The Trans-Pacific trade agreement signed last week between the United States and 11 other Pacific Rim countries will be another nail in the coffin of the populist governments of Brazil, Argentina, Venezuela and other countries that will be left even more isolated from the global economy — and poorer — than before.
Once ratified by the countries that signed it, the agreement — officially known as Trans Pacific Partnership (TPP) and heralded as the biggest trade deal in history — is expected to cover 40 percent of the world economy. It’s likely to be a major boost to trade and investments among the United States, Japan, Australia, Singapore, Canada, Mexico, Peru, Chile and the remaining Pacific Basin signatory countries.
But what has gone almost unnoticed is that it will further isolate the struggling economies of Brazil, Argentina, Venezuela and other countries on Latin America’s Atlantic coast, whose disastrous populist governments have refused to enter free trade deals with the world’s biggest economies.
And what’s even sadder, this is not even a major topic of discussion in Brazil, Argentina or Venezuela, whose leaders live in an ideological bubble, oblivious to the fact that the commodity price boom their countries benefitted from in recent years was a stroke of luck that is not likely to be repeated anytime soon.
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While their governments pretend that everything is fine, Brazil, Argentina and Venezuela are facing an economic tsunami that may worsen their current crises.
At last week’s annual meeting of the International Monetary Fund and the World Bank in Lima, Peru, the IMF projected that Venezuela’s economy will contract a whopping 10 percent this year, and that the country will suffer a 200 percent inflation rate this year, the world’s highest. Brazil’s economy will contract by 3 percent, and Argentina’s will remain flat at 0.4 percent this year, and contract by 0.7 percent next year, the IMF said.
These populist governments, which are already weakened by corruption scandals, face bad news everywhere: China’s economy is slowing, world commodity prices have plummeted, nervous investors are fleeing from emerging countries, the U.S. dollar is gaining strength while their currencies get weaker, and the U.S. Federal Reserve may soon raise interest rates, which will make it more expensive for developing countries to borrow abroad and pay their debts.
And now comes the Trans-Pacific deal, which will make international companies more likely to open up manufacturing plants in Latin America’s TPP-member countries than in non-member ones. Whereas investing in any TPP member country will alllow multinational corporations to export duty-free to the entire TPP market accounting for 40 percent of the world economy, investing in non-TPP members such as Argentina, Brazil or Venezuela will only allow them to export duty free to their Mercosur economic bloc, which accounts for only 5 percent of the world economy.
In addition, the Trans Pacific deal will allow member countries to export to one another under common regulations. By comparison, non-members will have to adapt their exports to the individual import regulations of each of the 12 TPP member countries.
All of this will lead to a formal partition of Latin America. There will be a Pacific bloc led by TPP member countries that will be linked to the world’s biggest trading bloc, and an Atlantic bloc led by Brazil, Argentina and Venezuela that will be linked to an economically troubled China. The division, which has already existed de facto, will now become official.
My opinion: South America’s populist cycle may soon come to an end in several countries, as a result of new economic realities. Whether they like it or not, Brazil, Argentina, Venezuela and their ideological allies will have to desperately seek investments to face the perfect economic storm that is heading toward them.
The Trans-Pacific agreement is just the latest reason why they should leave behind their unsustainable demagogic isolationist models, and seek new trade and investment agreements with the biggest world blocs as fast as they can.