Adriano Machado / REUTERS Argentinean President Mauricio Macri and his Brazilian counterpart Michel Temer listen to their national anthems before their meeting at the Planalto Palace in Brasilia, Brazil, February 2017.

A Good Neighbor Policy for Trump

How to Engage With Argentina and Brazil

Every incoming U.S. president begins his tenure by seeking out opportunities to establish a foreign policy legacy; Donald Trump doesn’t have to look far to find them. In the United States’ own neighborhood, he has a chance to realign relations with two of most important and influential countries in the Western Hemisphere: Brazil and Argentina.

Besides being the largest and third-largest economies in Latin America, the two countries carry great political weight in the region. After years of tense relations, they could help the United States consolidate democratic and free-market development in the region. That would, in turn, enhance U.S. security and prosperity.

Brazil and Argentina are busy attempting to shake off the legacies of years of statist economics. Each now has a market-friendly president desperate to produce economic growth and less friendly toward the neopopulist authoritarianism of the late Venezuelan President Hugo Chávez and his successor, Nicolás Maduro.

BRAZIL’S GROWTH PUSH

Hosting the 2014 World Cup and the 2016 Summer Olympics was supposed to be Brazil’s entry onto the world stage as a country of global consequence. But it was not to be. The boom times that preceded the events were fueled by China’s voracious appetite for commodities. Those ended as Chinese demand slowed, exposing structural flaws in the Brazilian economy that successive leftist presidents from the Brazilian Workers’ Party—first Luiz Inácio Lula da Silva and then his protégé, Dilma Rousseff—had ignored.

In August 2016, against a backdrop of growing public anger over austerity and massive corruption scandals, Rousseff was impeached for cooking the books to cover up the parlous state of the government’s finances. (In truth, the punishment might not have fit the crime; Rousseff was more of a scapegoat for her government’s deep-seated corruption.)

Into the breach stepped Vice President Michel Temer, a centrist, 76-year-old constitutional lawyer from the Brazilian Democratic Movement Party and longtime member of the Chamber of Deputies, the lower house of the Brazilian Congress. Despite his own poor approval numbers (currently hovering around 10 percent from having also been implicated in ongoing corruption investigations, Temer has pushed ahead with ambitious economic reforms, seeking to boost growth by scaling back the state’s role in the economy and attracting foreign investment.

The challenge is daunting. Brazil is trying to climb out of its worst recession in decades. The economy contracted 3.8 percent in 2015 and another 3.5 percent last year. For 2017, the Central Bank expects .5 percent growth. At the end of 2016, unemployment stood at 12 percent, reportedly the highest on record.

To arrest the decline, Temer first won from Congress a 20-year cap on government spending meant to shrink a massive budget deficit. Next on his list are overhauling the bloated pension system and inefficient tax structure and easing Brazil’s rigid labor code. He wants to open up Brazilian infrastructure to foreign investment and allow full foreign ownership in the Brazilian agribusiness and airline industries.

The elephant in Brazil’s living room, however, remains the ongoing corruption scandal around the state oil company Petrobras—to date involving some $2 billion in kickbacks to Brazilian politicians—which threatens to further scramble Brazil’s prospects at any moment by ensnaring more elected Brazilian officials, including, possibly, Temer. Whether these reforms will continue will depend largely on the results of Brazil’s 2018 presidential elections, but there seems to be a clear recognition by many Brazilians that a departure from Rousseff’s policies is needed.

MACRI’S CHALLENGE

Like Temer, Argentinean President Mauricio Macri inherited an economic disaster following more than a decade of left-wing populist rule. After its 2001 sovereign debt default—one of the largest in world history, amounting to some $95 billion—Argentina elected the late Nestor Kirchner and then his wife, Cristina, who isolated the country from the international financial system while cozying up to the Chávez regime in Caracas.

Macri, a centrist businessman and the former mayor of Buenos Aires, was elected president in December 2015 on a platform of restoring sensibility to the country’s economic policies, boosting investor confidence, and repairing relations with international financial institutions. Like Brazil’s, Argentina’s economy has been mired in recession (its GDP declined by an estimated 1.5 percent last year) and dogged by an inflation rate of around 40 percent and a huge budget deficit.

Since taking office, Macri has aggressively moved to dismantle currency controls and end a dispute with bond holders that allowed Argentina’s reentry to international credit markets. He has worked to reduce the influence of growth-killing labor unions through negotiated agreements as well as eliminate a range of trade barriers on agricultural products and other goods.

Like Temer, Macri wants to create a business-friendly environment that is more attractive to foreign direct investment in an economy desperate for foreign capital. He is hoping to generate around three percent growth this year, and is expecting inflation to drop to 17 percent from 40 percent recorded last year.

Still, Macri faces a difficult political situation. His party is a minority in Congress and tough austerity measures, such as cutting down the size of the country’s bloated bureaucracy, have taken their toll on his popularity. But analysts in Argentina believe that the population still broadly trusts Macri and is willing to give him the time to turn around the country’s long economic decline. Polls show that Argentineans are optimistic about the future. And so, perhaps, is the Trump administration. Last year, before he became Trump’s secretary of state, then ExxonMobil CEO Rex Tillerson said, “I’m optimistic about the changes that have happened in Argentina with the new government.”

WASHINGTON'S PATH FORWARD

Two of the largest and most important countries in the Western Hemisphere are undergoing profound course correction. Washington ought to take advantage of this opportunity. Brazil and Argentina have populations of 200 million and 40 million and a combined GDP of over $2 trillion. Both are sophisticated markets and have vast natural resources in energy and agriculture. They also carry weight diplomatically and are eager to move past recent dalliances with autocratic, anti-U.S. populism. (Mercosur, the regional customs union led by Brazil and Argentina, recently suspended Venezuela from membership due to its antidemocratic actions.)

Two of the largest and most important countries in the Western Hemisphere are undergoing profound course correction.

U.S. relations with Brazil have always been tricky, but in Argentina the path will likely be smoother. Macri already has a personal history with Trump, dating back to the 1980s, when Macri’s father and Trump struck a major New York real estate deal. Both presidents are entrepreneurs and negotiators, risk-takers and deal-makers.

There is an array of earlier U.S. initiatives launched with Brazil and Argentina that can now be reinvigorated, among them commercial dialogues, CEO forums, trade and investment councils, defense industry dialogues, and strategic energy dialogues. Counterterrorism and counternarcotics cooperation (including on illicit finance and the troublesome triborder area) can also be improved.

In seeking to escape the economic wilderness of the Kirchner years, Argentina has petitioned the United States to redesignate it as a beneficiary developing country for the Generalized System of Preferences (GSP) program, which removes U.S. duties on select imports, from which it was suspended in 2012. It also wants to accede to the Paris-based Organization for Economic Cooperation and Development (OECD), in which Chile and Mexico are the only representatives from Latin America. Although the OECD is currently not looking to expand, the United States can show good will by still making the case for Argentina’s entry.

But the big economic play is in energy. Brazil and Argentina are eager for private investment to boost gas and oil production. In Brazil, recent discoveries of deep-sea oil deposits off the coast—estimated at more than 50 billion barrels—are said to be some of the world’s most important in the past decade. And with the country scrapping the rules requiring the state-oil company Petrobras to have at least 30 percent ownership of all projects and to be the sole operator, it will clearly draw the interest of foreign investors and large oil companies.

Meanwhile, Argentina has some of the largest shale oil and gas reserves in the world, much of it unexploited. The huge formation known as Vaca Muerte, which contains an estimated 16.2 billion barrels of oil and 308 trillion cubic feet of natural gas, has already attracted international interest, and the Macri government is working hard to entice more investment to boost domestic production of gas. Encouraging investment and increasing trade ties between the United States and Argentina, such as by reintegrating Argentina into the GSP, can help stimulate economic activity to the benefit of both countries.

With two Latin American powerhouses intent on discarding their populist straitjackets after more than a decade, it makes both strategic and economic sense for the United States to engage with purpose. If not, others will certainly fill the void: Japan, the European Union, and, most especially, China, which is already Brazil’s largest trading partner. In a Financial Times interview, Temer said that Chinese companies were interested in some 34 concessions for airports, ports, roads, and other infrastructure projects. “They [the Chinese] are coming to Brazil in a big way,” he said. “And they are very interested in these concessions.” In Argentina, China has been aggressive in the energy, mining, and banking sectors, and served as a lender-of-last-resort for critical infrastructure projects when Argentina was shut out from international markets.

But, the fact is, the United States remains a preferred trading partner for Brazil and Argentina because of the size and stability of U.S. markets, cultural similarities, and the generally stricter adherence to legal regulations practiced by U.S. corporations. A reinvigorated U.S. engagement with the two countries is a win-win situation for all. To some, there may remain an air of uncertainty regarding Trump’s intentions on foreign policy and trade, but what is clear is that the president is looking for relationships that produce tangible benefits for his country—and, for that, he need look no further than the United States’ own neighborhood.

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