Wednesday’s sterile meeting between the foreign ministers of Argentina and Brazil (Héctor Timerman and Mauro Vieira respectively), which basically kicked the ball ahead, may have had the best of intentions but it was cruelly timed for a day when the collision course between the monetary policies of the two Mercosur countries accelerated — a new dip in the real for a 10-year low brought its depreciation so far this month up to 11 percent while only last weekend Central Bank Governor Alejandro Vanoli confirmed that there would be no change in Argentina’s policy of devaluation (2.4 percent so far this year). There is nothing especially new in Brazilian complaints about trade barriers despite the Mercosur bond but for much of the past decade most of the problems could be kept at bay thanks to growth. But these days a Brazil entering its 5th year of little or no growth has scant margin to offer in terms of its market while the Argentine authorization of imports has become extremely erratic due to dollar shortages — fairly normal so far this week but almost non-existent for much of last week. If trade is declining in general, Mercosur seems to have taken the biggest hits — while the exchange rate lag of the peso makes Argentine exports to a stagnant Brazilian market less competitive, imports from Brazil fell 25 percent last year according to official INDEC data.
“Two’s company, three’s a crowd” runs the saying and much of the bilateral problem stems from the emergence of an extremely powerful third player — namely, China. Brazil’s natural role as the regional giant, which climaxed during the Lula years (2003-10), has since been eclipsed by the Chinese sun. China’s vast reserves of over four trillion dollars make it a potential lender of last resort to the world, never mind the region (especially given that they are more than tenfold the current stock of International Monetary Fund lending rights, some 367 billion dollars). While sharing the general problems of emerging markets who are losing capital to a United States offering both growth and higher future interest rates, Brazil also has its own woes with a snowballing Petrobras scandal and a monster drought this summer. It thus seems almost ironic that when the acronym BRIC (Brazil, Russia, India and China) was coined for the main emerging heavyweights by Jim O’Neill in 2001, Brazil should be first and China last.
In the long term Timerman may be right when he says that the relationship with China will strengthen Mercosur but the long term is never reached by postponing the short term.