bureaucratic structures and high taxes. Europe, at the same time, is facing an aging population that has left a generation of young people with limited opportunities for social ascension, as it lost out on a digital revolution that has been dominated by Silicon Valley and Asia. This agreement could allow both blocs to gradually recover productivity and opportunity.

The risk that South America could once again fall prey to foreign siren calls for globalisation and openness that ultimately destroy their productive sectors and leave them indebted and poor is very real. Argentina, for example, managed to become an advanced economy with a powerful exporting sector, rising industrial sector, and solid internal market by the mid-twentieth century. Not only did the internal struggle between the working sector and the conservative hegemonic sectors lead to deep political divisions and political swings, but the involvement of the United States in the whole of Latin America resulted in brutal dictatorships that raped and pillaged the continent. A big part of this had to do with economics: the risk of socialism was substantial, and in the middle of the Cold War the US couldn’t have the Soviets in their backyard. This led to a drastic move to the right by several Latin American nations, including Argentina, which destroyed their industrial sectors and took up tens of billions of dollars of foreign debt which haunt these countries to this day.

It is important the Mercosur team make sure that the final conditions of the agreement generate opportunities rather than dependencies. It seems to be the case: falling tariffs for the industrial and agricultural sectors are what Latin America needs in order to take advantage of its competitive advantage. At the same time, the EU is the world’s leading investor and Argentina only participates in 2 percent of its foreign direct investment. Europe spends some US$800 billion annually on service imports, for example.

Fernández’ initial rejection of a deal he hasn’t even read is a proxy for how his political boss, Cristina Fernández de Kirchner, thinks. He seems right in cricitising the use of the tens of billions of dollars lent by the International Monetary Fund (IMF) to fund capital flight, but it isn’t reasonable to believe that the agreement will automatically destroy Argentina’s industrial sector, which has been slowly shrinking for over half a century. With the Fernádez-Fernández ticket leading the latest surveys, let’s hope it’s just campaign speak.

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Agustino Fontevecchia

Agustino Fontevecchia

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