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The beginning of the end for Mercosur?

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Argentina’s decision to renationalize a Brazilian held rail concession could have serious consequences for the trade bloc.

Argentina’s Interior Minister Florencio Randazzo announced yesterday that his government would be renationalizing two rail concessions held by the Brazilian company América Latina Logística (ALL). The announcement came almost a year after the country renationalized a 51 percent stake in oil company YPF from Spain’s Repsol, and amid a number of high-profile cases of Brazilian companies abandoning the Argentine market. The decision was poorly received by Brazilian industries, who are increasingly exhausted by the difficult of conducting business with their Mercosur associate. The move also comes at a time when Brazilian business seems more interested in bilateral agreements with other South American countries, say analysts.  

Dysfunction within Mercosur – especially disputes between Argentina and Brazil – is nothing new. The bloc long ago abandoned its founding mission of a common market with the free movement of goods, services, and currency across borders. More often the story today is of protectionism, trade disputes, and diplomatic rows. Both countries have established long lists of exceptions to free trade, and goods often get stuck at the borders of member countries for weeks. Brazilian companies have also increasingly been frustrated by the Argentine market. In April, Brazilian mining giant Vale abandoned a $6 billion potash mining project in the country citing inflation and currency controls as impediments to doing business. In late May, Brazilian state-oil company Petrobras considered divesting its Argentine assets, but abandoned the idea after failing to secure a buyer.

Officially the Argentine government said it seized ALL’s lines due to the company’s “serious and repeated” failure to comply with the terms of their contract. In line with rationales of other Argentine nationalizations, it said that company had underinvested in the tracks, and had failed to pay a number of fines and royalties. The Brazilian company – which has held the lines since 1999 – said the country’s political and economic situation had made the concession impossible to run and that it was looking for buyers.

In response to the move by Argentina, the Industry Federation of the State of Sao Paulo (FIESP) said Brazil should “free” itself from “the straitjacket” of Mercosur, adding “this country is going nowhere with partners like Argentina and Venezuela.” In an op-ed the editorial board of O Estado de Sao Paulo, said the decision came at a “particularly difficult time” for Argentine-Brazilian relations, and gave more ammunition to critics of the fractious trade bloc. The op-ed also notes that this comes at a crossroads for Brazilian business: “After years of seeking protection from the government, Brazilian industry is realizing the internal market is no longer sufficient to guarantee its future success. As their share of exports is falling, and they lose market share in South America, the industry is now pushing the government to pursue more bilateral agreements.” 

Regional attention for trade integration has largely moved from the bloc to the open-market and Asia-focused Pacific Alliance, consisting of the continent’s Pacific-coast economies. To that end, Mercosur junior partner Uruguay announced this week that it would be seeking full membership in the Pacific Alliance. The country, which already has free-trade agreements with the four Pacific Alliance members (Chile, Colombia, Mexico, and Peru), cited “inactivity” and protectionism within Mercosur and said they believed the Pacific Alliance would offer “great integration potential” for their economy.

 

 

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