The Road to a Free Trade Agreement between Uruguay and China

Over the last few weeks, talks about China in Uruguay have taken centre stage. Indeed, this has been the case for some time now, when China became Uruguay's largest trading partner and accounts for more than 30% of the South American country's foreign trade. The latter phenomenon is certainly not confined to Uruguay and has been seen in practically all Latin American countries and in a large part of the world's economies.

It all began when President Lacalle Pou unexpectedly summoned the leaders of the political parties to make an important announcement for the country's economic development. Naturally, this call drew the attention of the media and the public, who began to wonder about the announcement that the president would make later in a press conference. A few minutes after the meeting began, the media anticipated what Lacalle Pou later confirmed: Uruguay would carry out a joint feasibility study to sign a bilateral FTA with China.

Although the news came as a surprise to some national players, it is part of a foreign policy that the country has been consistently following since 1988 , and which has gained momentum under the current administration through specific actions and the leadership of Lacalle Pou, to which the change in the international and regional context must be added. The news is not that Uruguay wants to negotiate an FTA with China, but rather that the second Asian power has agreed to discuss bilateral trade beyond Mercosur (China has been demanding an FTA with the bloc for some time now, but the bloc has not yet given a joint response), which despite having already been discussed, had not yet materialised.

It is clear that Lacalle Pou is pragmatic in his foreign policy, with a strong presidential diplomacy that has yielded positive results in relation to China. Moreover, he is a president who, unlike his predecesors,  is prepared to face the regional and national restrictions that will arise from his decision. On the other hand, Brazil's position, led by Bolsonaro and Economy Minister Guedes, has been key to reaching this scenario. As the Mercosur member that accounts for 70% of the bloc's main indicators, Brazil has spearheaded the opening up to the world, which represents one of the major reforms of its current government.

This national and regional scenario coincides with a dynamic international context, with China implementing a more assertive and geostrategic foreign policy at a time when it is engaged in a harsh confrontation with the United States in a struggle for global leadership. These dynamics, together with the impacts of COVID-19, which have expedited many of the global economic and social processes, have prompted China to adopt a more understanding approach to regional phenomena, as is the case of Mercosur and in particular Argentina's position regarding the opening of its economy.

Reactions in Uruguay

Generally speaking, the news was well received in Uruguay, since all the governments of different political persuasions have had a strategic vision of China, which has resulted in scores of agreements on various issues, as well as the incorporation of Uruguay into the Asian Infrastructure Investment Bank, the Memorandum of Understanding for the New Silk Road and the incorporation of Uruguay into the New Development Bank of the BRICS. This virtually state policy has led China to define its relationship with Uruguay as a Strategic Partnership. The initiation of FTA negotiations could take the relationship to the level of a Comprehensive Strategic Partnership.

Few national players showed concern; such was the case of some factions of one of the political parties, trade unions and academics, while admittedly many others  suddenly changed their position on China when the government announced the decision. Regardless of dissenting viewpoints, which are always welcome to enrich the debate as long as they are grounded in technical arguments and are in line with the current state of affairs, it is worth making some clarifications, which in my opinion make it difficult to take a stand against the path taken by the Uruguayan government with regard to China.

In the first place, the President announced the decision to the entire political spectrum with regard to a study to be conducted by the government, including consultations with all economic players, which will be made public once it has been completed. Besides, the negotiations have not yet started, though technical work is under way to assess the future impacts of the FTA and accordingly make a joint decision with China on the FTA negotiation.

Clearly, China sees this as the first step towards signing a treaty, albeit in some cases the completion of the study did not enable the ensuing negotiations. As regards this point, it is true that in these cases, the reasons why no progress was made have to do with definitions of the counterpart and not with China.

As for the anticipated repercussions of an FTA, it is well known that there are tariff disadvantages for the main products exported to China compared to other competitors, such as meat and dairy products, among others. There is less awareness of the potential for export flows of processed foods, fruits and beverages that are subject to tariffs of more than 20% in China and have thus far not been exported to the Asian country. Likewise, the benefits for the trade of services and investments should also be taken into account.

Concerning the adverse effects, President Lacalle Pou himself acknowledged that there would be winners and losers along the way. The study should identify them, in order to find options to mitigate possible negative impacts, which might occur in clothing, footwear, metallurgy, chemicals and some plastic products. However, China is not to blame for the long-standing competitiveness problems of some of the aforementioned productive sectors. On the other hand, it must be understood that the second global power is not concerned about entering the Uruguayan market, so exceptions may be considered. Furthermore, in terms of the impact on import flows within the framework of an FTA with China, it is necessary to update the arguments, in view of China's current production structure (and even more so in the future).

While debates tend to focus on the classic effects of FTAs on export and import flows, which narrows the analysis to how much and in which sectors external purchases from China will increase, or how many millions of dollars will be saved by not paying tariffs, a partnership of this nature should also encompass the effects on cooperation, infrastructure and business partnerships, as well as on the international image of Uruguay.

The step taken by Uruguay regarding China could also have political implications, such as the impact it might have on the relations with the United States and the European Union. In this regard, and bearing this reality in mind, it is worth noting that in international politics the expected impacts of foreign policy decisions tend to be overestimated, especially in the case of small countries, and plenty of examples illustrate this point. In no way does this mean overlooking the fact that China naturally has specific interests in Uruguay and the region, which is why signing an FTA would open up new spaces for dialogue and consultation on matters of national interest beyond economic and trade issues.

Uruguay and Mercosur

Uruguay's position on the bloc has been very explicit, and was upheld by the Uruguayan president at the memorable presidential summit on the occasion of Mercosur's 30th anniversary, but also at the most recent summit at which the pro tempore presidency was handed over from Argentina to Brazil, as well as at the various meetings of the Mercosur Common Market Council.

The strongest argument holds that Mercosur does not operate as a customs union (let alone as a common market), hence the failure to achieve its main goal. In addition, members do not comply with a number of other important commitments established in article one of the Treaty of Asunción. However, Uruguay is required to respect the joint negotiations or to abide by the controversial decision 32/00, which Uruguay never incorporated into its legal system.

Ultimately, Mercosur operates as a free trade area with a regime of origin in force, with ample exceptions and bilateral agreements, as well as negotiations with differentiated deals, which has been the rule rather than the exception. On the other hand, it is worth mentioning that at the WTO level, countries have made bilateral rather than regional commitments. These and many other arguments call for Mercosur to come to terms with the different pace of its members in order to avoid the total loss of regional cohesion.

The idea of a more flexible Mercosur has traditionally been advocated by Uruguay since the first decade of the 21st century, but this time, and at least during Bolsonaro's administration, it is supported by Brazil.

Future steps

Uruguay announced the launch of a joint feasibility study for the signing of a bilateral FTA with China, which is already in progress and expected to be completed in the forthcoming months. In the meantime, all Uruguayans should support the decision made by the government, thus reaching a national consensus that puts aside political and sectorial interests.

Mercosur expects Brazil's stance to remain firm, despite the specificities of its government in terms of internal differences. It will also be necessary for Argentina to acknowledge that it is no longer possible to continue ignoring the current reality. Being part of one of the most inward-looking regions on the planet has no merit and is seriously affecting the economic development of all members of the bloc.

Ignacio Bartesaghi is the Director of the Institute of International Business of the Catholic University of Uruguay. He holds a PhD in International Relations