Trade with Mercosur: Opportunities for Canada

Commentary, Economy, Alexandre Massaux

In November 2018, Canada and Mercosur opened negotiations for a free trade agreement. The Mercosur, composed of Argentina, Brazil, Paraguay and Uruguay (Venezuela is a suspended member from 2016), represents a bloc representing a GDP of over $3 trillion and a population of 261 million in 2019. In comparison, it is the GDP of Germany and a population close to Indonesia. Among the Mercosur countries, Brazil has a preeminent position: 212 million habitants and a GDP of 1.8 trillion in 2019. Considering that South America and North America have primary diplomatic, cultural and economic links, free trade between Canada and Mercosur would be a shared asset—especially considering that the EU is currently concluding a free trade agreement.

The whole of Latin America and the Caribbean represented 11 per cent of the inflows of foreign direct investments in the world in 2018. A little less than Europe (13 per cent). Between Canada and the Mercosur, bilateral trade represented $9.9 billion in 2019. Moreover, Brazil has experienced an impressive growth of its trade based on the data of 2018: 7.1 per cent Real Exports Growth and 6.8 per cent Real Imports Growth. Numbers which are higher than the ones of advanced countries (three per cent for both export and import) and which are comparable to the ones of Asian countries. South America and especially Mercosur countries can be a promising region for trade.

For the Brazil Canada chamber of commerce, Brazil exports to Canada represented C$3.7 billion and Brazil imports from Canada C$2.2 billion in 2015. Brazilian exportations to Canada are mainly aluminum oxide, petroleum oils, sugar, gold, coffee, insulin, antibiotics, iron and steel. Inversely, Brazil imports potassium chloride, nuclear reactors and turbojets, bituminous coal, newsprint, wheat and meslin and aircraft. 

If we look at the Brazilian importations globally, petroleum and fossil energy account for 10 per cent. This aspect can be an asset for the Prairie provinces of Canada, which have substantial mining and energy activities. In Alberta and Saskatchewan, this economic sector is the main one, producing 16 per cent of Alberta’s GDP and 25.7 per cent of Saskatchewan’s GDP. 

Accordingly, a free trade agreement would help Canadian exporters. However, tariffs to exportation for Canadians to Mercosur are up to 35 per cent in many primary and industrial sectors. A consequent barrier to exchanges.

The political instability and polarization of Latin America is a severe problem to efficient trade. Free-market and economic liberalism are not popular values among many politicians.

For example, Argentina is currently putting on protectionist policies to fight against high inflation, which is forecasted to reach 50 per cent. The Argentine government suspended corn shipments through February to force growers to sell to the local livestock industry. Argentine farmers are worried that this ban will hurt them. From a Canadian perspective, it raises the question about the reliability of the Argentine government on open trade. The Peronist shadow is still living in the economic policies of Argentina.

In Brazil, the upcoming October 2022 elections will significantly impact the Mercosur situation and its relations with the rest of the world. There are strong possibilities the duel will be between incumbent president Bolsonaro and former president Lula. According to recent polls, Lula would take 55 per cent and Bolsonaro 32 per cent in the 2022 presidential vote. Of course, the situation can easily change in more than one year. But it shows that Lula still has a strong popularity among the Brazilian population. 

For the trade impact, Bolsonaro wanted to align the country more closely with the United States. Still, tensions with environmentalists have hindered his capacity to become closer to the western world. On the contrary, under Lula’s past mandates, Brazil had reinforced its presence in the BRICS group composed of Brazil​, Russia, India, China and South Africa. Strong relations with China were a significant point of Lula’s foreign policy.

Finally, the Canadian trade policy in South America would have to manage this explosive political situation. Taking a more neutral position can give Canada an advantage in this region compared to the U.S. However, Ottawa will have to pragmatically work with these countries and defend the interests of Canadians and its economy.

 

Alexandre Massaux is a research associate at the Frontier Centre for Public Policy.