East Meets West: The Potential Uruguay-China FTA

When it comes to trade, a tide of protectionism seems to be sweeping the world. But one country is bucking the trend. While much of the globe, including swaths of Latin America, is looking inward, Uruguay has distinguished itself as a key exception, looking far to the East to find opportunities for its exports.

Uruguay is a nation of nearby 3.5 million people, tucked between Argentina and Brazil on the east coast of South America. It is a well-organized country, especially by South American standards, and enjoys the economic stability and resilient institutions that have eluded many of its contemporaries. Uruguay may be geographically small compared to its behemoth neighbors, but it is nonetheless a force to be reckoned with.

Due in part to its small domestic market, Uruguay has long emphasized exports, particularly of its agricultural products. Uruguay’s exports reached a value of $11.3 billion US dollars in 2022 and have expanded at an average annual rate of 2.7% over the past decade. Meat, especially beef, accounts for over a quarter of Uruguay’s exports, while oilseeds, forestry products, dairy, and grains also figure prominently.

As Uruguayan exports have grown, China has solidified its position as a key trading partner. In 2010, China accounted for just 5.5% of Uruguayan exports. That figure ballooned to as much as 28.7%, before settling at 24.5% in 2022, making China the undisputed top destination for Uruguayan exports. Yet despite their strong commercial affinity, Uruguay receives no preferential tariff treatment on products moving into China – a situation that it is keen to change.

Unlikely Bedfellows

Uruguay and China have eyed each other from across the ocean for years with an underlying desire to formalize their relationship. Discussions of a potential free trade agreement (FTA) date back to 2016, when the respective presidents of the two countries met to lay the groundwork for negotiations. Since then, however, the conversation largely remained stagnant until the current Uruguayan president, Luis Lacalle Pou, took up the mantle.

In late 2021, Lacalle Pou announced that Beijing had accepted a Uruguayan proposal to advance work on the FTA, beginning with a bilateral feasibility study. The study was completed in July 2022 with apparently satisfactory results. Since then, Lacalle Pou has continued to push for the FTA although little substantive progress has been made.

In February of this year, a coalition of economic representatives from China visited Uruguay and in April, Uruguay’s Foreign Minister Francisco Bustillo traveled to China in an attempt to propel the agreement forward. It was likely not coincidental that Bustillo’s trip came on the heels of Brazilian president Lula da Silva’s own visit to China. The Chinese ambassador to Uruguay has said that the agreement is advancing ‘without hurry but without stopping’ and insists that China is still ironing out the technical and administrative details of the FTA.

Failure to Launch

An FTA between Uruguay and China will have deep political consequences for the region and beyond. Most importantly, as a member of Mercosur, the South American trading bloc, Uruguay is effectively precluded from negotiating bilateral trade agreements. However, Uruguay’s commitment to the bloc has been undermined by increasing frustration with Mercosur’s failure to modernize.

Mercosur was established by the Treaty of Asuncion in 1991 and was designed to function as a South American customs union. In fact, the name Mercosur is a shortened version of the full designation, ‘Mercado Común del Sur’ or Southern Common Market. The bloc is comprised of Argentina, Brazil, Uruguay, and Paraguay. Venezuela was formerly a member until its suspension in 2017.

Despite the best of intentions, Mercosur has fallen short of its full original mission. Indeed, there are tariff advantages for products moving within the bloc and prohibitive tariffs for products coming in from outside Mercosur, but these have been unevenly applied. Free trade zones can be found across the member states that have allowed some products to skirt some of these barriers.

But perhaps more importantly, the bloc has failed to implement synchronized trade policy and periodically falls victim to the political whims of its members. In an article published on March 23, 2023, Igor Patrick of The Diplomat wrote, “[Mercosur] is the integration bloc with the lowest foreign trade to GDP ratio (14.9% compared to the world average of 33%)”. Mercosur has not managed to achieve meaningful increases in market access in recent years. Even the EU-Mercosur agreement signed in 2019 is unlikely to be ratified in light of political developments in South America and increasing environmental pressures in Europe, among other issues.

Facing the Music

Frustrated by a lack of action from Mercosur, Uruguay seems prepared to go it alone. Its interest in seeking export opportunities was further demonstrated by its request to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was filed late in 2022. Now, Uruguay’s attention is fixed squarely on the FTA with China

If Uruguay is successful in its quest to negotiate an FTA with China, it will receive preferential tariff treatment and likely further opportunities for economic development, but it will also have to face the consequences dealt by Mercosur. For the moment, it is unclear what or how severe the consequences from Mercosur might be. While it is certainly plausible that Mercosur could expel Uruguay from the bloc, it is not obvious that the other member states possess either the appetite or the political capital to do so. There is also a possibility, albeit small, that Uruguay’s push could incentivize reforms for Mercosur.

Angering Mercosur could also have implications for China. Argentina and Brazil both have deep commercial and economic relationships with China, benefitting from agricultural exports but also substantial foreign investment from the country. China has previously expressed interest in a trade agreement with Mercosur, but because of Paraguay’s recognition of Taiwan as a sovereign state, the likelihood of such an agreement is effectively nil.

Furthermore, an FTA between Uruguay and China also has the potential to alienate other potential trading partners for Uruguay, perhaps most importantly the United States. Uruguay has previously made overtures to the U.S. to set up a trade agreement but has received little traction in return.

The implications of a potential free trade agreement between Uruguay and China are sweeping and surely economists and policy wonks in Montevideo have crunched the numbers. The fact that Uruguay continues to push so hard for this agreement despite the risks implies that it is convinced that the potential benefits for the country will outweigh the costs…if they can get the deal done.

An earlier version of this article was written by Ashley Scoby

Quarterra is a boutique strategy consulting firm dedicated to helping its clients understand and unlock opportunities in the food and agriculture industries of Latin America. This article is from Quarterra’s Agropolics blog, which investigates the intersection between agriculture, politics, and economics.

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