30/12/2022

Trade Relations between Brazil and Argentina: The Challenges for Lula

The inflation projected for Brazil for the whole 2023 will be 4.8%, one point below the estimation of 5.8% for December 2022 in our country, according to ABECEB forecasts released today before the upcoming inauguration of President Lula.

The strong reaction of the Central Bank of Brazil to the rise in prices led to a substantial process of deflation throughout 2022 that is expected to continue next year. Thus, 2022 would end with an inflation rate of 5.7%, a far cry from Argentina, which closes the year with an inflation rate of nearly 100 per cent (96%).

But as far as activity is concerned, the balance of power is leaning more in favour of Argentina. The local economy will close the year with an expected rise of 5.5 per cent, while our neighbour's economy is expected to grow 3.2 per cent in 2022. In 2023,  during Lula's first year in office, it is expected to slow down to +0.7% in a similar dynamic to that of Argentina, which will grow around 1%.

The slowdown in Brazil's economy will be mainly due to a post-pandemic normalisation of the economy, slower global growth, the delayed effect of the Selic rate hike and the reduction of the extraordinary fiscal package implemented by Bolsonaro's administration in the context of the elections.

Brazil's industry has already experienced a downturn in August and September, growing 2.4%, a level below the pre-pandemic (and well below the 18.7% peak in 2011). Trade has been increasing, but at a cumulative rate of 0.7% in recent months, while services have been growing for five consecutive months with a rise of 1.1%, the highest level in the series.

Employment also shows positive figures: unemployment fell by 3.9% in the third quarter (compared to the same period in 2021) and reached the lowest level since 2015. 

The bilateral relation with our main partner is in the red

The accumulated bilateral trade deficit up to November was USD 2,238 M, which represents a significant deterioration compared to the balance of the same period last year (USD -26 M). The balance results from imports that have grown 33.7% so far this year, while exports to Brazil grew by 13.1% year-on-year.

Therefore, after the exceptional surplus of 2021, this year is on track to close with a bilateral trade deficit for Argentina of around USD 2.4 billion.
However, it is worth mentioning that this is still almost 30% below the average of -USD 3,500 between 2004 and 2018.

Going forward, although Lula might pursue greater regional integration in South America and this could give some further momentum to bilateral trade, trade flows should not change substantially, as specific proposals to overcome structural issues are still missing.

These are the main obstacles to integration between neighbours: volatility and incompatible macroeconomic policies in both countries; low systemic competitiveness, except in food sectors and in some industrial and service areas; and insufficient funding for regional integration projects. 

With regard to institutional matters: Mercosur's lack of direction (neither a free trade area nor a customs union); non-tariff barriers and excessive intra-zone bureaucracy; limited agreements beyond the scope of tariffs (services, investment, public procurement, intellectual property, technical and labour standards).

The sectorial obstacles are: the larger relative size of Brazilian companies; infrastructure deficiencies in both countries and a logistics structure focused on extra-regional trade; the absence of promotion of more competitive niches or those with greater need for investment (Software, Biotechnology, Energy, Infrastructure); and the experience of productive integration policies with poor results. Other more specific obstacles include the national promotion schemes (Automotive, Machinery, Capital Goods, Consumer Electronics); regulatory differences (Pharmaceuticals,Food), and the barriers to trade (e.g., the lack of a national trade promotion scheme).

Gustavo Perego holds a Master's degree in International Relations with a specialisation in Finance from the GetúlioVargas Foundation and an MBA. from the Di TellaUniversity. He is the Director of ABECEB, an international consulting firm.