Impact of South American FTAs on Aus Agri: Insight

South America is becoming a major competitor for Australian agricultural products in Asian markets.

The signing of 45 free trade agreements (FTAs) between South American and Asian markets over the past 10 years is increasing competition. At least 35 more agreements are under negotiation.

Other factors include:

• improved market access for South American products
• increased agricultural production in South America
• growing demand for imported food in Asia.

South America is a competitor for some of Australia's major agricultural exports – such as grains, beef, and horticulture. However, it is also a valuable market for Australian agricultural exports. These exports include barley, malt, frozen beef and, in 2022, red table wine.

Implication for Australian exporters

Two factors will continue to improve the competitiveness of South American producers in international markets. These are staged tariff reductions under current FTAs and the potential for new agreements.

Australia's reputation for high-quality produce, and our proximity to Asia will partly mitigate the impact of competition from South America. High global shipping costs have increased the importance of proximity in recent years.

However, in the longer term, increased supply from South American countries may place downward pressure on prices in Southeast and Northeast Asian markets.

Summary of recent South American trade agreements

South American countries have entered into more than 45 FTAs with Asian countries over the past decade. At least 35 more agreements are under negotiation. Signed agreements include bilateral agreements, such as the Peru-China FTA. Others are multi-country agreements, including by the eastern South American trading bloc, MERCOSUR.

MERCOSUR has 11 FTAs, including agreements with Egypt (2010), Israel (2007), Mexico (2002) and India (2004). The EU and MERCOSUR reached an in-principal trade agreement in 2019. However, the agreement has not been finalised and the timeline for ratification remains unclear.

Chile has the most FTAs in the region (30). Several countries, including Colombia, Ecuador and Peru, signed half or more of their FTAs since 2010. Argentina, Brazil, Paraguay and Uruguay have over 15 agreements under negotiation. Most of these are as part of the MERCOSUR trading bloc.

Figure 1: Trade agreements in South American countries

Source: SICE – Trade Policy Developments (oas.org)

See Table 1 at the end of this article for further detail.

FTAs: increasing competition and opportunities for Australian exporters

The South American region is a major producer and consumer of meat, grains and horticulture products. Lower tariffs, improved market access and improved farming techniques have led to increased competition for Australian beef and grains. South America's horticulture seasons also align with Australia, which increases competition for Australian table grapes.

Despite increased competition, free trade has a net positive benefit for Australian exports. This is because Australian farms are highly efficient and Australian produce has a reputation for quality and reliability.

Free trade agreements give Australian exporters preferential access to South American countries. For example, the Peru-Australia FTA provides reduced tariffs across a range of commodities. Australia has a 0% tariff or large duty-free quotas for beef and dairy exports under the Australia-Chile FTA.

The impact of FTAs on South American beef, table grapes and wheat exports

Beef

South American countries are major beef producers and exporters. In 2021, Brazil and Argentina accounted for 15.1% of global beef production and 20.5% of global beef exports (Source: FAO 2022 and UNComtrade 2022).

The main driver of higher exports is increased production. Between 2000 and 2020, Brazilian (+32%) and Argentinian (+17%) beef production increased substantially (see Figure 2). Beef production in Brazil and Argentina is expected to increase steadily over the next decade by about 7.5% (Source: OECD-FAO 2022).

Figure 2: Beef production, 2000 to 2031 (million tonnes)

China has been the main destination for increased South American beef exports. Beef exports from South America to China grew from less than US$100 million in 2011 to more than US$12.5 billion in 2021 (a 62% increase on average per annum). This was despite import tariffs of between 12% and 25% for Argentinian, Brazilian and Uruguayan beef products into China.

Argentina, Brazil and Uruguay are all members of MERCOSUR. An FTA between China and MERCOSUR is unlikely in the foreseeable future. This has led Uruguay to begin negotiating a bilateral agreement with China. If concluded, it would be the first bilateral agreement signed by a MERCOSUR member. It is likely to result in reduced tariffs for Uruguayan beef. Other MERCOSUR countries, such as Argentina, have criticised the potential bilateral agreement.

Better market access and preferential trade agreements have also increased South American beef exports to markets other than China.

Brazil gained market access for beef to the US in 2016. However, its beef was banned in 2017, reportedly due to not meeting food safety standards. After regaining access to the US in 2020, Brazilian beef exports grew to US$471 million in 2021. Exports rose further in 2022 (Source: USDA 2022).

In 2019, Brazil gained access to the Indonesian beef market. Brazilian frozen beef exports to Indonesia grew from US$15.2 million in 2019 to US$88 million in 2021 (an increase of 480%) (See Figure 3). Exports to other Asian markets, including the Philippines, Singapore and Malaysia, have also increased.

Figure 3: Emerging Asian markets for Brazilian beef exports, 2015–2022

Table grapes

In 2021–22, Chile and Peru accounted for approximately 6% of global table grape production and 31% of global exports (Source: USDA 2022). Australia and South America are in the same hemisphere. This means horticulture products tend to ripen at the same time.

Chilean table grape production and exports have declined in recent years. Conversely, Peruvian production and exports have increased. If current trends continue, Peru will overtake Chile as the world's largest exporter of table grapes (see Figure 4). This change reflects:

• ongoing dry conditions in Chile
• lower production costs
• improved farming techniques in Peru
• improved market access for Peruvian fruit (to a lesser extent).

Peru has concluded FTAs with the EU (2013), China (2009) and the US (2009). These agreements have reduced or removed tariffs on table grapes. Collectively, Peruvian table grape exports to these countries have increased from 31,427 tonnes in 2009 to 309,571 tonnes in 2021 (an increase of 885%).

From 2015 onwards, Peruvian table grapes have entered the Rep. Korea tariff-free between 1 November and April 30. This tariff-free access has helped Peruvian table grape exports to grow from US$17 million in 2014 to US$41 million in 2021. Australian table grape exporters have tariff-free access to the Rep. Korea between December and April. Exports have also grown in recent years.

Peru is seeking improved access to other Asian markets. This includes efforts to open new markets for table grapes in Japan and the Philippines (Source: USDA 2022). Australia's important table grape markets include Japan (fourth largest) and Philippines (sixth largest).

Figure 4: Table grape exports, Australia, Chile and Peru 2015–2021 (thousand tonnes)

Wheat

In 2021, Argentina was the world's seventh largest wheat exporter (Source: UNComtrade). Argentinian wheat exports have grown substantially since 2014. Growing global demand, strong increases in production and relatively stable government export policies have driven export growth.

Despite the lengthy voyage, Argentinian wheat exports to ASEAN have increased in recent years. In 2015, no Argentinian wheat was exported to Indonesia, Vietnam or Thailand. Between 2019 and 2021, 20% of Argentina's wheat exports went to these 3 countries (collectively). Indonesia was the largest market, accounting for 15% of Argentina's wheat exports, worth US$358 million each year.

The OECD-FAO expects Argentinian wheat production (see Figure 5) and exports to grow steadily over the next decade. Argentina's key wheat market, Brazil, is aiming to increase grain production and reduce imports. Together, these 2 factors could cause more Argentinian wheat to be exported to Asian markets.

In December 2021, Indonesia and representatives from MERCOSUR agreed to launch negotiations towards a Comprehensive Economic Partnership. Progress on the agreement has been limited so far. If negotiations are successful, it is likely the 5% wheat import tariff that MERCOSUR countries, including Argentina, incur when exporting to Indonesia, would be reduced or removed.

Figure 5: Wheat production, 2000 to 2031* (million tonnes)

Table 1: List of South American trade agreements

a Agreements signed since 2010 as a proportion of all signed agreements.

Resources

The Manual of Importing Country Requirements has information about South America's import conditions.

Austrade has more information about market opportunities in South America.