Brazil examines US-Argentina trade deal over Mercosur conflicts, sources say

By Lisandra Paraguassu and Lucinda Elliott

BRASILIA/MONTEVIDEO, Feb 10 (Reuters) - Brazil is scrutinizing a trade agreement announced last week between the United States and Argentina due to concerns it violates the rules of South American trade bloc Mercosur, three sources with direct knowledge of the matter told Reuters.

Brazilian diplomats are combing through the document released by Washington on Friday to determine the scope of the deal. At first reading, it appears to go beyond limits set for bilateral deals by Mercosur members, two of the sources said.

To strengthen the negotiating power of the bloc, Mercosur restricts how far members can go in signing their own trade pacts with third countries.

Last year, amid global trade tensions sparked by U.S. President Donald Trump, Argentina sought and obtained a temporary expansion of exemptions to the bloc's common external tariff. Brazil and Argentina were granted 150 exceptions each, while Uruguay and Paraguay received larger quotas.

Asked about Brazilian scrutiny of the deal, an Argentine official said "the tariff reductions announced for U.S. products fall within the list of 150 exceptions that Argentina is entitled to."

But Brazilian officials told Reuters the new U.S.-Argentine agreement appears to cover closer to 200 items.

"We are looking very closely into it so we can be fair," said one of the sources.

The governments of Brazil and Uruguay declined to comment.

Paraguay and Argentina's foreign ministries did not immediately respond to requests for comment. The U.S. State Department did not immediately respond to a request for comment.

MERCOSUR FACES REPEATED STRAINS

Another source said that the bilateral trade pact may run into other non-tariff issues, such as Mercosur's rules of origin for goods, services and technical barriers.

The same source said that the move by Argentine President Javier Milei, one of Trump's closest allies in the region, to initiate unilateral talks with Washington would make it difficult to accommodate the deal within last year's exceptions.

At a Friday press conference, when asked if Mercosur could obstruct the deal, Argentine Foreign Minister Pablo Quirno said the trade bloc does not stop members from such agreements.

He said Milei could implement parts of the deal by decree, although the overall trade and investment pact would require congressional approval.

Mercosur, founded 35 years ago, has faced repeated strains as members have sought to expand trade ties independently, though none has previously gone ahead with a side deal.

Uruguay nearly signed a free trade agreement with the United States in 2006 before backing off over fears it could face expulsion from the bloc. Montevideo has also pursued an FTA with China, generating friction with Argentina, Brazil and Paraguay.

In 2019, under former Brazilian President Jair Bolsonaro, then‑Finance Minister Paulo Guedes threatened to leave the bloc, accusing it of holding back Brazil's trade ambitions.

Neither Bolsonaro nor his leftist successor Luiz Inacio Lula da Silva has taken any formal steps to break with Mercosur.

Asked about possible consequences if Argentina's deal exceeds the permitted scope, a Brazilian official said "there are rules that have to be followed."

"If this really happens, we will have to call the Mercosur Council and decide what the bloc will do," the official added.

The group's next summit is scheduled for late June, in Asuncion, when Paraguay hands the bloc's rotating presidency to Uruguay.

The response will have to be decided at the top levels of Brazil's government, said another source in Brasilia, but the issue has yet to come before Lula.