:

SPECIAL REPORT

Time for change at

Sao Paulo / , December 2015

BARCELONA BOGOTÁ BUENOS AIRES LIMA LISBOA MADRID MÉXICO MIAMI PANAMÁ QUITO RIO J SANTIAGO STO DOMINGO TIME FOR CHANGE AT MERCOSUR

1. INTRODUCTION

Recovery, redesign, reconfiguration, a possible new format. It 1. INTRODUCTION seems that it has come the long-awaited time for change in worn 2. STARTING WITH THE Mercosur. It all started when the Argentine Foreign Chancellor Susana Malcorra declared that "the most immediate priority is Mercosur", expanding its horizon when adding that "not AUTHORS thinking about the options for the Pacific would keep us out of an important part of the existing opportunities".

The command change at the Casa Rosada brings encouragement to the block that was losing economic importance and becoming merely a stage for political statements. Or, as defined Malcorra, when speaking to journalists at the Planalto Palace, in Brasilia, it is time to replace the "discursive" integration of recent years by the "operative", clearly abandoned.

The president Macri also spoke of "convergence" between the South American customs union and the Pacific Alliance, an idea that attracts entrepreneurs from all countries of Mercosur but dividing the bloc's governments up to the point that they lost the momentum of negotiations because of the establishment of the new covenant.

The president Mauricio Macri and his team of foreign policy made it clear that its main attention about diplomatic and commercial stuff will be to rebuild links with , a region to which devoted a priority in the rhetorical field in recent years while in fact imposed latches to in order to protect its frayed international reserves amid a flight of capital that led the country to also impose a strict exchange control.

"We believe in unity and cooperation in Latin America with the world, in strengthening democracy as the only possibility to solve the problems of different societies. It is necessary to overcome the confrontation time", Macri said in his inaugural speech, witnessed by the presidents of , , , , , and , to name those in the region.

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The center of Macri’s strategy Macri made it clear that he is the relationship with Brazil, will face this discussion: he including its political system wants an open Mercosur, and and business. he is eager to establish strong links with the European The famous DJAI, dreaded Union –through a Free Trade acronym of Declaração Jurada Agreement– and with the Antecipada de Importação, Pacific Alliance, always in “The center of Macri’s that went crazy all foreign agreement with Brazil, in trade actors in recent years, order to transform the strategy is the will be overcome and will sector in the dynamo of the relationship with Brazil, be only a theme of the past, economy. In this sector is also including its political since Argentina normalize its necessary to consider the shift delicate financial situation, lag that, when it is corrected, system and business” anticipated the new president. as expected, will benefit Reducing taxes has begun, products that today have their that situation gives to the competitiveness impaired, economic agents the sign that such as fruits, dried fruits, the foreign trade activation is wine, dairy, meat, and even the for real. agricultural machinery.

To turn the discussion a "The strategic partner of sincere dialogue with Brazil Argentina, by history, by will be essential, a dialogue possibilities, for exchange, is that Argentina avoids since at Brazil. We are countries that least 2012, when the Ministry can complement each other of Economy led by Axel and we have to interact with Kicillof hardened barriers the rest of the world along to trade –including the with Uruguay and Paraguay", exchange with members of the Macri said before taking office. customs union– and blocked negotiation channels with The Macri plans for a new Brazilian authorities. Mercosur sound literally like music to the ears of Since then, Argentina has the most liberal ministers fallen to third place (behind and pragmatic of the Dilma and the United Rousseff government, as States) as a destination for Joaquim Levy (Finance), Katia from its biggest Abreu (Agriculture), Armando trading partner. Numerous Monteiro (Industry) and the investments in Brazil, very Chancellor Mauro Vieira, including Brazilian, which who believes that the current sought to turn Argentina task of Brazilian diplomacy into an export platform, is to support the economic were paralyzed, undermined policy concentrated on by fancy economic and recovering the fiscal balance trade policies, guided by in the face of severe political improvisation. and institutional crisis in the

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country. The postulates of economic liberalism. It creates the new Argentine leader also a dynamic environment for delighted the large Brazilian Brazil", said Levy. companies, as shown by the reception he had in FIESP's Monteiro, Minister of headquarters (Federation of Development, Industry and São Paulo State Industries) Commerce, which managed before taking office. to reverse the trade deficit in Brazil in 2014 into a surplus Levy welcomed the change that could reach almost 15 of course in Argentina and billion dollars this year, also emphasized that this path assessed the arrival of Macri to will favor their country. "The power as good news for Brazil- dynamics of Argentina can Argentina relations. change. They will have a big job to fix some many things. "All the signs are positive. But of course, specially Macri reaffirms the view that because of the country's Brazil is a strategic partner. potential and human It supports the position that capital, changes in the entire Mercosur is more open to environment can be achieved other international networks. if they go to a path of more Therefore, for us, this is music

Figure 1. Commercial Relations Argentina - Brazil

ARGENTINIAN COMPANIES IN BRAZIL

They represent 8,400 million dollars in productive investments and 44,000 direct jobs created.

BRAZILIAN COMPANIES IN ARGENTINA

They represent 17,600 million dollars in investments and 51,000 direct jobs.

ARGENTINA STOPS BRAZILIAN EXPORTS

It maintains its position as the first Latin American market, although it loses some place.

Brazilian sales to Argentina fell 42.4% in the period January-October this year in comparison to the same period in 2011.

INVESTMENTS

Chile overcame Argentina as the major destination for the Brazilian investment flow in 2014.

Chile received 41.6% of the Brazilian capital, whereas Argentina received just 25.5%.

In the biennium 2010-11 the proportion was 46.5% to Argentina and 27.4% to Chile.

REASONS TO SUCH HALT

Macroeconomic instability, external capital restrictive policies, expropriations and nationalizations.

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to our ears", Monteiro said on a the Brazilian and Argentina recent trip to Chile to promote business community, only gain trade between Brasilia and with these new winds. Santiago. 2. STARTING WITH THE As recently recalled the INFRASTRUCTURE ambassador of Brazil in Argentina, Everton Vargas, the Of all the promises made by two countries are connected the new Argentine president “All the signs are by a bilateral trade that Mauricio Macri during the positive. Macri already approached the 40 campaign that elected him, billion dollars (this year the one that deserved more reaffirms the view fell to about 30 billion); by care and detail has been the that Brazil is a 8,4 billion dollars in capital country's infrastructure strategic partner"” investment and 44,000 direct renewal, that the new jobs generated by Argentine representative called "the companies in Brazil, and largest infrastructure plan in by 17,6 billion dollars in Argentine history”. investment and 51,000 direct jobs generated by Brazilian Designed to be a Buenos companies in Argentina. Aires version of the Growth Acceleration Program "Building, maintaining and (Programa de Aceleração do strengthening the bridges Crescimento - PAC) launched between our countries is a by president Luiz Inácio Lula process that requires political da Silva, the plan already has will, firm decisions and long- a designated coordinator, the term vision. If "all politics is Economist and Transport local", as they say, democracy Minister Guillermo Dietrich, is a blow that crosses borders who organized four teams and helps companies keep for project development track of their destinations. which shall have decisive As well as democracy, participation of Brazilian integration is simultaneously companies. a consolidated achievement and a dynamic process: there The Macri’s Growth is no definitive conclusion, Acceleration Program (PAC) will only new steps to be covered", aim at renovating the damaged Vargas wrote. Argentinian , dredging waterways, ameliorating the The new stage to be faced access of trucks to the strategic by the dynamic process of of Rosario (whose sphere regional integration, in the of influence hosts the largest words of a diplomat, it surely soya processing center) and will start in the first half of upgrading the in the 2016. Mercosur, especially country —some of which are the most dynamic sectors of collapsed.

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“Waterways, trains, airports, García; and also discussed with energy… There are many things Dilma Rouseff on the payment to invest in”, Macri declared. of credits which have already “There are always credits been approved by the Banco for such ”, he Nacional de Desenvolvimento explained. “The Rosario hub Econômico e Social (BNDES), “The tunneling works should be addressed. The the largest development bank have had allocated hours wasted because of the of Latin America. 1,500 million dollars stopped trucks are paid by the producer. There is no entry to “The President Dilma told me by the BNDES” the port, and this is going to be that there are many credits changed”, Macri continued. approved by the BNDES, which is a large Brazilian The President-elect had development bank, to invest in already discussed on financing tunneling the railway line of with the President of the Sarmiento and in power lines”, Inter-American Development Macri said. Bank (BID), Luis Alberto Moreno, and with the head The tunneling works have of the Andean Development had allocated 1,500 million Corporation (CAF), Enrique dollars by the BNDES. It is crucial to integrate a large part of the metropolitan region of Buenos Aires, because it Figure 2. Commercial exchange Argentina - Brazil will transform a railway line between the west periphery

EXPORTS FROM ARGENTINA TO EXPORTS FROM BRAZIL TO and the downtown area of YEAR BRAZIL (IN MILLION US$) ARGENTINA (IN MILLION US$) the biggest Argentinian city. Another BNDES credit —which 2003 4.666.335 4.561.146 has already been allocated, 2004 5.605.067 7.373.218 but not paid yet— aims at enhancing the capacity of 2005 6.335.068 9.915.423 470 km of high-voltage power lines in the province of Buenos 2006 8.140.942 11.713.819 Aires. This project is known 2007 10.497.885 14.384.822 as Regional Electricity Forum of the province of Buenos 2008 13.272.361 17.605.621 Aires (FREBA), an awarded work whose completion would 2009 11.379.426 12.784.967 benefit 1.6 million inhabitants 2010 14.424.644 18.596.234 of the district.

2011 17.347.028 22.709.344 In parallel with the

2012 16.486.582 17.997.706 Brazilian contribution to the infrastructure plan, the 2013 16.216.124 19.615.414 new Argentinian agrarian authorities expect the country 2014 13.881.338 14.281.998 to be once again a wheat

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reliable supplier to Brazil, Certain members of the eliminating obstacles to export Macri’s foreign policy team which have given a part of are convinced that immediate the once captive neighboring efforts can be implemented market to Canadian, Ukrainian by Mercosur, so that South or producers. America becomes a free “It could be a Brazil, which is in deficit in trade area. They also believe great opportunity terms of wheat production, that Brazil and Argentina for the damaged needs a reliable supply favoring could work together to that its central bank may reach a consensus on how Brazilian companies lead once again in 2016 to the to help to carry a of Argentinian convergence of prices with the democratic transition through. infrastructure” target, which has an annual ceiling up to 6.50 %, According to some hopeful greatly exceeded today. members, debates may serve to go back to certain issues If Macri keeps his enthusiastic —that had not been subject promise about modernization, of discussion for more than it could be a great opportunity fifteen years—, such as the for the damaged Brazilian necessary macroeconomic companies of Argentinian convergence for which goals infrastructure. were already set back in 2000, further casted into oblivion by In the meantime, it will the Argentinian crisis of 2001-02. reemerge the game of diplomacy, which had been Macri’s resolution in the crippled by the absolute openness of the economy, centralization of decisions in together with the reduction the past few years. of the State’s intervention, the credibility restoration Proposals may even aim at of public statistics, the transforming Mercosur so that trade liberalization and the its members gain flexibility negotiation with external to negotiate commercial creditors, pave the way for agreements with third Argentina to reintegrate in countries or blocks, which is global economy. And, at the currently prohibited by the same time a virtuous circle is customs union regulations. growing to begin the recovery of the economy of Brazil, its major regional partner.

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Authors Marco Antonio Sabino is Partner and Chairman at LLORENTE & CUENCA Brazil. Journalist (Cásper Libero, where he was also a lecturer) and lawyer (Universidad de São Paulo-USP-), with postgraduate studies in Organisational Communication (USP), he is specialised in economic, legal and governmental matters. He has extensive experience in the creation and implementation of communication plans for the Brazilian government and multinational companies. He was the Communication Director of the Telefónica Group in Brazil and managed the editorial staff of Bandeirantes Radio and TV. He was a reporter and editor of the business magazine Exame and he also acted as a special reporter for Globo TV. In 2006, he founded S/A Comunicação, and positioned the company among the largest and most awarded communication agencies in Brazil. S/A was, for seven years, the representative of the Swedish company Kreab in Brazil. At the end of 2015, S/A was acquired by LLORENTE & CUENCA. [email protected]

Pablo Abiad is Partner and Managing Director at LLORENTE & CUENCA Argentina. He joined the firm in 2009, and is an expert in Corporate Communication and Public Affairs, having developed strategies for such major Argentinean and multinational corporations as Barrick, Bimbo and . He worked for over 15 years for the daily newspaper Clarín, where he covered legal issues in the Politics and Economy section, and collaborated with other media in both Argentina and overseas. He is the author of two journalist investigation books that had a strong impact on public opinion and has given lectures on journalist in the country and neighbouring regions. [email protected]

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