Thread by @juanicarranza

argentina.gob.ar/noticias/sciol…

Sistema de Pago en Monedas Locales (SML), a Regional Payment Agreement to foster Intra-regional trade within #Mercosur SME's, is back on the bilateral agenda 🇦🇷🇧🇷

Why? Because Argentina's Central Bank scarcity of dollars.

SML enables the importer and exporter to pay and charge in their respective native currencies, which excludes from any exchange market activity, eliminating financial and administrative costs that would be a barrier for SMEs to foreign trade market.

Central banks support the conversion internally to the system, obviating the need for a private exchange transaction; and reward transactions channelled via the SML on a periodically basis through a clearing system based in US currency.

Will the SML work? Most probably not. 👇

Since its inception in 2008 and up until 2019, Brazilian exports averaged 4.9% of total exports per month, whereas the Argentines averaged only 0.05%. SML's application is imbalanced, focusing primarily on Brazilian exports. LOW IMPACT

Brazilian exports via the SML grew between 2011 and 2015. Why? Because the Argentine government imposed limits on foreign currency acquisitions. This restriction resulted in the establishment of a parallel market (a black-market dollar, dubbed the "blue dollar")

Within this period, the SML was employed by argentine importers because they could get access to the official dollar, cheaper and with an increasing spread, and they could capitalize themselves in the event of a future devaluation of the argentine peso's legal quote.

The argentine government's restrictions, which were designed to control and manage the scarcity of foreign money during that time, had the unexpected consequence of encouraging the usage of SML.

The paradox? It also had the unintended consequence of expanding Argentina's trade imbalance with its primary trading partner, Brazil, through the SML, which hampered clearing procedures and, as a result, deepened Argentina's Central Bank foreign currency loss.

Asymmetry of information around importers and the strict control that the argentine government imposed over importers (DJAI) may explain why this mechanism of getting cheaper dollars was not widely used.

In sum:
1) The SML works effectively. It's easy to operate.
2) It's not widely used because of the mistrust of operators in their local currencies (mostly Argentine exporters). When used, it was to

3) Stagnation of Intra-regional trade within #Mercosur will continue because of lack of complementarity of their economies, low level of interdependence and the preference of sovereignty by local stakeholders.

4) Other scenario for the development of #Mercosur would be fostering inter-regional trade. The Free Trade Agreement signed in 2019 with the European Union offer a possible horizon. However, this agreement is also stagnated.

5) A challenge #Mercosur faces is the one that presents the multi-multipolarity of the international order. Regions are multipolar themselves as, for instance, security and economic links do not converge around the same poles.

The emergence of the new poles like China and Russia pulls regions apart instead of cementing them together.

Negotiations of Uruguay with China for a free trade agreement exemplify this situation: barrons.com/articles/the-u…

Under this scenario, tensions among its members promise to keep on occurring: lanacion.com.ar/politica/tensi…

Looking forward, can the redefinition of global value chains foster near shoring opportunities and foster trade within #Mercosur and #LATAM?