Fuente: https://www.elobservador.com.uy/nota/uruguay-accede-a-bajar-arancel-del-mercosur-y-brasil-libera-exportaciones-desde-zonas-francas-20226922845

The governments of Uruguay and Brazil concluded this Thursday a negotiation that includes several sensitive points on the bilateral and Mercosur agenda that had remained paralyzed for months.

After weeks of conversations in which the ministries of Economy and the foreign ministries of both countries participated, The Minister of Foreign Affairs, Francisco Bustillo, and his Brazilian counterpart Carlos França agreed in Los Angeles a text that includes the Uruguayan decision to adhere to the Brazilian initiative to lower the bloc's Common External Tariff (CET) when the issue is raised again within Mercosur, while Itamaraty expressed his commitment to speed up the bloc's external agenda, as well as his determination to prioritize the treatment of “negotiating flexibilities” that this international insertion requires and that Uruguay demands, as it learned The Observer.

In addition to these two points of regional scope, at a bilateral level the countries agreed – at the impulse and demand of Uruguay – on the conditions for preferential access of merchandise produced in free zones and special customs areas located in both countries, based on the list of products covered by the Economic Complementation Agreement (ACE) number 18. Meanwhile, Uruguay enabled the import of yerba mate for cases where limits are found. cadmium maximums, thus excepting a health standard at the Mercosur level. This is a relevant issue for Brasilia because the
Yerba is the only Brazilian product that has Uruguay as its main market: it represents 60% of its exports. In 2021 that was equivalent to more than US$58 million.

Regarding the first issue, Bustillo and França defended the idea that the current situation of the Common External Tariff “does not reflect current needs” of Mercosur and that its reduction contributes to improving the competitiveness of the countries. Although they did not agree on a specific percentage – which must meet the consensus of the partners – Brasilia is betting on a 20% reduction, as it was unilaterally adopted, which is a number that Uruguay can tolerate, political sources told The Observer.

Regarding modernization, the chancellors emphasized the need to give greater
dynamism to the bloc's external agenda, for which they understand that new “flexible formats and mechanisms” that can be adjusted to the “specifics” different situations and respond to “interests and sensitivities” of each of the state parties.

Brazil, in particular, demonstrated its willingness to give “priority” to treat the “flexibilities
negotiators” in Mercosur. In this context, Bustillo informed his Brazilian counterpart about steps that his portfolio had been taking to pursue negotiations with countries that are outside the bloc, such as China and Türkiye.

The story: a stalled negotiation that took PepsiCo hostage

With this agreement that arises as a result of the negotiating will, both governments ironed out the disagreements that had limited the relationship in recent months and, fundamentally since the end of 2021, when Uruguay rejected Brazil's proposal – negotiated with Argentina and supported by Paraguay – to lower the bloc's CET by 10% for a list of 6,195 products (87% of the products in the Common Nomenclature of the Mercosur).

At that time, Uruguayan diplomacy functioned based on declarative actions in which Uruguay insisted on the need to “make the bloc more flexible,” and conditioned its support for the reduction of the CET on being explicitly enabled to negotiate with third parties bilaterally. Brazil, for its part, prioritized the reduction of the CET as a mechanism to combat high inflation.

However, the persistent Uruguayan refusal to the Brazilian proposal had its consequences. One of singular importance was Brazil's decision not to renew for this year the regime of total relief from the CET or national import tariffs on PepsiCo products that come from the Cologne free zone.

In January 2014, when the last year of José Mujica's government began, the two had negotiated under the umbrella of the Latin American Integration Association (Aladi) an Economic Complementation Agreement that allowed Uruguay preferential access to the Brazilian market for certain products from the Colonia and Nueva Palmira Free Zones, while Brazil had the same benefit with some products that left the Manaus Free Zone.

This agreement, which had to be renewed annually, was comparable to the historic tariff exemption achieved by Brazil and Argentina in the 1994 negotiations for the special customs areas of Manaus and Tierra del Fuego respectively. These exceptions pierced the Common External Tariff by treating the products that were exported from these places as if they originated in Mercosur and, therefore, authorized to circulate in the free trade zone, unlike what the norm establishes for the rest of the free zones.

That at the end of 2021 and beginning of 2022, Brazil had not renewed this tariff exemption for the Colonia free zone – and that this remained paralyzed for six months – was a sign of dissatisfaction with the way in which the Uruguayan government had stopped in the negotiation field and its refusal to accept the reduction in the CET, demanded by none other than the Minister of Economy Paulo Guedes, the best ideological ally in Brazil that Uruguay's international insertion has had in recent years.

That request to reduce the tariff made a big difference for Brasilia – depending on the upcoming electoral scenario and the Jair Bolsonaro government's quest to improve the economic situation – and did not move the needle in Uruguay, so Guedes and his people navigated in confusion over the position adopted by the Executive Tower.

The Brazilian reaction was disturbing for the multinational PepsiCo, which saw the profit it had for its export to Brazil from Colonia affected a few months after its CEO for Latin America, Paula Santilli, traveled to Uruguay to announce an investment of US$64 million in its plant located in that free zone. The situation generated so much concern that the company mobilized its highest regional and international authorities to make calls at the highest level.

França's visit to Montevideo at the beginning of May did not improve the situation. Itamaraty's representatives left the Santos Palace disgusted by the form and substance of a meeting in which they once again discussed Uruguay's rejection of a new request to make another reduction in the CET by 10% – something that Brazil would end up implementing unilaterally again at the end of May – and in which at the last minute they received the request to approve a text that would enable Uruguay to negotiate on its own, according to what establishes the Treaty of Asunción.

There was no press conference. França put on the best smile he could muster and resorted to his diplomatic devices to declare to the journalists who were waiting for him at the door of the chancellery because he knew that history always continues and that sooner rather than later he would end up sitting again at a negotiating table with Bustillo.

The new scenario: repositioning

This new meeting actually took place this Thursday afternoon in Los Angeles, where the ministers arrived to participate in the Summit of the Americas. However, the meeting was preceded by a month of work in which the Ministry of Economy headed by Azucena Arbeleche took a greater role on the matter with the support of the Foreign Ministry services.

With the change in position and the agreement with Brazil, the Uruguayan government was left with a tangible achievement that has potential in bilateral trade: the liberalization of trade for exports from all free zones of the country. He also achieved a nod towards China with the long-awaited Brazilian statement, which they hope will generate some effect in Beijing, while the Asian country completes the internal consultation and responds to the joint feasibility study. Brazil, meanwhile, acquired the Uruguayan commitment to adhere to the reduction of the CET.

If in December the panorama was that of an involuntary "triple alliance" against a Uruguay that was left isolated, with this negotiation now the government of Luis Lacalle Pou kicks the board and puts the Argentine Foreign Ministry in the need to dialogue with Itamaraty before the next summit or bear the responsibility of a new break in the Mercosur consensus.