Big trade opportunity for Mexico and Brazil

Mexico and Brazil this month announced the start of negotiations that could eventually lead to what government officials in both countries call a “strategic economic integration accord” between Latin America’s two largest economies.

If all goes to plan, the resulting agreement would not only reduce tariffs between the two countries, but would also entail treaties in key areas of the economy, agreements on investments, property rights and public sector investment.

As Beatríz Leycegui Gardoqui, Mexico’s assistant secretary for foreign trade at the economy ministry, told the FT this month: “The idea is to negotiate a truly broad agreement in which Brazil and Mexico can co-operate with each other.” Ultimately, she said, the accord’s structure could even allow other countries to join later on.

On paper, at least, such an agreement is potentially a big deal. Mexico and Brazil are by far the largest economies in Latin America and together make up an estimated 74 per cent of the region’s gross domestic product. They are also by far the most populous countries in Latin America, with a combined population of about 300m – almost the size of the US.

Yet trade between the two countries last year was a mere $6bn. To put that figure into perspective, Mexican exports to Brazil accounted for just 1 per cent of the total, while Brazilian exports to Mexico represented 1.8 per cent of that country’s total exports.

For Mexico, the promise of a wide-ranging agreement with Brazil comes at a delicate time. The country of about 108m people is struggling to recover from the worst recession since 1932, as the economy contracted by 6.5 per cent in 2009 – the worst performance in the region.

Much of that contraction had to do with the intimate link that Mexico’s economy has with that of the US and the open nature of its economy. About 80 per cent of its exports go to its northern neighbour, and exports account for about 30 per cent of GDP. The result is that every time there is a downturn in the US, Mexico suffers.

“Depending economically on only one region is inadequate for any country … such dependency explains why Mexico was so affected in this crisis,” Felipe Calderón, Mexico’s centre-right president, said this year after a meeting with Luiz Inácio Lula da Silva, his Brazilian counterpart.

For Brazil, an accord with Mexico also represents a big opportunity. While the country has by far the largest domestic market in Latin America, and has also been the darling of international investors in the region in recent years, it has a much more closed economy than that of Mexico, and exports account for just 14.3 per cent of its GDP.

Experts say a deal with Mexico could lift that figure and provide important access for Brazilian products to the US and Canadian markets through the North American Free Trade Agreement, which binds the US, Canada and Mexico.

Sérgio Augusto de Abreu e Lima Florêncio Sobrinho, Brazil’s ambassador to Mexico, is upbeat about the possibilities. He points out, for example, that Mexico would benefit considerably from a lowering of Brazilian tariffs, which are currently about 12.5 per cent compared with about 5 per cent in Mexico. “If Mexico signs an agreement, it would have preferential access to the Brazilian market before other countries,” he says.

At the same time, he admits that Brazil could learn much from Mexico, which already has trade agreements with 44 countries. “Mexico has long experience in this area compared with Brazil, and we do not have an agreement with a country the size of Mexico,” he says. “It is a stimulus for us.”

He also points out there could be important co-operation agreements in areas of nanotechnology and biotechnology and, in particular, energy. It is no secret that Pemex, the Mexican state-owned oil monopoly, would like to have greater access to the know-how and technology of Petrobras, the Brazilian oil company, when it comes to deepwater exploration.

Meanwhile, the ambassador says, Petrobras could benefit from certain areas of Pemex’s expertise, such as gas injection to augment production from existing wells.

María Cristina Capelo, an investigator at Mexico City’s Centre of Research for Development, argues that multinational companies operating in both countries could be important beneficiaries of an eventual accord because they could integrate operations more closely.

“Brazil and Mexico have many similar products, but if you look at sectors such as automobile parts and aerospace, there is potential because a lot of the commerce is between companies,” she says. She also sees an upside in petrochemicals, where Brazilian companies setting up in Mexico could purchase primary materials from Pemex to manufacture derivatives.

“Inevitably, though, many challenges to reaching agreement lie ahead. One is the potential resistance from Mexican companies involved in agriculture, where Brazil is bigger and more competitive.

Experts say any far-reaching agreement would have to include persuading Brazil to drop non-tariff barriers such as certain sanitary requirements for Mexican products – an area in which Mexico’s ability to negotiate will almost certainly be tested to the limit.

Another key area is energy, where legal and constitutional restrictions in Mexico prohibit Pemex from entering into joint venture contracts with third parties.

Unless the agreement can overcome at least some of those hurdles, it is highly unlikely that Petrobras would be willing to share much of its know-how in deepwater drilling – an area that Mexico considers vital for its long-term oil self-sufficiency.

Without meeting those challenges, there is a danger that any resulting accord would end up looking more like a widening of the current trade agreement between the two countries, which covers roughly 800 products. That would be a step in the right direction, but it would also almost certainly be an opportunity wasted.