South America Stands to Benefit From a Trade War It Doesn't Want

(Bloomberg) -- Some South American commodity producers may see their fortunes rise from the trade spat between the U.S. and China. But none are rejoicing, at least not publicly.

China, gobbling up a growing share of the region's exports since the commodities boom, could further deepen its ties with South America to make up for the closure of the U.S. market. Take the example of soy. If Beijing restricts imports of the product from the U.S., it would likely need to buy more from the other three top exporters -- Paraguay, Argentina and Brazil, said Paraguayan central bank chief Carlos Fernandez Valdovinos.

“As there's not enough supply probably, the price will increase, so in the end we could benefit there,” Fernandez said in an interview in Washington, where he attended the International Monetary Fund's spring meetings. “But trade wars are bad for everyone. Maybe it's beneficial for one sector, maybe for one year, but in the medium-term it's bad for everyone.''

Fears that U.S. and Chinese threats of protectionism could spiral out of control have overshadowed the IMF meeting, with the fund recently warning that the global commercial order risks being “torn apart” by trade wars. While U.S. President Donald Trump has seized on trade deficit figures to justify his harder line, South and Central America has mostly stayed clear of the fray. The U.S. has had a trade surplus with the region since 2009 -- last year it reached $75 billion. By contrast, its trade deficit with the euro bloc was $102 billion and its deficit with China more than triple that.

China-SouthAm Ties

China has forged strong commercial ties with South America over the past two decades. It unseated the U.S. to become Brazil's top trading partner in 2009, and has remained in that position ever since. Acknowledging that Brazil's trade ties with China are strong, central bank president Ilan Goldfajn demurred when asked whether the recent trade spat could further strengthen them.

“If you provide me with two options -- benefiting from this conflict, or not having this conflict and continuing the benign global environment -- I would prefer to continue having the benign global environment,” Goldfajn said in an interview on Bloomberg Television.

To read more about how the trade spat may improve Brazil's soy export outlook, click here

Argentina finds itself in a similar situation. While its finance minister says Argentina is trying to foster the best possible commercial ties with both the U.S. and China, the South American country could soon benefit from the trade spat to start selling soy meal to China -- so far, Beijing mostly buys soybeans elsewhere and does the crushing domestically.

“You can always describe some situation of trade tensions that ends up benefiting somebody,” said Alejandro Werner, the IMF's Western Hemisphere director. “But the spillover to the world will be mostly negative. Therefore we don't think there will be any winners.”

Mercosur, Europe

Policy makers from Brazil, Argentina and Paraguay are backing their free-trade talk with action. Their Mercosur trade bloc could sign a free-trade deal with the European Union as soon as June, according to Paraguay's Fernandez, who's also a former senior economist at the IMF.

“Politically, it's very important, even more important than before,” said Fernandez. “Because then Mercosur and Europe will show what the right path is.”

--With assistance from Jonathan Gilbert Gerson Freitas Jr. and Francine Lacqua

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Walter Brandimarte

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