What would be the impact of a free trade agreement between China and Mercosur?

A free trade agreement between the Mercosur bloc – formed by Argentina, Brazil, Paraguay and Uruguay – and China could generate a positive impact on the countries' GDP and also on investment. However, political differences are likely to prevent this from materializing.

According to a study by think tank China-Brazil Business Council (CEBC), a free trade agreement would generate a positive impact on Argentina’s GDP of 2.58% in 2024-35, a rise of 1.43% for Brazil, and 2.16% and 3.49% for Paraguay and Uruguay, respectively, while the Chinese economy could see a boost of 0.07%.

Meanwhile, investment would increase 10.77% in Argentina, 7.27% in Brazil, 7.25% in Paraguay and 15.55% in Uruguay, the study shows.

"The main message of this study is that any discussion about a possible free trade agreement between Mercosur and China should not be restricted to only commercial issues, but also cover topics such as investments, technology and the creation of regional production chains, especially those linked to the energy transition and decarbonization," the study said. 

However, political differences between Mercosur members make an FTA with China improbable.

"Currently, Mercosur countries have antagonistic leaders, with Brazil's government having differences with Argentina's government, and also cool relations with the president of Uruguay [Luis Lacalle Pou]. It shouldn't, but political differences end up contaminating the countries' trade activity and mainly the progress in agreements," José Augusto de Castro, president of Brazilian foreign trade association AEB, told BNamericas.

According to the CEBC, a free trade accord would result in Brazil having a trade surplus of US$1.22bn with China but Argentina would have a deficit of US$4.45bn, Paraguay a deficit of US$290mn and Uruguay a deficit of US$658mn. China would have a trade surplus of US$5.86bn with Mercosur. 

However, while such an FTA is not a short-term prospect, China's current economic situation is a real headwind for Latin American countries.

"We expect China's economic growth to slow to about 4.8% in 2024, down from last year, with a further slowdown to 4.5% in 2025," Shelly Shetty, managing director and head of Asia and Americas sovereigns at Fitch Ratings, told BNamericas. 

"China's reliance on commodities like copper and oil means that any slowdown in China could impact Latin America, especially commodity-dependent countries like Brazil, which has significant trade ties with China," she added.