The history of trade disputes between Brazil and Argentina is as long as the Amazon River, with just as many twists and turns. High-level meetings over the past weeks have attempted to draw a close to the latest one, but some experts say the new government in Brazil will be quicker to react to Argentina's non-tariff trade barriers than its predecessors.

Trouble began brewing in February, when Argentina lengthened the list of Brazilian-made products that no longer qualify for its automatic import licenses from 400 to 600. One of the first sectors to take a hit was Brazil's footwear manufacturing. After the U.S. and the U.K., Argentina is the biggest market for Brazilian shoes. Suddenly, every time a Brazilian shoe company, like the popular Calçados Bibi for kids, made a sale to Argentina, it had to wait several weeks before the red tape would be cleared and the order shipped. In March, Brazilian trade group Abicalçados said more than 500,000 pairs of shoes were held up for shipping because of the measure, costing an estimated US$10 million in logistics, warehousing and other additional charges.

Then on May 12, Brazil went on the offensive, going after auto imports, an important market for Argentina since Brazil accounts for 80% of its passenger and light commercial vehicles exports (compared with 40% from Brazil to Argentina). Brazil took the same route as its neighbor did: requiring individual import licenses for every product from every company, rather than automatic licensing, leaving thousands of cars stuck in customs for weeks before the two sides backed off in early June.

Brazil didn't say officially the new license requirement was in retaliation for Argentina using non-tariff trade barriers against Brazilian-made products, but one can speculate. Auto imports from Argentina rose to 35,430 vehicles in the first quarter this year, up 87% from the first quarter of 2010, according to Abeiva, an import car association in Brazil. Initially, Brazil's Ministry of Trade and Development insisted the new license requirement was meant to help it measure the flow of vehicles imported into the country, but similar talking points have been used in the past whenever Brazil has put up barriers to slow Argentine imports.

But arguably in a change from the past, "this dispute has less relevance economically," particularly when put into perspective of two countries' overall levels of trade, observes Pedro Videla, a professor of economics at IESE business school in Spain. Trade between Brazil and Argentina was about US$32.95 billion last year, with Brazil running a US$4.08 billion surplus with Argentina. As for this year, Brazil's Trade Ministry data shows that trade between Argentina and Brazil was nearly US$15 billion during the first five months. Argentina's trade deficit with its neighbor — its largest trading partner — was US$626 million in May, up 85% on the year, while the deficit from January to May rose 79% to US$1.95 billion. But Argentina's exports to Brazil dropped 13% on the month to US$1.3 billion.

You Say Samba, I Say Tango

But Videla and other experts say that the dispute speaks volumes about where South America's two largest economies want trade trends to head and how each is both helping and hindering the other to get there. Part of it has to do with their contrasting economic trajectories, which began with Argentina's US$132 billion debt default of 2002 and its disastrous de-pegging of its currency from the U.S. dollar. Up until then, Argentina might not have been an investor's paradise, but investors had trusted it more than they trusted Brazil.

The election of Luiz Inacio Lula da Silva as Brazil's president in 2003 made investors nervous as they feared the country would be the next to default on its debt. Instead, Lula paid off Brazil's debt with the International Monetary Fund in his first term. Within the next few years, the majority of Brazilians were in the middle class; its natural resource firms, like Vale and Petrobrás, were major names worldwide; and its farmland began drawing attention as both a producer of alternative energy — ethanol — and its ability to meet local and Chinese demand for soybeans.

"Lula had inherited more problems than the Greeks have today," says Videla. "But he was able to turn around the debt problem." According to Videla, what has been critical for Brazil was that Lula used his seven years as president to distance himself from the populist Left movement sweeping across the rest of the region. "Lula didn't want to join that group, but [Argentina's then president] Nestor Kirchner did," he says. "I think the new president of Brazil wants to emphasize that difference even more." 

In terms of trade with Argentina, President Lula did deploy protectionist measures even though he publicly denounced them, imposing non-automatic licenses in 2009 on Argentina's wheat flour, wine and soybean oil, leaving hundreds of Argentine trucks stranded for days at customs posts at the border with Brazil. A similar dispute occurred in 2004, with Kirchner threatening to restrict imports of Brazilian textiles.

Given May's measures, it looks as if Dilma Rousseff is using her first year as Lula's successor to be more openly tough with Argentina. “She wants to put her foot down and show Argentina that Brazil’s policy is different now, and they are not going to sit back while Argentina restricts our imports," says Vander Lucas, an economics professor at University of Brasilia. "Lula was more tolerant of Kirchner’s measures. Dilma won’t be.”

Not everyone in Brazil agrees with Rousseff's change of tack. In late May, Miguel Jorge, industry and foreign trade minister for four years under Lula, said imposing non-automatic licenses on car and auto-parts imports was like “firing a cannon ball” at Argentina. He also told local press, “We are to Argentina what, despite some large differences, China is for Brazil. The population, the GDP and Brazilian industrial production rates are several times larger than in Argentina.”

According to Felipe Monteiro, a management professor at Wharton, “It’s never a good political decision for Brazil to win the battle with Argentina and end up losing the war. Brazil definitely has the privileged position here in the argument…. but their relationship is more important than that, and probably Argentina knows that and might even use it to their advantage.”

Argentina says its deficit with Brazil is its main concern, even though the country was running a trade surplus of around US$1.3 billion as of April 30 with its other trading partners. "Argentina has its own set of macroeconomic problems to deal with, as does Brazil with a strong currency," says Lucas. "Argentina is seeing more demand for its commodities at home, so that's going to impact its balance of payments, not just Brazilian imports."

Imports are rising in Argentina because after long last, its economy is turning a corner. But as in the past, its current strategy appears to be to pull policy levers to slow down the flow of Brazilian goods. "Argentina uses these non-tariff trade barriers to solicit a response from the Brazilian government," he says. "If they don't get a response, they keep making trade as difficult and as bureaucratic as possible until it aggravates someone in the Brazilian government, as it finally did in May."

Choosing Battles

Brazil has said it is considering taking the trade dispute with Argentina to the World Trade Organization (WTO), as it has successfully done with the U.S. and the EU in the past. Under WTO rules, countries cannot impose licensing restrictions on a single country. The WTO allows for such measures if they are applied to all countries, and for no more than 60 days.

Joel Trachtman, professor of international law at Tuft University's Fletcher School, says in the case of Argentina, Brazil should choose its fight wisely. "Brazil has to ask itself whether litigation in the WTO is useful to them, and I don't think it is," he says. 

"There is a chance that Argentina, in particular, can try going to the WTO and declare that they are using import license restrictions because of their balance of payment deficit," he notes. "But it is not a case that has ever been made successfully, and if the WTO allowed it for Argentina, it would open a string of similar cases from countries around the globe."

The other factor at play is that Brazil and Argentina are the biggest members of the four-member Mercosur trade union. Formed before Brazil burst into global trade as one of the BRIC darlings, Videla wonders whether "Brazil is realizing that agreements like Mercosur are unnecessary" at a time when it's better to have trade with the rest of the world." As he sees it, "Brazil is going to be a giant in the world economy pretty soon…. This current fight is a sign that they don't value Mercosur that much."

Yet publicly, Brazil's politicians insist that they still have faith in Mercosur. The country's combined export and import trade with the other Mercosur partners — Argentina as well as Uruguay and Paraguay — was US$39.2 billion last year, its highest on record. Brazil exported US$22.6 billion of goods to other Mercosur, beating 2008's record US$21.7 billion. But Brazil is also buying more from its neighbors, including Argentina. Imports were US$14.4 billion in 2010, beating the last record in 2008 of $13.25 billion, according to Brazil's Foreign Trade and Commerce Ministry.

Outside the region, the fact of the matter is that both countries' embrace of protectionism is far greater than in other parts of the world. In the annual Enabling Trade Index of 125 countries compiled last year by the World Economic Forum, Brazil fared only slightly better than Argentina, coming in at 87th place compared with Argentina's 95th place. High tariffs on imports, the heavy use of non-tariff measures, and burdensome and costly export and import red tape are among the shortfalls cited by the study's authors.

Preserving a robust trade relationship remains vital to both countries, regardless of the trade battles, asserts Wharton's Monteiro. “Their relationship is very important for a healthy Mercosur," he says. "So all of the problems they are having now are really minor. The two countries will never lose sight of the key bilateral relationship that they have.”