China and Mercosur: Perpectives for Bilateral Trade

1 November 2007

While China’s economic importance to Latin America, and to Mercosur in particular, has increased exponentially over the past few years, countries in the region should be wary of potential competition in their domestic markets.

Since the opening up of the Chinese economy and the reduction of export and import controls, Brazil and Argentina’s foreign trade has shown sustained growth, which accelerated after China undertook trade reforms – including significant tariff cuts – in the 1990s. China’s accession to the WTO in 2001 further contributed to this dynamic (see graph overleaf ).

Mercosur Export Growth

In 1980, Argentine exports to China represented 2.34 percent the country’s total foreign sales. This figure remained relatively stable until 2002. By 2004, however, it reached 7.58 percent and 7.94 percent two years later. Between 2000 and 2003, Argentina’s exports to China grew by an astonishing 123.7 percent.

Imports from China also increased considerably. While they represented a negligible 0.3 percent of Argentina’s total imports in the 1980s and 1990s, by the year 2000 they had climbed to 4.56 percent, followed by 6.23 percent in 2004 and 7.8 percent in 2005.

The scenario is largely similar for Brazil. Both exports and imports amounted to 3 percent in 1985, dropping to 1 percent in 1991. Although trade between the two countries increased steadily from 1993-1998, truly spectacular growth occurred between 1999 and 2003. During his period, Brazil’s exports to China rose by 525 percent – compared to a 52-percent increase in exports to other destinations – making the country China’s main supplier in Latin America.

While China is now Argentina’s fourth largest export destination, and Brazil’s third, the picture is quite different for the two smaller Mercosur partners Paraguay and Uruguay. In 2005, the latter’s exports to China reached just US$119 million, while imports totalled US$242 million. For Paraguay, the gap was even larger: US$69 for exports versus US$716 million for imports.

From the Chinese perspective, however, Latin America remains a relatively unimportant export destination. According to 2002 data, Mexico, with 0.9 percent, is China’s 20th export market and Brazil, with 0.5 percent, is 26th. The value of Chinese exports to Mercosur represented just 0.6 percent of the country’s total at that time.1

Composition of Mercosur Exports

Between 2001 and 2003, primary products made up 55.5 percent of Brazilian shipments to China, i.e. double the proportion of such products in the country’s total exports. Semiprocessed goods represented 20.1 percent of exports to China compared to 14.7 percent in overall foreign sales. While shipments of fully processed manufactures accounted for 55.1 percent of Brazil’s total exports, they amounted to only 24.1 percent of goods shipped to China.

In addition, Brazilian exports were concentrated in just eight sectors, with agrifood and extractive minerals representing 47 percent of the total. Interestingly, this ratio is virtually unchanged since 1985.

The 2001-2003 level of export concentration was also high for Argentina: three products – soya seeds (41 percent), unprocessed petroleum oil (25 percent) and soya oil (18 percent) – accounted for 84 percent of all goods exported to China. Industrial manufactures represented just 4 percent of the total, a 20-percent drop from the year 2000. From 2003-2006, the share of agrifood shipments reached 72 percent. These products involved no (or very little) processing, a figure far superior to the 49 percent that primary agricultural and industrial products (excluding fuels) represent in the country’s total exports.

Furthermore, export concentration in Argentina continues apace. For instance, the metallurgic sector accounted for 15 percent and textiles 14 percent in 1996. In 2004 and 2006, their respective shares had fallen to 2 and 1 percent. Similar drops have occurred in Chile and Venezuela.2 Both countries’ exports to China are concentrated in very few sectors, composed essentially of minerals – and copper in particular – for Chile; and hydrocarbons – particularly crude oil – for Venezuela.

Trade Barriers

China’s average bound tariff is 9.8 percent (14.9 percent for agricultural goods and 9 percent for manufactures). The highest tariffs apply to footwear, food products, beverages and tobacco. Import duties for live animals reach 12.4 percent, while applied tariffs on vegetables stand at 13.7 percent. Duties on edible fats and oils average 13 percent.

The Chinese tariff structure contains significant peaks. While these are more pronounced in the sector of industrial goods, they remain relevant in the agrifood sector. For instance, high tariffs are levied on unprocessed agricultural products such as strawberries (30 percent), plums (25 percent), wheat and rice (65 percent) and sugar (60 percent). In contrast, market access for minerals and fuels is largely duty-free, or tariffs are very low.

In addition to high tariffs for processed food products, Argentina and Brazil’s exports to China continue to face considerable nontariff barriers, including taxes, subsidies and phytosanitary measures.

What Happened to Comparative Advantage?

Mercosur’s integration into the Chinese economy has up to now been limited to the supply of raw materials. The bloc provides the Asian giant with products that are immediately processed and either exported to third markets or consumed locally. While the region’s export frenzy toward China can be explained by the phenomenal growth of the Chinese economy, as well as certain complementarities between the economies involved, Mercosur clearly lacks an active reciprocal market opening strategy. Indeed, imports from China have registered their highest growth in sectors where Argentina and Brazil have major competitive advantages.

Although bilateral trade between Mercosur and China is – at least in theory – based on comparative advantages, intra-industrial trade remains quasi inexistent. This is not the case with other Asian developing countries, where the trade pattern reflects the partners’ specialisation and division of labour at the global level.

There is no doubt that the principal challenge facing Mercosur is to maintain and improve its integration into the Chinese economy while at the same time preserving the competitiveness of its industrial products and eventually raising the value-added content of its exports. For Brazil and Argentina, Chinese industrial products present a latent danger, which is currently relegated to the back burner given the boom in their overall exports to China.


Mercosur’s immediate problem vis-à-vis China appears to be not so much access to third markets, as the protection of domestic markets. It seems clear that low-cost Chinese imports pose a serious threat to regional industries, particularly due to their higher value-added technological content and better ability to meet quality standards.

As for external trade, the Inter-American Development Bank has estimated that only 2 percent of Argentine exports to third markets are likely to be displaced by Chinese competition. Brazil appears to have slightly more cause for concern: over the past decade, the country has lost 4 percent of its exports to third markets to China. Low-tech goods, such as textiles and steel products, were most affected in relative terms. In terms of value, however, products involving intermediate technologies were hit the hardest. However, the IADB also found that the composition of Chinese and Brazilian exports to the US in particular began to diverge markedly between 1992 and 2001.3

In short, Mercosur’s trade relationship with China presents the same shortcomings as the region’s overall trading pattern, except that in this case the shortcomings are more sharply evident. Without entering into a detailed discussion on the long-term effects of a trade strategy based on natural resources, we can nevertheless conclude that the industrialisation of Mercosur member countries is likely to be negatively impacted by a greater market penetration of Chinese imports.

Welber Barral is Professor of International Economic Law at the Federal University of the State of Santa Catarina in Brazil. Nicolás Perrone is Researcher, Centre of Interdisciplinary Studies of Industrial and Economic Law,University of Buenos Aires. Opinions here are expressed in the authors’ personal capacity and do not involve their institutions.

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