Spring 2023

Uruguay and the United States

– Ignacio Munyo

A free trade agreement could strengthen their historical ties.

The trade relationship between Uruguay and the US is closely dependent on the two nations’ historical friendship. The US is already one of Uruguay’s main trading partners for goods and, by far, the first market for services’ exports, including information technology services. At this stage, a free trade agreement is not only crucial to increase Uruguayan exports of goods to the US, but both countries would benefit from intensified trade flows.

Strong historical ties

The relationship between Uruguay and the US began before Uruguayan independence and, consequently, is deep and long-lasting.

Whereas other Hispanic independence leaders were strongly influenced by the French Revolution and the founders of France, Uruguayan national heroes found their ideological roots in American political liberalism. José Artigas (1764–1850), regarded as the father of Uruguayan nationhood, was shaped by the philosopher and US founding father Thomas Paine. One of Artigas’s main sources of inspiration was the book, “The Independence of the Mainland Justified by Thomas Paine, Thirty Years Ago, published in Spanish in 1811. Not only did the book contain Paine’s most important works, but also a large appendix of documents including the US Declaration of Independence, the US Constitution, and several state constitutions.

Since 2022, Uruguay has been part of the Americas Partnership for Economic Prosperity, a new US initiative to drive greater trade and investment.

The US recognized the independence of Uruguay in 1836, only six years after the ratification of the first Uruguayan Constitution, with diplomatic relations formally established between the countries in 1867 after the American Civil War.

A steppingstone in the Uruguayan-US relationship occurred during World War I, when Uruguay supported the US. Before Germany declared the seas surrounding the British Isles a war zone, which would set off submarine warfare, Uruguayan Foreign Minister Baltasar Brum protested saying, “It violates the indisputable rights of neutrals and offends humanity.” When the US finally broke relations with Germany, Minister Brum himself sent a message of solidarity recognizing “the justice and nobility of the feelings that in this emergency have guided President Wilson.” Brum also coined a concept that extended to World War II: “We are neutral because we do not participate in hostilities, but we are not impartial, and even less are we indifferent.”

Decades later, Uruguayan President Jorge Batlle had a close relationship with US President George W. Bush, their terms overlapping from 2001–2005. At the very beginning of Batlle’s administration, the top priority was to sign a free trade agreement with the US. His government took all the necessary steps in the US Congress, but a major financial crisis thwarted previous plans. The Bush administration made an emergency loan of $1.5 billion to Uruguay in a bid to halt the country’s banking crisis, and to curb economic collapse and social unrest until the International Monetary Fund and other multinationals could act on Uruguay’s behalf. It was an extraordinary action for the US administration, which explicitly opposed bailouts.

In 2004, the US and Uruguay signed an Open Skies Agreement allowing Uruguayan carriers for government-funded travel. In 2005 a bilateral investment treaty was enacted between the nations that required the host state to treat foreign investments on the same level as investments from any other nation. In 2007, the US and Uruguay signed a trade and investment framework agreement to foster an attractive investment climate in their respective territories, and to expand and diversify bilateral trade in goods and services. Even with a lack of local and regional support for the 2006 free trade agreement, Uruguayan President Tabaré Vázquez managed to maintain a close relationship with the US; in 2007, he sought its help in the Uruguay River pulp mill dispute, which threatened to damage the normally strong Argentina-Uruguay relationship.

Since 2022, Uruguay has been part of the Americas Partnership for Economic Prosperity, or APEP, together with Barbados, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, and Peru. APEP is a new US initiative to drive greater trade and investment, including customs procedures, logistics, regulatory practices, and non-tariff barriers. With big subsidies, the US government wants to reorient business toward the region and relocate global supply chains from Asia to the Western Hemisphere, with partners who are committed to the values of liberal democracy. The US already has free trade agreements with most of these nations with the exception of Ecuador, Barbados, and Uruguay.

Toward a new free trade agreement—and a closer look at beef

Today, the US is a significant supplier of goods to Uruguay and is one of the largest markets for Uruguayan goods and services. Uruguay’s main imports from the US are oil, plastics, chemical substances, chemical inputs for agriculture, telephone equipment, electric motors and turbines, agricultural machinery, and computers. Uruguay’s main exports to the US are software, information technology services, beef, wood, citrus, and honey. According to official figures, about 150 US companies operate in Uruguay.

Cattle ranch in Tacuarembo, Uruguay. Ksenia Ragozina/Shutterstock.

Using Russian-American economist Wassily Leontief’s input-output matrix, it is clear the multiplier effect of Uruguay’s meat industry would greatly benefit the Uruguayan economy. Uruguay represents 3 percent of US meat imports. This figure has been relatively stable for a couple of decades because there is a quota with a preferential tariff to export to the US. Within this quota, the tariff is 1 percent; outside the quota, the tariff jumps to 26 percent.

Close to 10 percent of Uruguayan meat usually goes to the US, 20 percent to Australia, and 30 percent to New Zealand. According to beef producers, if the 26 percent tariff were eliminated, meat exports to the US could easily increase to 30 percent. Part of the increase would come from Uruguay’s current exports to China, and part from an increase in production. Uruguayan beef has many attributes valuable to North American consumers including being hormone-free, grass-fed, organic, sustainable, and cruelty-free. Moreover, total US meat imports are four times higher than all Uruguayan meat exports.

Opening the economy to international trade is a natural route to stimulate innovation in businesses.

There is evidence that a free trade agreement with the US would provide Uruguay with many opportunities to sell food products beyond the meat sector. Additionally, Professor of International Trade and Economic Integration at Uruguay’s Universidad de la República Marcel Vaillant argues that a free trade agreement with advanced economies like the US would spur positive structural economic reforms that have yet to take hold in Uruguay.

A controversial point is Uruguay’s membership in Mercosur. In 1991, Argentina, Brazil, Paraguay, and Uruguay created the Southern Common Market, a free trade zone commonly referred to as Mercosur, its abbreviation in Spanish. To be part of the common marketplace required Uruguay to forgo other agreements. However, the common market was never fully implemented, and Mercosur should not be an obstacle to Uruguay negotiating free trade agreements with other countries, although, the support of Brazil is crucial in order to move forward.

Lorenzo Caliendo and Fernando Parro—from Yale and Penn State universities, respectively— developed a general equilibrium model to evaluate tariff policy and quantify the trade and welfare effects of Uruguay leaving Mercosur and signing a free trade agreement with the US. They found that by bilaterally reducing tariffs with the US there would be positive net effects for Uruguay. They also found that Uruguay would benefit much more from a free trade agreement with the US than Argentina and Brazil.

However, leaving Mercosur is off the table. Several Uruguayan firms depend exclusively on exports to Brazil that fall under Mercosur. Additionally, last year Uruguay and Brazil reached an agreement to allow exports from Uruguayan free trade zones to Brazil, which is a big opportunity to increase trade between the neighboring countries.

A debatable point of a free trade agreement with the US are the market regulations in which state-owned enterprises operate. There is always concern that critical internal markets would be deregulated. Since future markets could not be regulated, the State would lose control of technological advances. However, doing whatever it takes to secure a monopoly is not the only way to strengthen state-owned enterprises. Requiring external providers of public sector purchases to be treated equally would prevent subsidies to specific sectors that negatively affect most Uruguayans. In every aspect related to the public sector, Uruguay should be able to request what is in its best interest and strategic considerations.

Another crucial point is the regulation of intellectual property. The negative consequences that may result from joining the Patent Cooperation Treaty—usually a requirement of modern free trade agreements—could be relevant, but one for which they can also be compensated. Generics or copies represent 90 percent of pharmaceutical products consumed in Uruguay and their cost is much lower than that of patented originals. Resistance to a potential increase in drug costs may express itself in public opinion, but the likelihood of negative effects is relatively low. Deadlines are negotiable and a tiny market like Uruguay’s would not move anyone’s balance sheet into the red.

The traditional protectionist logic has also become debatable. It is true that there are many employees in the sectors protected by Mercosur’s import tariffs.  With technological progress most of these jobs, as they are currently conceived, will likely disappear in the medium term no matter what. Most workers employed in sectors that compete with US-imported products are in positions with a high probability of being automated in the coming years.

To prove this point, I analyzed the trade flows between Uruguay and the US and computed the probability of automation of each job position potentially affected by greater US competition. Based on an official household survey, I turned to the theory of economist Carl Benedikt Frey and machine-learning specialist Michael A. Osborne, both of Oxford University, to assign a probability of automation to each job position in Uruguay according to the main bottlenecks of robotization (manipulation, creativity, and emotional intelligence). The evidence shows that two-thirds of the job positions in industries potentially competing with imports from the US would disappear regardless. With or without a free trade agreement, these jobs are at risk. It is a problem that Uruguay must address, and one that is no longer solved with commercial protection.

A future of openness and innovation

Since the 1999 review of economists Jeffrey Frankel and David Romer—from Harvard and Berkeley universities, respectively—there is clear evidence that trade causes economic growth and personal income. A free trade agreement with the US would be great news for Uruguay. The gains from greater trade openness have been widely analyzed in economics discourse. The greater the commercial openness, the bigger the economic development. Of course, it is not simple: opening the markets must be accompanied by other public policies that contribute to quality-of-life improvements for the population. Openness does not only provide access to markets. The benefits are amplified by reducing tariffs on goods used in the production process, which lowers overall costs and improves competitiveness.

Moreover, trade openness spurs innovation, a relationship that is even stronger in emerging markets. Opening the economy to international trade is a natural route to stimulate innovation in businesses, which drives economic growth via “intrapreneurship,” or entrepreneurship in an existing organization.

According to the US government: “The two countries share important values such as a commitment to democracy, the rule of law, sound economic policies, strong labor rights, environmental protection, investing in people, the desire to see disputes between nations resolved peacefully, and the commitment with the multilateral system. Uruguay is a constructive partner that has a fundamental role in promoting regional stability and democracy.”

Uruguay needs to create permanent trade openness with new opportunities. A free trade agreement with the US would be helpful in this regard, and a natural step in the historically close relationship between both nations.

The author thanks Andrés Durán, Juan Ignacio García Pelufo, and Leonardo Veiga for their very helpful comments. 

Ignacio Munyo, PhD, is executive director of the Center of Economic and Social Affairs (CERES, Uruguay) and professor of economics at the University of Montevideo. He is also board member of the Montevideo Stock Exchange, and columnist of newspaper El País. He was Consultant at Grant Thornton, Inter-American Development Bank (IADB), and Orgnaization of American States (OAS). He was also Non-resident Fellow at Brookings Institution. He has several scientific publications in leading scientific journals such as The Review of Economic Dynamics (US), The Journal of Law & Economics (US), The Journal of Public Economics (UK), The Journal of Economic Behavior & Organization (Netherlands), Kyklos International Review for Social Sciences (Switzerland), Management Review (Spain), The Innovation Journal (Canada), and The Scandinavian Journal of Economics (Sweden), among others. He holds a PhD in Economics from Universidad de San Andrés (Argentina), a master’s in Economics from the University of Chicago (US), and a Licentiate in Economics from Universidad de la República (Uruguay). 

Cover photo: Aerial night view over Montevideo, the capital of Uruguay. Drone 5/Shutterstock.