The Pacific Alliance and Mercosur commit to integration amid trade war threats

In spite of the long road ahead for the two main regional trading blocs to strengthen their relationship, the 13th Pacific Alliance Summit in the western Mexican resort city could not have been more opportune for its participants and especially for the host country

The Pacific Alliance and Mercosur commit to integration amid trade war threats
Photo: Taken from gobmx Twitter account
English 27/07/2018 17:08 Gabriel Moyssen Mexico City Actualizada 17:08

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Facing threats of protectionism and global trade war unleashed by the United States decision to slap tariffs against Mexico, Canada, China and the European Union, Latin American leaders of the Pacific Alliance and Southern Common Market (Mercosur) met this week in Puerto Vallarta, where they committed to increase their commercial and economic cooperation.

In spite of the long road ahead for the two main regional trading blocs to strengthen their relationship, the 13th Pacific Alliance Summit in the western Mexican resort city could not have been more opportune for its participants and especially for the host country.

The U.S. imposed tariffs on Mexico’s steel and aluminum exports on May, while uncertainty surrounds the stalled renegotiation of the North American Free Trade Agreement (NAFTA), due to Washington’s stubborn attempts to favor its auto industry and establish a “sunset clause” that would kill the deal after five years, unless the parties agreed to extend it.

Mexican Economy Minister Ildefonso Guajardo, still hopeful of a positive outcome, traveled to Washington to discuss the status of NAFTA talks with U.S. Trade Representative Robert Lighthizer on Thursday.

One day earlier, Canadian Foreign Affairs Minister Chrystia Freeland met with officials from the incoming and outgoing Mexican administrations, concurring with them in the need of a final trilateral agreement.

Politics are now a major ingredient in the process since in an exchange of letters Mexican President-elect Andrés Manuel López Obrador urged U.S. President Donald Trump to maintain NAFTA as a three-way deal.

For his part, Trump called for a quick renegotiation which would bring more jobs to both countries, yet he warned of a “very different path” otherwise.

The White House is pandering to its far-right base towards the U.S. midterm elections on November with an isolationist agenda that includes up to USD $12 billion to help farmers weather the growing international trade battle, in a clear signal the president is determined to stick with tariffs.

Drought and crisis

In the Southern Cone, the region is still recovering from the worst crisis in Brazilian history, aggravated by a slump in commodities exports to China and a severe drought.
 
The world’s eighth largest economy is heading to an unpredictable election in October which could see the return to power of former leftist President Luiz Inácio Lula da Silva, yet the markets and the International Monetary Fund are stressing the urgency of fiscal consolidation and ambitious structural reforms.

Since 2014, Brazil’s public debt as a share of GDP has jumped some 20 percentage points to its present level of around 75%.

To complicate things, following a truckers’ strike that brought the country to a near standstill, the central bank said last month in its quarterly report that the economy is expected to grow only 1.6% in 2018, down from the 2.6% growth it was forecasting just three months ago.

The situation is similar in Argentina, the Finance Ministry cut its 2018 GDP growth forecast to 0.5%-0.6% this month, down from the 3.5% announced in the budget in September.

Economic Policy Minister Guido Sandleris warned that the new goal of a meager 0.6% will depend “on what happens in the world”.

He added that “we will depend on the pace of economic activity in Brazil, with the greater political uncertainty”.

In Puerto Vallarta, Mexican President Enrique Peña Nieto said both the Pacific Alliance and Mercosur agreed to explore new areas of cooperation to promote a regional model in favor of social inclusion, deepening the fight against poverty and inequality, “committed with democracy, rule of law, and full respect of human rights.”

The Pacific Alliance (composed by Mexico, Chile, Colombia, and Peru) together with Mercosur (composed by Brazil, Argentina, Uruguay, and Paraguay) represents 79% of the Latin American population, 86% of its exports and 88% of the foreign direct investment inflows.

Long seen as representatives of rival blocs, the Pacific Alliance is attracting more international attention than Mercosur and its so-called “political wing”, the Union of South American Nations thanks to its open approach complementary of several mechanisms, such as the Asian Pacific Economic Cooperation forum and the Trans-Pacific Partnership signed in March by 11 countries, including Mexico and Chile, after the withdrawal of the U.S. in 2017.

For instance, Mexico’s Foreign Ministry said on Monday that South Korea had initiated the process of seeking associate membership of the Pacific AllianceSingapore, Australia, New Zealand, and Canada were last year admitted with the same status—, while the United Arab Emirates received its membership as an observer.

In contrast, political divergences led to the indefinite suspension of Venezuela from Mercosur in 2016 as a result of the establishment of a Constituent Assembly replacing the opposition-controlled Parliament.

Almost 20 years after the start of the process, on the other hand, Mercosur and the European Union are expecting to close a free trade deal in the next months, spurred by the ongoing tensions with the United States.

However, the potential of Mercosur, boosted by the discovery of the giant Brazilian pre-salt oil reserves, must not be underestimated; given the pragmatic, business-friendly tone recently showed by Lopez Obrador, as well as his plans to enhance the development of the Central American nations, there is no doubt that the current juncture provides an opportunity for Mexico to diversify its economic and trade links.

Edited by Sofía Danis
More by Gabriel Moyssen

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