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SPECIAL REPORT

Time for change at Mercosur

Sao Paulo / , December 2015

BARCELONA BOGOTA BUENOS AIRES LIMA LISBON MADRID MIAMI PANAMA CITY QUITO RIO J SAO PAULO SANTIAGO STO DOMINGO TIME FOR CHANGE AT MERCOSUR

1. INTRODUCTION

Recovery, redesign, restoration, a possible new format. It seems 1. INTRODUCTION as though the tides of change are finally crashing upon the 2. STARTING WITH THE worn out Mercosur. Argentinian Chancellor INFRASTRUCTURE raised the alarm when she declared “Our most urgent priority is Mercosur,” while expanding her horizons by adding “by not AUTHORS thinking of the options in the Pacific we would be giving up on a good number of opportunities.”

The change of command at Casa Rosada brings a breath of fresh air to a block that was losing economic ground and turning into a scene of political discussion. Or, as Malcorra declared at a press conference at Planalto Palace, in Brasilia, it is time to replace the “discursive” integration of the past few years with an “operative” one, a path that had been clearly abandoned.

President Macri also spoke about “convergence” between the South American union and the Pacific Alliance, a seductive idea that begs the attention of entrepreneurs in the countries that make up Mercosur, but divides the governments of the block, to the point of losing the initial momentum in the negotiations in order to establish a new agreement.

President and his foreign policy advisors made very clear that reconstructing ties with Latin America will be at the core of their diplomatic and commercial efforts. ´s priority to the region in recent years was merely rhetoric, while in reality commercial barriers were being imposed. All this, to the ends of protecting its own depleted international reserves in the middle of a capitalistic feud that drove the country to impose a rigorous exchange control.

“We believe in unity and cooperation between Latin America and the world, in fortifying democracy as the sole solution to resolving problems between diverse societies. It is pivotal to look beyond the times of confrontation”, said Macri in his inaugural speech, observed by the presidents of Chile, Uruguay, , , Colombia, Ecuador and Paraguay, among others in the region.

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The focal point of Macri’s Macri made clear he strategy is its relationship with would take the lead in the Brazil, including its political discussions: he is an advocate and corporate system. The for an open Mercosur and infamous DJAI (Declaración is urged to establish close Jurada Anticipada de ties with the European Importación), which in recent Union -through a Free Trade years drove the players in Agreement- and the Pacific “The focal point of foreign trade mad, is going Alliance, all while working in to be downgraded and before collaboration with Brazil so Macri’s strategy is its long will become a thing as to transform the exporting relationship with Brazil” of the past, once Argentina sector in the engine of the normalizes its fragile financial national economy. It is situation - announced the new necessary to take into account president. Tax cuts are already the disparities in the exchange being implemented, giving rate, which once is adjusted economic agents a signal of will benefit products that had hope that the revitalization of seen their competitiveness foreign trade is real. decline, such as fruit, nuts, wine, dairy, meat and In order to bring this agricultural machinery. discussion to life, it is fundamental for Argentina to “Brazil has been Argentina’s open a transparent dialogue strategic business partner with Brazil, which Argentina throughout history, because has been postponing since of possibilities and exchanges. 2012 when former Minister We are countries that of Economy Axel Kicillof complement each other and strengthened commercial we must interact with the rest barriers -including the of the world in a joint manner, exchange with members just as Uruguay and Paraguay of the Customs Union- and do”, said Macri before taking blocked all channels of office. negotiation with Brazilian authorities. Macri’s plans for a new Mercosur sound like music to Since then, Argentina has the ears of the most liberal fallen to third place, behind and pragmatic ministers in China and the U.S., as export ´s government, destination from its biggest such as , commercial partner. Numerous Minister of Finance, Kátia investments, including those Abreu, Minister of Agriculture, from Brazil, which looked to Armando Monteiro, Minister transform Argentina into an of Industry, and Chancellor exporting powerhouse were Mauro Vieira, who considers paralyzed, undermined by that, given the political and extravagant economic and institutional crisis the country business policies. is going through, the real

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task at hand for Brazilian the whole scenario could diplomacy is mending its change if they choose to economic policy and restoring embrace economic liberalism. the tax balance. The premises This new pattern becomes of the new Argentinian leader favorable for Brazil,” said Levy. also swayed the Brazilian business community, as Monteiro, Minister of became clear at the reception Development, Industry, and held at FIESP´s (Federação de Trade, who in 2014 was able Industrias do Estado de São to transform Brazil´s trade Paulo) headquarters before he balance deficit into a surplus took office. that could reach close to 15 billion dollars this year, also Levy welcomed the change considered Macri’s arrival as of pace in Argentina and good news for the relationship emphasized it will benefit his between Brazil and Argentina. country. “Argentina’s dynamics could change. It is going to "All the signs are positive. take a lot of work to fix many Macri believes in Brazil as things. But obviously, because a strategic partner and in of the country’s potential, Mercosur being more open to along with its human capital, other international networks.

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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For us, this is music to our 2. STARTING WITH THE ears," Monteiro said on a recent INFRASTRUCTURE trip to Chile to promote trade between Brasilia and Santiago. Of all the promises made by the new Argentine president Everton Vargas, Ambassador Mauricio Macri during his of Brazil in Argentina, electoral campaign, the most recently evoked that the two significant one has to do countries are connected by with infrastructure renewal, “All the signs are bilateral trade that has already which he described as "the positive. Macri approached 40 billion dollars, largest infrastructure plan in although it felt to about 30 Argentine´s history”. believes in Brazil as a billion this year; 8.4 billion strategic partner” dollars in capital investment; Designed to be a Buenos 44,000 direct jobs generated Aires version of the Growth by Argentine companies in Acceleration Program Brazil; and17.6 billion dollars in (Programa de Aceleración del investment and 51,000 direct Crecimiento - PAC) launched jobs generated by Brazilian by president Luiz Inácio companies in Argentina. Lula da Silva, the plan will be supervised by economist "Building, maintaining and , Minister strengthening ties between of Transport. He has organized our countries is a process four teams to develop the that requires political will, project, which will count on firm decision making and the participation of Brazilian long-term vision. If, as the companies. Macri’s Growth saying goes, "all politics are Acceleration Program (PAC) local," democracy is a force will aim at renovating that crosses borders and helps the damaged Argentinian societies keep control of their roads, dredging waterways, destiny. Likewise, integration facilitating the access of is both a consolidated trucks to the strategic port of achievement and a dynamic Rosario, which hosts the largest process at the same time: there soya processing center, and is no final conclusion, only upgrading the airports, some of new phases to be assessed," which are collapsed. Vargas wrote. He claimed that the new phase in the process “Waterways, trains, airports, of regional integration will energy… There are many areas begin in the first semester to invest in,” Macri said. “There of 2016. Mercosur, and is always credit for such especially the most dynamic infrastructures.” According to sectors within Brazil´s Macri, “The Rosario hub needs and Argentina´s business to be addressed. The time communities, will benefit from wasted because of blocked these changes. trucks are paid by the producer.

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There is no entry to the port. “President Dilma told me we That is going to change.” have plenty of funds approved by the BNDES, a large Brazilian Macri has already talked to development bank, to invest in the President of the Inter- burying the Sarmiento railway American Development Bank and in power lines”, Macri said. “The BNDES has (BID), Luis Alberto Moreno, allocated 1.5 billion and to the head of the Andean The BNDES has allocated 1.5 dollars towards these Development Corporation billion dollars towards these (CAF), Enrique García, on burying works, which will be burying works” financing. He has also talked crucial to integrate a large to Dilma Rouseff about part of the metropolitan the payment of funds that region of Buenos Aires by have already been approved burying a railway that links by the Banco Nacional de the western periphery of the Desenvolvimento Econômico city to the downtown area. e Social (BNDES), the largest Another BNDES credit, which development bank in Latin has already been allocated but America. has not been paid yet, aims at enhancing the capacity of 470 km of high-voltage power lines in the province of Buenos Aires. This project is known as Regional Electricity Forum of Figure 2. Commercial exchange Argentina - Brazil the province of Buenos Aires (FREBA), a job that has already

EXPORTS FROM ARGENTINA TO EXPORTS FROM BRAZIL TO been awarded and once it is YEAR BRAZIL (IN MILLION US$) ARGENTINA (IN MILLION US$) completed it will benefit 1.6 million people. 2003 4.666.335 4.561.146

2004 5.605.067 7.373.218 Parallel to the Brazilian contribution to the 2005 6.335.068 9.915.423 infrastructure plan, the new Argentinian agrarian 2006 8.140.942 11.713.819 authorities expect the country 2007 10.497.885 14.384.822 to be once again a reliable wheat supplier to Brazil, 2008 13.272.361 17.605.621 eliminating the barriers to trade that had held this market 2009 11.379.426 12.784.967 captive, relying instead on 2010 14.424.644 18.596.234 Canadian, Ukrainian and American producers. Brazil 2011 17.347.028 22.709.344 does not produce enough

2012 16.486.582 17.997.706 wheat, so it needs a reliable provider that contributes to 2013 16.216.124 19.615.414 the central bank’s mission of seeing a convergence in prices, 2014 13.881.338 14.281.998 hoping to meet its inflation

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goals for 2016, with a current Argentina could work together ceiling of 6.50% that has long to reach a consensus on how been surpassed. to help Venezuela carry out a democratic transition. If Macri keeps his enthusiastic promises about modernization, Those who are optimistic “Argentina could Argentina could represent a think that the debate may help represent a great great opportunity for Brazilian reopen certain issues that had opportunity for Brazilian damaged infrastructure not been part of the discussion companies. for more than fifteen years, damaged infrastructure including the once much companies” In the meantime, the game of needed macroeconomic diplomacy, which had been convergence for which goals crippled by the centralization were set back in 2000, although of decisions in the past few it was casted into oblivion by years, will reemerge. the Argentinian financial crisis of 2001/2002. Proposals may even aim at transforming Mercosur so that Macri’s determination to its members gain flexibility open the economy while to negotiate commercial reducing the intervention of agreements with third the government, restoring countries or blocks, which is the credibility of public currently prohibited by the statistics, liberalizing trade customs union regulations. and negotiating with external creditors, pave the way for Certain members of Macri’s Argentina to reintegrate in the foreign policy team are global economy, which, in turn, convinced that immediate will create a virtuous circle efforts can be taken by that will serve to kick start the Mercosur to make South recovery of Brazil’s economy, America a free trade area. They Argentina’s major regional also believe that Brazil and 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 Petrobras. 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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