Trade relations between Argentina and Brazil date back to the colonial era. Two centuries later, that strong historic relationship is in danger of breaking apart. Several factors could lead to a divorce – disputes, suspicions, envy, and personal disagreements between the presidents of the two countries.  Nevertheless, analysts are optimistic that the marriage between Argentina and Brazil, as well as the MERCOSUR   free-trade pact (Argentina, Brazil, Paraguay and Brazil) they belong to will continue to grow, generating economic and cultural benefits, and benefits for the tourism sector.


When Argentine President Nestor Kirchner returned from the Mercosur -Arab Summit in early May, it set off a style worthy of a soap opera. Although both governments issued denials, Kirchner had been expected to meet one-on-one with [Brazilian president] Inacio Lula da Silva to speak about some sensitive topics involving bilateral trade. But the Argentine president decided to board his return flight without providing any notice.


Beyond leaving Lula in the lurch, the incident made it clear that there are still plenty of issues pending between the two countries.  They include the application of safeguards; the divergent positions of the presidents on international relations; and the asymmetries in their economic structure. Personal issues are also involved. The mass media is saying Kirchner is envious of Brazil’s new leadership role in the region.


Brazilian Leadership


Brazil has “moved a bit ahead of Argentina as the leader in the region,” says Fernando Sarti, a professor at UNICAMP, the state university of São Paulo, Brazil. Brazil “has been bolder in its international relations, opening new channels that were not explored by the previous government. They include South Africa, India and China.” Sarti coordinates the Nucleus of Industrial Economy and Technology (NEIT) at UNICAMP. Add to that, Brazil’s battle for a seat on the U.N. Security Council, and its negotiations with the WTO. “Brazilian international policy has an activism it never used to have,” said Sarti. “Generally speaking, it used to support U.S. policy.”


Alejandro Perotti, professor of law at the Austral University of Argentina, agrees. “One significant factor behind the quarreling in the Argentina-Brazil marriage is that Brazilian foreign policy has changed significantly. Brazil is developing a policy that involves coming closer to the countries of the so-called South, including Africa, China, India, Oceania, and South America. Brazil’s goal, apparently, is to re-float the idea of a Free Trade Zone of South America, under the new name of the South American Community of Nations.”


“First of all, Brazil and its business leaders believe that Argentina is no longer all that relevant, compared with the rest of the global market,” says Félix Peña, director of the BankBoston Foundation of Argentina. His non-profit organization organizes activities and capacity training on foreign trade. He adds, “Second, I have the impression that this perception on the part of Brazilians is based on the fascination that the great dynamics of change are producing. It also involves the enormous business opportunities opening up on all horizons, particularly in Asia. Meanwhile, the Argentines would be more inclined to remain on a much more limited playing field.”


In defense of Argentina, analysts agree that it cost a great deal for that country to recover from the impact of the economic and social crisis of 2001. The situation affected the country’s international image and the morale of its people. “Every country has chosen its foreign policy,” Perotti notes. “If Brazil has overwhelmed Brazil over the past year with its foreign policy, it does not mean it has stolen opportunities away from Argentina. Nevertheless, Argentina has been going through a clamorous period of social, economic and commercial collapse, ever since 2001, while Lula [in Brazil] had fewer internal problems to attend to. Argentina had to get to the point where it renegotiated its debt with both public-sector creditors and the foreign private sector. That limited the moves the country could take in its foreign policy when it was time to negotiate with other countries.”


Brazil’s progress could damage its bilateral relationship with Argentina. According to Sarti, “There is clear concern about avoiding a major imbalance in the region with Brazil, which the other countries of the area view as a leader. The basic reason, however, is Argentina is still putting its house back in order. It cannot sit down and chat about these international topics with Brazil; Argentina is positioning itself more like a partner than like a competitor. That’s the way I see it.”


Does Mercosur Have a Future?


If relations between Argentina and Brazil, the two largest partners in Mercosur, are not at their best, what will happen with Mercosur ? “I believe relations between the two countries are okay,” says Perotti. “The disagreements that have arisen are a part of the normal relationship between two countries involved in a process of integration. What’s more, the problems between the countries demonstrate that the integration process is moving forward. In addition, the more trade there is, the more these sorts of problems increase, proportionally. You cannot have a system of integration where there are no problems.”


In fact, the European Economic Community, which has a lot many years of experience in regional integration, is having some of its own problems when it comes to applying a common constitution. Apparently, the French public is not very satisfied with the political path that has been outlined.


Despite everything, Peña believes that relations between Argentina and Brazil are sound. “Mercosur has a lot of potential. I have the impression that this potential will become more apparent if the bilateral relationship takes a much broader view of the profound changes taking place on the map of global economic competitiveness. We have to project the balance of convergent and divergent interests in our two countries on the future of global economic competitiveness. Given the surge of the big emerging economies such as China and Russia, you could conclude that the balance is moving in favor of factors of convergence; of common interests.”


Sarti adds, “The misunderstandings between Brazilians and Argentines are part of the process. Mercosur is an integration of economies, so it is going to reflect internal problems. This is a period of growth in which Argentina and Brazil are growing well. The important thing is that the progress has advanced in economic terms much more than it has advanced in institutional terms. That is to say, there was no regulatory or institutional apparatus for treating crisis situations. That’s when you can do a lot of damage.”


A Renewed Mercosur  


Like every regional bloc, Mercosur is undergoing a dynamic process of integration, and it clearly needs to make some changes to improve the way it functions. Peña, Sarti and Perotti cite three totally different aspects, all of which are important for improving the way the regional bloc moves ahead.


On the one hand, Perotti focused on the institutional components of the common market. “You cannot continue to use the same structure for administering Mercosur,” he said. In those sectors most sensitive to competition between Argentina and Brazil, the two countries have pursued divergent policies regarding footwear, white goods (refrigerators, washing machines, etc.), textiles, and auto parts. Often, there were different routes for carrying out the negotiations.


“You have to change the process of administering the agreement, the negotiations, and the instruments of trade policy,” adds Perotti. For example, the famous safeguards that Argentina demands for its products were, in reality, prohibited by the Treaty of Asunción in 1995. It’s okay that this type of tool exists; the problem is who administers them. You need to provide Mercosur with an independent institution that is in charge in these areas, and has representatives in each country.”


As for legal controversies, Perotti believes, “We have to try to speed up mechanisms and enable judges in each country to use a special court where they can raise questions about regulations.”


For his part, Sarti believes that the future of Mercosur depends fundamentally on political relationships. “Although there are local problems involving appliances, autos, oil and wheat, these are small things in the overall process. In terms of government, the position tends to be more favorable. If the economies of both countries continue to grow by at least 3 percent, and if there are no international complications, then both Kirchner and Lula will certainly be reelected. It also seems that things will calm down, providing some internal consolidation and legitimization to both governments. That will make it easier for them to go to the table and negotiate. When you are growing, it is much easier to negotiate, and much easier to make concessions, and move the negotiations forward.”


Peña has a much deeper perspective. “A company or society that has strong institutions can eventually absorb levels of governmental inefficiency. When society is weak, it is very hard to compete on an international level. You need one sector dedicated to business, another for labor unions, and a society that is, overall, conscientious, organized, and informed. It must be trained, and have competitive intelligence to think about the future and develop strategies in each sector. The strategy must work smoothly in academic, business, labor and governmental sectors.”


Peña cites several cases that show Brazil’s development skills, including some transnational (Brazilian-based) companies that now have assets and investments abroad. “This is also happening in the academic arena where a large number of projects have a bi-dimensional focus – both legal and economic,” said Peña. “Even some press organizations have full-time correspondents who cover international negotiations; for example, in Geneva.”


The problem is that Argentines “have a certain genetic predisposition to be defeatists. This shows up the very first moment there is a problem. In contrast, Brazilians are unreasonably hopeful, in my opinion. We need what Tancredo Neves, the Brazilian [political leader], called the sort of person who is ‘driven mad by hope,’” concludes Peña.