Several factors are affecting the economic and trade relations between Argentina and Brazil. These are factors that transcend even the bilateral relation and are linked to the perceived shortcomings in the construction of Mercosur.

In the presence of some of these factors, several courses of action would seem advisable, especially for businessmen interested in preventing the deterioration of the bilateral trade scene with Brazil and even of Mercosur. Without excluding other options, the following would seem the most relevant:

• To carry out a systematic analysis of the alternatives that the country has for its international insertion through international trade negotiations, such as FIESP and IEDI have currently done for Brazil.
  
  
• To revalue the real scope that a more credible and efficient Mercosur could have as a platform for competitive insertion and bargaining power in the current international trading system.
  
  
• To realistically assess what kinds of adaptations and improvements would be required of Mercosur, of its working methods and its operational tools.
  
  
• To develop strong interactions, as informal as possible, with business leaders and relevant institutions of Mercosur member countries, in particular Brazil, in order to have a good diagnosis of the real problems and an accurate assessment of the existing margins of maneuver to untie any knots with intelligence and efficacy. To achieve an adequate business-academic synergy could be very useful in this respect, complementing the necessary interaction with government sectors.
  
  
• To give priority to the issue of preferential trade negotiations with the EU, avoiding the trend towards more radical versions of what has been called the 'umbrella', in which each Mercosur country would negotiate bilaterally with Europe.
  
  
• To place the emphasis on developing an effective strategy of alliances and joint ventures with companies from Brazil and from the other partners, especially in the context of regional production chains and according to the opportunities that are opening up for Mercosur countries in the world.

Several factors are affecting the economic and trade relations between Argentina and Brazil. These are factors that transcend even the bilateral relation and are linked to perceptions of inadequacies in the process of the construction of Mercosur. Such perceptions are more prominent in the business sectors of Brazil, Paraguay and Uruguay. In each case they vary their intensities and especially in Paraguay and Uruguay they also have, due to different motives, political connotations.

In the case of Brazil we see the government's interest in avoiding a deterioration of the quality of bilateral relations and, in particular, of the value of the strategic relationship. As was defined in 2008 by the then Minister of Foreign Relations and now Minister of Defense, Celso Amorim, on a panel at the World Economic Forum in Davos, 'for Brazil, Mercosur is synonymous with peace and political stability in South America'. Such definition would still have validity at the government level in Brasilia.

In terms of the bilateral relation between Argentina and Brazil, the greatest degree of dissatisfaction relates to those restrictions that affect trade. While these restrictions have been observed in the past and can be observed in the present with varying degrees and in different forms in both countries, more recently the focus has been the reaction of Brazilian exporters to what they consider are restrictive measures applied on the side of Argentina. They consider that these are contrary to the rules agreed bilaterally (ACE 14) as well as in Mercosur. In the opinion that prevails among Brazilian businessmen, such restrictions would also be affecting investment by Brazilian companies in the country. To this we must add the uncertainties surrounding the future of the automotive agreement. One factor that during the last two years has accentuated the criticism from Brazilian business sectors to such trade measures is what is considered to be a diversion effect of its trade with Argentina in favor of third countries, especially revealed by the growth of manufactured imports from Asia. But such diversion would also be observed in the case of manufactured exports from Argentina to Brazil.

In any case, it is difficult to assess in the Brazilian business positions how much there is of substantial argumentation grounded in reality and how much is just gambit strategy in relation with pending negotiating processes, such as the automotive agreement and the agreement between Mercosur and the EU. Accurately gauging this aspect seems vital in defining the negotiating strategies of the Argentine business sector.

The relative weight of the South American region in manufactured exports from Brazil to the world and of manufactured products in the exports to Mercosur and Argentina is not a minor fact when assessing Brazil's actual margins of maneuver in its trade relations with Argentina and with the region. Such relative weight would reveal differences in the degree of industrialization of Brazil with Argentina and other South American countries, but it would also show the positive effects that the tariff reductions, both within the scope of the LAIA and Mercosur, have had for Brazilian exports and for the internationalization of its businesses.

In the case of Uruguay and, to a lesser extent, of Paraguay, the main complaint has to do with the fact that they have not obtained -neither in Argentina nor in Brazil- the guarantee of unrestricted access to an expanded market that was -in their perception based on the Treaty of Asuncion- one of the reasons for the existence of Mercosur. 'We were promised a market that we were given only precariously' is the argument that is wielded repeatedly in the business and political sectors of both countries. However, in general this argument is not made in the context of an analysis based on whether the firms from both countries have developed appropriate strategies adapted to the fact that they could be inserted into larger and more complex markets. It also seems important to clarify this topic for a solid debate on the asymmetries in Mercosur.

The main complaints refer however to what Mercosur means for the global international and regional trade insertion strategy of each of its member countries. It is a strong complaint on the side of Brazilian businessmen and in political and business sectors of Uruguay. There is a split in such complaints.

On the one hand, they refer to the ineffectiveness and inefficiency of Mercosur rules. Very recently some Brazilian business leaders declared that, at least in the economic, 'Mercosur is dead'. Similar expressions have been used in the political and business environments of Uruguay. At the time, even President Mujica said that 'Mercosur is lame and in misery'. Vice-President Astori has been one of the leading critics of the current state of Mercosur. All this has a broad impact in the media and influences public opinion.

On the other hand, the complaints refer to the fact that Mercosur would be preventing the insertion of each country in the current trend towards the negotiation of interregional mega trade agreements, in particular the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. The complaints on this regard are expressed through arguments such as 'Mercosur ties us and pulls us down' that are often heard in business sectors and in the press in Brazil, who feel their country is being isolated from the global scene. These complaints are accentuated by three factors: i) the current stalemate of the Doha Round and the existing doubt about the future effectiveness of the WTO, at least to promote multilateral trade negotiations; ii) the contrast between the aforementioned mega-negotiations (although it is still difficult to say whether they will conclude successfully and when) and the present state of the Mercosur-EU negotiations, and iii) the idea that has been installed that the future of international trade for a developing country is strongly linked to the capacity of its productive system to insert itself in transnational value chains, something that would require the regulatory frameworks that would result from the negotiations of the mega-deals, given that they could not arise, at least in its current situation, within the scope of the WTO. Professor Richard Baldwin is who has promoted this view, even proposing the idea of a new WTO 2.0 with participation restricted to only a group of countries that would facilitate the development of transnational value chains (Baldwin, Richard, WTO 2.0: Global governance of supply-chain trade, Centre for Economic Policy Research (CEPR), Policy Insight N° 64, London, December 2012, on http://www.cepr.org/.). The so-called Pacific Alliance between Chile, Colombia, Peru and Mexico which, beyond its real results, has had an effective media campaign, is contributing to that feeling of 'being isolated' observed with different intensities in Brazil, Uruguay and Paraguay.

Several courses of action are recommended, especially for businessmen interested in preventing the deterioration of the bilateral relation with Brazil and even of Mercosur.

Without excluding other options, the following would seem the most relevant:

• To carry out a systematic analysis of the alternatives that the country has for its international insertion through international trade negotiations, such as was recently done for Brazil by the FIESP in its report 'External Integration Agenda' (http://www.fiesp.com.br) and the IEDI in its report 'The Multiplication of Preferential Trade Agreements and the Isolation of Brazil' (http://www.iedi.org.br/).
  
  
• To revalue the real scope that a more credible and effective Mercosur could have as a platform for competitive insertion and bargaining power in the current international trading system, characterized by the proliferation of actors with multiple negotiating options and the fragmentation of trade, production and investment in various forms of transnational value chains.
  
  
• To realistically assess what kinds of adaptations and improvements will be required by Mercosur, its working methods and its operational tools in order to increase its effectiveness and social legitimacy; to become stronger as an effective environment to guarantee economic preferences among its members, with emphasis on those that are functional for transnational productive linkages, and to establish relevant trade negotiations with the largest possible number of countries and/or regions.
  
  
• To develop a strong interaction, as informal as possible, with business leaders and their relevant institutions in other Mercosur member countries and, in particular, of Brazil, in order to have a good diagnosis of the real problems and an accurate assessment of the margins of maneuver available to untie knots with intelligence and efficiency. For this purpose it would seem advisable to multiply informal channels of dialogue and mutual understanding. To achieve an adequate business-academic synergy could be very useful in this respect, complementing the necessary interaction with government sectors.
  
  
• To give priority to the issue of preferential trade negotiations with the EU, avoiding the tendency to more radical versions of what has been termed as an 'umbrella', which in practice means that each Mercosur country will negotiate bilaterally with the Europeans. Such a concept could eventually lead to an erosion of the trade and economic preferences of Argentina in the Brazilian market and, moreover, it could cause a marked deterioration in the quality of the binational strategic relation. This could even set back the relation to a state prior to the signing of the agreements in the nuclear field and the launch by Alfonsín-Sarney of the bilateral integration program. There is however ample space for a negotiation that combines a common framework with multiple variants of flexibilities and differentiated speeds that take advantage of the vagueness of the WTO rules (GATT, Article XXIV paragraph 8); of the precedent of other trade negotiations of the WTO itself (it would seem advisable to follow closely the evolution of the India-EU negotiations); of the time required for the maturation of the agreement that is reached (if well negotiated, it could be somewhere between twenty and twenty-five years, to which we should add the exceptions and the possibility of applying different types of safety valves, such as those recommended by the IEDI in the aforementioned report, in order to mitigate the impact on the most sensitive sectors), and of the real interest that the EU may have to conclude the agreement with Mercosur before doing it with the U.S., taking into account the negotiations on agriculture and the growing insertion in the region of China and India, in economic sectors of interest to European companies.
  
  
• To place the emphasis on developing an effective strategy of alliances and joint ventures with companies from Brazil and from other partners, especially in the context of regional production chains and in relation with the opportunities that are opening up in the world for Mercosur countries as a result of the growth of the urban middle classes, which involves profound changes in consumption patterns, both of processed foods that are different and 'intelligent' and in diverse aspects of daily life (such as clothing, entertainment, health, education and tourism, among others) and in the requirements for energy, logistics and transportation.

Recommended Reading:

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