The U.S., Mexico, and Canada sign the revised NAFTA. Photo: Ron Przysucha/U.S. Department of State

In 1994, the situation of the Brazilian market was dramatically different from today. After years of grinding hyperinflation that led to a huge financial crisis, a new currency—the Brazilian Real—was conceived and prevailed ever since. At the time, center-right Finance Minister Fernando Henrique Cardoso earned the plaudits for the “Real Plan,” being elected president in the same year. 

Another important milestone in the recent history of trade deals occurred that year in the U.S., while the Brazilian national football team won its fourth World Cup in Pasadena. In January, the U.S. economy approved the North American Free Trade Agreement (Nafta), which would transform regional relations and put beneficiaries Mexico and Canada on a new global economic footing.

</p> <p>As Latin America’s biggest economy and the second-largest in the Americas as a whole, Brazil had also had a myriad of reasons to prick up its ears to Washington’s decisions. Throughout the 1990s, when the U.S. became the world&#8217;s undisputed superpower after the collapse of the Soviet Union, southern countries followed the White House&#8217;s lead of liberal economics.&nbsp;</p> <p>This remained the order of the day in Brazil until 2003, when Luiz Inácio Lula da Silva was elected president, heralding the new center-left Workers&#8217; Party era.&nbsp;</p> <p>Almost 26 years after the birth of Nafta, <a href="https://brazilian.report/podcast/2019/03/20/jair-bolsonaro-donald-trump/">Brazil and the U.S. once again share a liberal agenda</a>, no longer following the &#8220;Washington Consensus” script. However, since his campaign, President Donald Trump has called for the creation of a “new and improved” Nafta, to be named the U.S.–Mexico–Canada Agreement, or USMCA. </p> <p>A new settlement is already on its way to completion. After overcoming initial resistance from Canada, the USMCA has now been signed by the three states and awaits ratification from their respective legislatures. Amid these expectations, Brazil&#8217;s recovering economy is looking on in excitement at the prospects of &#8220;Nafta 2.0,&#8221; despite not being a direct beneficiary.&nbsp;</p> <div class="flourish-embed" data-src="visualisation/914955"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <h2>(In)direct advantages of the USMCA</h2> <p>Brazil is around 7,000 kilometers from Mexico, its closest Nafta member. However, Mexico’s economic acquiescence could hint toward a cross-border perk that could have an effect on the continent below.</p> <p>When the North American deal was under serious risk of falling through—with Mr. Trump disagreeing with former Mexican president Enrique Peña Nieto—Brazil already saw itself as a solid candidate to fill a very advantageous gap.&nbsp;</p> <p>In the case of broken ties in North America, Mexico and Canada being left alone in the open sea would have created clear bilateral opportunities for Brazil. But even with the USMCA going through, these chances will not disappear.</p> <p>Neither heaven nor hell. In general terms, some of Brazil’s sectors must first be on alert to follow the new rhythm of the market, as economist Carlos Goes told <strong>The Brazilian Report.</strong>&nbsp;</p> <p>“Though the overall implications of moving from NAFTA to USMCA are small, as overall trade patterns between these countries will not tend to change significantly, there are some sectors that will be impacted more intensely.”&nbsp;</p> <p>According to Mr. Goes, two changes in particular will set the tone. One concerns rules of origin for the automotive industry, which will now require 75 percent of a car&#8217;s components to be produced in North America in order to avoid import charges. The other decisive change will be the requirement of higher minimum wages—USD 16 per hour—for factories that manufacture at least 40 percent of vehicle components.</p> <p>And the knock-on effect for Brazil is not negligible. The Economy Ministry tabulates the annual bilateral flow between Brazil and Mexico as close to USD 9 billion, accounting for about 2.5 percent of all Brazilian trade. Most of this—both imports and exports—is centered precisely on the automobile chain, involving vehicles, engines and their parts and components. This will be the sector most directly impacted by the changes of the UMSCA.&nbsp;</p> <p>Furthermore, these new rules of origin curb the use of Brazilian components in cars built in Mexico, which are then exported to the U.S. and Canada. So, the new agreement could push a loss on Brazilian exporters with deep investments in the Mexican production chain.&nbsp;</p> <p>On the other hand, Mr. Goes says, the new wage obligation will likely increase production costs in North America, which could in turn increase the competitiveness of Brazilian exporters who sell directly to the northern continent&#8217;s biggest markets.&nbsp;</p> <p>“Therefore, there is no clear prediction on the effects for the Brazilian economy. It&#8217;s ambiguous, there are positives and negatives,” he added.&nbsp;</p> <p>Nevertheless, authorities are hopeful.&nbsp;</p> <p>Between 2006 and 2015, Brazil was one of the top investors in Mexico, according to a <a href="https://www1.folha.uol.com.br/mundo/2017/04/1879378-impacto-de-dissolucao-do-nafta-para-brasil-seria-dubio.shtml"><em>Folha de S. Paulo</em> article</a> in 2017. Besides, Mexico currently represents Brazil’s eighth-most important export destination, with more than USD 3 billion sold between January and August this year. The nation on the other side of the Rio Grande also sold USD 2.8 billion throughout 2019.&nbsp;</p> <p>Even after the USMCA jinked past diplomatic obstacles and caught a sight of goal—coming as a relief to the U.S.&#8217; neighbors—Mexican interests in Brazil continued. In September, the Economy Ministry’s Secretary of Foreign Trade Marcos Troyjo told Reuters that a potential free trade agreement between Latin America’s two big dogs is in sight.&nbsp;</p> <p>According to Mr. Troyjo, Mexico wants to diversify its trade portfolio, which would help Brazil send more agricultural products in that direction. That philosophy mirrors the major interest of the &#8220;original&#8221; Nafta, to eliminate barriers for multinational companies from all three countries, allowing U.S. firms to invest in Mexico and vice versa. Similarly, Nafta allowed multinational corporations to invest in all three governments, regardless of their nationality.</p> <h2>Bringing Canada into the fold</h2> <p>The World Bank places Brazil and Canada side by side on the top 10 global economies ranking. So, imagining Mercosur establishing ties with Canada is no wild fantasy.&nbsp;&nbsp;</p> <p>Besides Brazil and Argentina&#8217;s possible disagreements in the future after the triumph of Kirchnerist president-elect Alberto Fernández on October 27—which could damage Mercosur&#8217;s free-trade deal with the European Union—good things could be coming from Ottawa, according to the Economy Ministry’s Secretary of Foreign Trade Lucas Ferraz, speaking to <em>Valor.</em>&nbsp;</p> <p>By the end of 2020, when the USMCA is also set to be triggered, Mercosur will conclude a new trade partnership with Canada, along with South Korea and Singapore. The governments say it is part of the “ambitious” trade agenda that Brasilia sees on the horizon.</p> <p>Canada’s desire to get closer to Latin America is not new. In 2010, amid Brazil’s economic boom, Canadian authorities already showed their interest. Later, in 2012, 2016, 2017 and earlier this year, the two nations began to discuss terms of goods, services, investments, sanitary and phytosanitary measures (SPS), intellectual property, environment, and labor legislation.

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MoneyNov 12, 2019

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BY Lucas Berti

Lucas Berti covers international affairs—specializing Latin American politics and markets. He has been published by Opera Mundi, Revista VIP, and The Intercept Brasil, among others.