Australian traders should turn to South America

With the ongoing trade war between the United States and China showing no signs of abatement, it’s easy to ignore the brighter spots on the horizon. Not least the historic agreement reached between the European Union and the four founding members of the Common Market of the South (Mercosur) – Argentina, Brazil, Paraguay and Uruguay – after twenty years of intermittent negotiations.

Australia should capitalise on South America’s increased openness to trade by consolidating its close political, economic and cultural ties with the region.

If there is one thing that rising global tensions between the United States and China has brought into clearer focus, it’s the need for regional blocs to continue their integration based on the transformative force of international trade.

In this regard the announcement of the political agreement between the EU-Mercosur for a Free Trade Agreement (FTA) is a piece of good news. If ratified, it will urge Mercosur countries to modernise their economies, internationalise their companies, and become more competitive as trade partners on the global stage.

Historically seen as a competitor to Australia in agricultural commodities and the mining sector, South America’s shift to open markets is playing out against a backdrop of a growing middle class, increased manufacturing heft and services capabilities in the region.

These developments have shifted the terms of trade between the blocs, and present fresh opportunities to develop a mutually beneficial relationship across key sectors such as energy, agribusiness, infrastructure, tourism, education, financial services and technology.

Efforts to strengthen Southern Hemispheric trade linkages fit well within the potential agreement between the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) and Mercosur.

Since 1996, senior leaders from member states have participated in talks to deepen trade and investment ties within the framework of the CER-Mercosur dialogue, the central mechanism for advancing Australia’s trade and economic relationship with Mercosur. If the EU-Mercosur Agreement comes into force, it should pave the way for Mercosur’s agreement with CER.

The Mercosur agreement is a game-changer. It will generate massive market opportunities for Argentina, Brazil, Uruguay and Paraguay. Their economies will open in a gradual and predictable way, offering governments and private sector allies a clear reform roadmap and decreasing the political risk of investing.

Companies will have more exposure to advanced standards, a force that will drive competitiveness and bring long-term benefits to the workforce and consumers. The agreement with the EU will force Mercosur into a fast track towards adopting higher standards to meet the EU’s requirements across social, labor, environmental and health.

Furthermore, Mercosur companies will now be competing in a global market with higher standards in public infrastructure and years of investment in developing a workforce equipped to meet the demands of developed nations’ trading rules. This will improve the attractiveness of South America as a place to do business for risk-averse Australian investors.

The vast physical distance of the Pacific Ocean separating Australia and Latin America is no longer a barrier for business engagement. Trade and economic relations between the two giants have grown significantly over the last decade—from 2016 to 2017 Australia’s imports from Latin America (2016-2017) totalled A$6,349 million, and exports to Latin America totalled A$4,752 million.

Australia’s top export markets in the region include Brazil, Chile, Colombia, Mexico and Argentina. With over 300 Australian companies calling Latin America home and 40,000 Latin American students choosing to study in Australia each year, Australia has the competitive advantage of strong people-to-people links with the region should more trade agreements come to fruition.

With ongoing tensions between Australia’s top trading partner, China, and its top defense ally, the United States, Mercosur’s market openness also offers Australia a chance to diversify its trading partners beyond the Asia Pacific. The pact is an important signal that this once-protectionist bloc is ready to adopt a more market friendly approach to trade relations.

This is an important win for pro-market Presidents Mauricio Macri of Argentina and his Brazilian counterpart Jair Bolsonaro who both vowed to increase growth, jobs and competitiveness through opening their economies to foreign trade.

The two countries are rich in natural resources and agricultural products, but high tariffs deterred potential trading partners for many years while leftist, populist governments imposed trade restrictions. Strengthening this trade bloc provides a much-needed victory for regional leaders to promote a positive international agenda to offset political troubles at home.

While the announcement bodes well, some political horse-trading remains before ratification of the EU-Mercosur agreement. A series of complicating factors may threaten its eventual passage, including political uncertainty in Argentina following President Macri’s defeat to his populist left-wing rival Alberto Fernández in the August 11 primary vote.

Time will tell how Argentina’s upcoming presidential elections may affect the ratification process and the country’s relationship with the Brazilian government, after President Bolsonaro publicly criticised the potential return of Kirchnerism to Argentina. 

Concerns are growing in Brazil over President Bolsonaro’s lax environmental policies and political rhetoric which environmentalists blame for the accelerated deforestation of the Amazon rainforest. European consumers, governments and companies favour strict standards across agricultural supply chains and efforts to combat climate change. Unless Brazil adopts measures to combat illegal logging and related trade, European ratification of the agreement is not a done deal.

Nevertheless, the agreement holds significant geopolitical importance and demonstrates political will to counter the rise of protectionism and unilateralism. Not only do the Mercosur countries benefit from enhanced market access to the EU, the agreement will also give the countries momentum to move forward with ongoing trade negotiations and look at potential new partners in addition to stimulating their own internal integration.

The Australian government has actively pursued trade agreements in the region, most recently through the signing of the Free Trade Agreement with Peru (PAFTA) in February 2018 and the 2009 Free Trade Agreement with Chile (ACIFTA)—testament to the possibility of mutually beneficial diversification within the mining and agricultural sectors, with a strong focus on the Asia-Pacific.

Australian expertise and world class companies in mining and energy technology and services, like Rio Tinto, have transferred knowledge for more efficient production of Chile’s natural resources. Australia’s capabilities in mining up the standards for processing Chile’s abundant raw materials which in turn enter global value chains more competitively.

On June 30, 2019, Australia also launched negotiations with the Pacific Alliance, a Latin American trading bloc including Chile, Colombia, Mexico and Peru. The Pacific Alliance is an associate member of Mercosur. Australia is a founding member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes several Latin American countries – Chile, Mexico and Peru. Australia is also a founding member of the Asia-Pacific Economic Cooperation (APEC) being hosted by Chile this year.

Historically, Australia has overlooked Latin America in favour of Asia, but recent developments show why it’s time for Australian policymakers to pay more attention to their friends on the other side of the Pacific. And with its close ties to Asia, Australia can also serve as a launch pad for Latin America’s expansion beyond its key markets in the North.

This article was published by the Australian Institute for International Affairs.