Brazil, Argentina locked in protectionism row

Tensions have mounted this week between Brazil and Argentina as a series of disputes over private investment and bilateral trade barriers have been escalating. The relations between the two main trading partners in Mercosur have soured after Vale, the Brazilian mining company, decided to suspend a $6 billion investment in Argentina. Earlier, the Argentine government had decided unilaterally to change the terms of the bilateral automotive trade agreement with Brazil in an attempt to protect its own industry. Brazilian trade officials are trying to find a negotiated solution with their counterparts in automotive trade, but Argentine officials have reacted angrily and threaten to quash Vale’s concession in the Mendonza province.

Protectionism is the big issue here, according to John Welch, chief macro strategist at CIBC World Markets, and Brazil may only get a taste of its own medicine when it comes to its tortuous relations with Argentina. The controversy over Vale is mainly related to tax issues and the turbulent macroeconomic environment in Argentina, but also to difficulties in importing equipment. “There are serious problems getting capital goods, it makes it very difficult to finish the projects or keep them going,” said Welch.

Vale is said to have invested some $2 billion of the $6 billion that would be needed to complete the Rio Colorado project. The decision to suspend the project triggered an angry reaction from the government, which has threatened to end Vale’s concession. “If I was a Vale investor, I would be worried,” said the Argentine planning minister Julio de Vido. The performance of other companies such as Odebrecht, Brazil’s largest construction company, and Loma Negra, which is controlled by the Brazilian conglomerate Camargo Correa, may also be affected by the deteriorating business climate.

Meanwhile, Argentina recently decided to unilaterally revise its bilateral automotive agreement with its powerful neighbour to protect its own industry. But Brazil restricted its own car imports from Mexico and other countries last year.

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“Brazil agrees to do the same silly things at the Mercosur level as Argentina did, but then they get nailed by Argentina for the same stuff, so they face their own protectionism,” Welch said. “It’s more a reflection of overall inconsistencies in the policies.”

Renewed tensions occur amidst concern in Brazil regarding bilateral trade with Argentina, its third largest export market behind China and the US.

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