Is South America the answer to Canada’s trade dilemma?

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The rise of American protectionism is forcing Canada to look further afield for trade partners, with some pointing south — much farther south — to one potential option.

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“With the U.S. an increasingly erratic partner, Canada needs commercial partners outside of North America, and Mercosur is the largest trade block with which Canada does not have a trade agreement,” said Rambod Behboodi, an international trade lawyer at Borden Ladner Gervais LLP.

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Mercosur — an abbreviation of the Spanish Mercado Común del Sur, meaning southern common market — was founded in 1991 when Argentina, Brazil, Paraguay and Uruguay signed the Treaty of Asunción. The pact effectively removed customs duties between the countries and placed a common external tariff (CET) on specific imports from outside the bloc (the CET currently averages 11.5 per cent), while establishing a common trade policy with outside countries.

Venezuela joined Mercosur in 2012, but was suspended indefinitely in 2016, while Bolivia became a full member in 2024.

Canada and Mercosur officially launched negotiations for a free trade agreement in 2018, but nothing was ever settled in the years following. The European Union just settled its trade negotiations with Mercosur last year, but it took a quarter of a century to get there.

“Both Canada and the EU are significant exporters of machinery to Mercosur member countries and while import duties can range up to 35 per cent for Canadian goods, the EU-Mercosur Agreement will reduce these tariffs to zero over time for EU goods, wrote Behboodi in a January note for BLG.

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Without a deal, Canada could lose out on growth in South America, he added, “especially given the EU’s new competitive advantage.”

Behboodi said there’s no single short-term replacement for the American market, but that Canada should look to reduce its reliance on the U.S. in the medium to long-term.

Last year Brazilian exports to Canada increased nine per cent to reach US$6.31 billion, although imports from Canada plunged 18 per cent amid the devaluation of the Brazilian real, according to the Chamber of Commerce Brazil-Canada (CCBC).

Top exports included gold, alumina, cane sugar, aircraft and equipment and coffee.

“Over the last decade alone, exports have grown over 60 per cent overall, symbolizing a milestone in the bilateral relationship between the two countries,” said Hilton Nascimento, CCBC’s commercial director, in November.

Canada’s ambassador to Germany, Evelyne Coulombe, recently called for the finalization of a Canada-Mercosur free trade agreement, pointing to the ongoing tariff war as presenting an opportunity to diversify and develop business ties with Brazil, Germany and Europe.

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Coulombe felt a trade partnership between Canada and Brazil could especially benefit the oil and gas industry and the renewable energy and IT sectors by exchanging technologies and collaborating in scientific research.

However, Fen Olser Hampson, professor of international affairs at Carleton University and co-chair of the Expert Group on Canada-U.S. Relations, doesn’t believe a Canada-Mercosur free trade agreement would be beneficial.

Hampson said Brazil and Canada tend to export similar products, like beef and poultry, crude petroleum and commodities. He noted Brazilian aerospace company Embraer S.A. manufacturers jets which competes with Canada’s Bombardier Inc.

It would be difficult to conduct trade between manufacturing industries, particularly auto, as well, since Canada’s manufacturing sector is so deeply embedded with the U.S..

Instead, Hampson felt Canada would be better off expanding trade with Asia and Europe, focusing on trade of commodities, agriculture, critical minerals and energy.

Canada already has 15 free trade agreements with other countries, including Chile, Colombia and Peru.

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Bernardo Blum, professor of economic analysis and policy at the Rotman School of Management, said it might be helpful for Canada to first examine the EU-Mercosur agreement to determine how much trade that agreement generates, and which industries and companies are coming out on top.

The EU-Mercosur deal, signed in December, eliminates tariffs on more than 90 per cent of trade between the two partners. Hampson said there’s more of a “basis for marriage” with the EU-Mercosur agreement, since the EU typically exports finished goods and depends on imports of commodities.

That said, the agreement took 25 years to be finalized due to apprehension from European farmers about competing with agricultural producers from South America, as well as concerns over Brazil’s human rights and environmental issues.

According to the Center for Strategic and International Studies, a Washington, D.C.-based think-tank, “the rise of protectionism, exemplified by Donald Trump’s reelection, pushed the European Union and Mercosur to act.”

Still, Blum believes a Canada-Mercosur agreement would do little to “move the needle.”

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He offered the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) as an example. CETA was implemented in 2017 to eliminate tariffs and reduce trading barriers between Canada and the EU.

However, the most recent data from Statistics Canada shows only 65 per cent of Canadian exports to the EU made use of CETA preferences in 2021. It was estimated that an extra $415.5 million in savings could have been realized if CETA was fully utilized.

“Even if we see an increase in trade, I’m not sure what fraction or share of Canadian firms will actually go through the certification process to take advantage of the free trade agreement,” said Blum, emphasizing that Mercosur is a much smaller trading bloc compared to the EU as well.

“So, I honestly don’t think that the effects will be that significant.”

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